WASHINGTONDerivatives held by U. S. commercial banks
increased $5.4 trillion in the first quarter, or 7.7%, to $76.5 trillion, the
Office of the Comptroller of the Currency reported today in its quarterly Bank
Derivatives Report.
The interest rate decline that occurred toward the end of
the first quarter offered risk managers an opportunity to lock in low rates,
and a lot of them seem to have done that, said Kathryn E. Dick, the OCCs
Deputy Comptroller for Risk Evaluation.
Our banks generally reported good client flow, and we certainly see
that reflected in the very solid gain in notional volumes.
Ms. Dick noted that derivatives volumes tend to increase as
expectations for interest rates change.
The economys recent strength, and the associated expectations for
higher interest rates, suggests further volume increases in the second
quarter.
Ms. Dick pointed out that the notional amount of derivatives
outstanding, including the large first quarter growth, is a new record. While notional amounts are a reasonable
reflection of business activity, they do 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 transaction. When
used properly, derivatives are a valuable risk management product to help bank
institutional customers manage a broad array of different risks arising from
common business activities such as securing long-term funding or protecting the
value of importing or exporting commercial goods.
The OCC also reported that revenues reported by banks
trading cash and derivatives instruments increased by $1.7 billion in the first
quarter, to $3.8 billion. We again see
the familiar pattern of very strong first quarter revenue performance, said
Ms. Dick. Theres still some noise in
the revenue numbers, as tightening credit spreads continue to reduce the value
of credit hedges banks have in place, but that impact has begun to
diminish.
Ms. Dick added revenues were basically strong across all
product categories. Interest rate
revenues increased by $845 million in the first quarter to $1.5 billion. Revenues from foreign exchange positions
increased by $213 million, to $1.4 billion.
Revenues from equity trading positions increased by $592 million, to
$849 million in the first quarter.
Revenues from commodity and other trading positions increased by $49
million to $89 million.
The report also noted that total credit exposure, the sum of
netted current exposure plus potential future exposure, increased 3.5% in the first
quarter to a record $779 billion. The
big rise in notionals caused a fairly sharp increase in the potential future
exposure component of total credit exposure, said Ms. Dick. Potential future exposure, which is an
estimate of how high credit exposure on existing contracts can become over
time, increased $35 billion, or 6.5%, to $573 billion. Netted current credit exposure, the other
component of total credit exposure, fell $11 billion to $206 billion. Netted current credit exposure fell because,
even though the value of receivables on derivatives increased due to the
decline in rates, there was an even larger increase in netting benefits. The gross positive fair value of contracts,
which is the mark-to-market gain on contracts with clients, increased $135
billion. Netting benefits that reduce credit exposures increased by a $146
billion. These two components: gross
positive fair values and netting benefits, yield netted current credit
exposure.
The concentration of interest rate contracts in bank
trading portfolios results in credit exposure calculations that are highly
sensitive to changes in interest rates, noted Ms. Dick. We expect that the increase in rates across
the yield curve during the second quarter will lead to a material decline in
current credit exposure.
Credit risk performance indicators confirmed the positive
view of credit quality as reflected by narrowing corporate credit spreads. The report noted that only a small fraction
of derivatives contracts were 30 days or more past due. For all banks, the fair value of contracts
past due 30 days or more totaled only $50 million, or .0064 percent of total
credit exposure from derivative contracts.
Derivatives charge-offs for the quarter were $120 million, and represent
.015 percent of total derivative exposures, well below the .17 percent for
C&I loans.
During the first quarter, the notional amount of interest
rate contracts increased by $4.3 trillion, to $66.2 trillion. Foreign exchange contracts increased by $770
billion to $8 trillion. This figure
excludes spot foreign exchange contracts, which increased by $427 billion, to
$700 billion. Equity, commodity and
other contracts increased by $144 billion, to $1.2 trillion. Credit derivatives increased by $201
billion, to $1.2 trillion.
The derivatives business remains largely concentrated in
interest rate contracts. Overall, 87
percent of the notional amount of derivatives positions was comprised of
interest rate contracts, with foreign exchange accounting for an additional 10
percent. Equity, commodity and credit
derivatives accounted for only three percent of the total notional amount.
The OCC first quarter derivatives report also noted that:
The number of commercial banks holding derivatives increased
by 28, to 601.
Swap contracts represent 62% of all derivative contracts.
Netting benefits reduced gross credit exposures by 84.2%.
A copy of OCC Bank Derivatives Report: First Quarter 2004
is available on the OCC Web site: www.occ.treas.gov.
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The OCC charters, regulates
and examines approximately 2,000 national banks and 51 federal branches of
foreign banks in the U.S., accounting for more than 56 percent of the
nations banking assets. Its mission is to ensure a safe and sound and
competitive national banking system that supports the citizens, communities
and economy of the United States.
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