WASHINGTON Derivatives
held by U.S. commercial banks increased by $3.2 trillion in the first quarter
of 2005, to $91.1 trillion, the Office of the Comptroller of the Currency
reported today in its quarterly Bank
Derivatives Report.
The continued growth
in notional volumes reflects positively on client demand for risk management
products, noted Kathryn Dick, Deputy Comptroller for Risk Evaluation. While still a small part of the total
notional amount of bank derivatives contracts, credit derivatives have grown substantially
over recent quarters and at $3.1 trillion now represent 3.4 percent of total
derivatives. The credit derivatives market is still a relatively young market
and one that our examiners pay close attention to because market participants
risk management practices are still evolving.
Ms. Dick advised that
while the notional amount of derivatives is a reasonable reflection of business
activity, it does not represent the amount at risk for commercial banks. The risk in a derivatives contract is a
function of a number of variables, such as whether counterparties exchange
notional principal, the volatility of the currencies or interest rates used as
the basis for determining contract payments, the maturity and liquidity of
contracts, and the creditworthiness of the counterparties in the transactions,
she said.
The OCC also reported
that current credit exposure net of legally enforceable netting agreements
declined by $22 billion to $198 billion at the end of the first quarter. The current credit exposure is the amount
owed to banks if all contracts were immediately liquidated and is a useful
measure of credit risk in a dealers portfolio.
Banks mitigate credit
risk in the derivatives portfolio through the selection of high quality
counterparties, use of legally enforceable netting agreements and application
of collateral requirements, as appropriate, she said. Legally enforceable netting agreements were
used to reduce 83.7 percent of credit exposure in the first quarter.
The OCC also reported
that revenues attributed to trading of cash instruments and derivative
activities increased by $2.2 billion in the three-month period to $4.4
billion.
Historically, the
first quarter earnings are higher than other quarters and this quarters strong
earnings are no exception, she noted. Client activity in the first quarter is
typically stronger as corporations issue debt and plan their foreign exchange
activities for the year.
The OCC first quarter
derivatives report also noted:
|
Revenues from foreign
exchange positions decreased by $283 million to $1.7 billion. Revenues from equity trading positions
increased by $314 million to $888 million.
Revenues from interest rate positions increased by $2.1 billion to $1.6
billion. |
|
The 25 largest banks account
for more than 99 percent of the total notional amount of derivatives. Five commercial banks account for 96 percent
of the total. |
|
The number of
commercial banks holding derivatives increased by 18 to 695 banks. |
A copy of the OCC Bank
Derivatives Report: First Quarter 2005 is available on the OCC Web site: www.occ.treas.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 in the best possible manner the banking needs of their customers.