OCC Reports Fourth Quarter Trading Revenue of $2.5 Billion

WASHINGTON -- Commercial banks reported trading revenue of $2.5 billion in the fourth quarter of 2011, 70 percent lower than revised third quarter revenues of $8.5 billion, and 27 percent lower than in the fourth quarter of 2010, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

“The seasonal decline in revenues we typically see in the fourth quarter of each year was made a bit worse by a noticeable reduction of risk appetite by both banks and their clients,” said Martin Pfinsgraff, Deputy Comptroller for Credit and Market Risk.  Mr. Pfinsgraff noted that in ten of the past twelve years, the fourth quarter has been the weakest revenue quarter.  “Against a backdrop of concerns about sovereign debt and the health of European banks, demand for risk intermediation products fell.  Market participants were very defensive.”   

For the full year, insured commercial banks reported a record $25.8 billion in trading revenues, surpassing the previous record of $22.6 billion in 2009 by 14 percent.  “Trading revenues have been quite strong in each of the past three years, as banks have continued to recover from the financial crisis.  Trading activities can be an important component of a diversified revenue stream, and have been so during this recovery period for large and midsize banks.”

Credit exposure from derivatives fell in the fourth quarter.  Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $74 billion, or 15 percent, to $430 billion.  “We saw a broad-based decline in derivatives portfolio exposures, as receivables from interest rate, FX, commodity, credit and equity contracts all declined,” said Mr. Pfinsgraff.  “Although credit exposures declined during the quarter, NCCE remains very high due to the prolonged very low interest rate environment.”  

The notional amount of derivatives contracts declined for the second consecutive quarter, falling $17 trillion, or 7 percent, to $231 trillion.  The fourth quarter decline followed a 0.6 percent decline in the third quarter.  Mr. Pfinsgraff stated that “the decline in notionals reflects the counterparty credit concerns that were fairly widespread over the latter part of the year.  While market uncertainties typically lead to increases in notionals, due to greater hedging activity, that dynamic changes when the concerns are credit related.  De-risking across trading, lending, or investment activities can lead to reductions in transaction volumes, including hedging.”  Mr. Pfinsgraff noted that the decline in notionals also reflected continued trade compression efforts.  Finally, he added that notionals had never declined for two consecutive quarters, and that the $17 trillion decline was the largest on record.

The report also noted that:

• Banks held collateral to cover 66 percent of their NCCE.  The quality of the collateral is very high, as 80 percent is cash (U.S. dollar and non-dollar).  
• Trading risk exposure, as measured by average value-at-risk (VaR), fell 9 percent during 2011 at the five largest trading companies.     
• Derivatives contracts are concentrated in a small number of institutions.  The largest five banks hold 96 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.  
• Derivative contracts remain concentrated in interest rate products, which represent 81 percent of total derivative notional values.  
• Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.  
• The number of commercial banks holding derivatives decreased by 10 in the quarter to 1,078.

A copy of the OCC's Quarterly Report on Bank Trading and Derivatives Activities:  Fourth Quarter 2011 is available on the OCC's Website.

Related Link

• OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Fourth Quarter 2011 (PDF)