WASHINGTON
Insured commercial banks earned $4.7 billion trading cash instruments and
derivative products in the second quarter of 2006, the Office of the
Comptroller of the Currency reported today in its quarterly Bank Derivatives
Report. For comparison purposes,
banks earned $5.7 billion from trading activities in the first quarter of 2006
and $1.96 billion in the second quarter of 2005.
We expected to see a drop off from the record
first quarter earnings performance, and we did, said Deputy Comptroller for
Credit and Market Risk Kathryn E. Dick.
However, when compared to the same quarter last year, the earnings
performance this quarter was actually quite strong.
Average trading revenues for the past 11 second
quarters is $2.8 billion, Ms. Dick noted. Both interest rate and foreign exchange
revenues increased from the first quarter.
In fact, foreign exchange revenues of $2.7 billion were a new record,
Ms. Dick said. It was the sharp
decline in equity revenues, resulting from difficult conditions in some
overseas markets that caused overall industry trading revenues to decline.
The notional amount of derivatives held by U.S.
commercial banks increased by $9 trillion in the second quarter of 2006, to a
record $119 trillion, 8% higher than the previous quarter and 24% higher than
the same quarter last year. Consistent
with previous quarters, bank derivatives activity remains concentrated in interest
rate contracts, which represent 83% of total notionals. Foreign exchange
products represent 9% and credit derivatives 6%.
Credit derivatives are a fast growing component
of the derivatives market, increasing 20% in the second quarter to $6.6 trillion. Credit derivatives have grown 60% since the
second quarter of 2005 and the continued strong growth in credit derivatives is
an area receiving close attention from the OCC, Ms. Dick said. While credit derivatives can be a very
effective credit risk hedging tool, most of the activity in this business is
creating structured products that can meet the increasingly aggressive yield
requirements of investors.
Ms. Dick noted that, of metrics available from
Call Report information, net current credit exposure is the metric most
representative of credit risk in derivatives portfolios. Net current credit exposure is calculated by
subtracting netting benefits from the gross positive fair value of contracts
(i.e., the total fair value of only those contracts where the bank is owed
money by its counterparties). At the end
of the second quarter, legally enforceable netting agreements allowed banks to
reduce the $1.320 trillion gross positive fair value of contracts by $1.121
trillion, or 84.9%, to yield a net current credit exposure of $199 billion.
Although credit exposure of $199 billion is a
large number, we find that the credit quality of these derivative exposures is
generally higher than in the commercial loan portfolio, and much of this
exposure is secured by cash or other readily marketable collateral, Ms. Dick
said. These factors explain why
charge-offs of derivatives exposures are so low.
The OCC second quarter derivatives report also
noted that:
Foreign exchange revenues increased 16% to $2.7
billion, a new record. Interest rate
revenues increased 34% to $1.7 billion.
Equity revenues fell 94% to $103 million, and commodity/other revenues
fell 12% to $274 million.
Derivatives contracts are concentrated among a
small number of institutions. The
largest 5 banks hold 97 percent of the total notional amount of derivatives,
while the largest 25 banks hold 99 percent.
The number of commercial banks holding
derivatives increased by 20 in the second quarter to 902.
A copy of the OCC Bank Derivatives Report:
Second Quarter 2006 is available on the OCCs Web site at www.occ.gov.
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The
Office of the Comptroller of the Currency was created by Congress to charter
national banks, to oversee a nationwide system of banking institutions, and to
assure that national banks are safe and sound, competitive and profitable, and
capable of serving the banking needs of their customers in the best possible
manner. OCC press releases and other
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