OCC Reports Quarterly Bank Trading Revenues of $2.3 Billion

WASHINGTON — Insured U.S. commercial banks generated $2.3 billion in trading revenues during the third quarter of 2007, down 48 percent from a year earlier, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Derivatives Activities.

“The third quarter trading numbers reflect the effects of the recent turmoil in the credit markets,” said Kathryn E. Dick, Deputy Comptroller for Credit and Market Risk. “Credit trading books were adversely impacted by rising credit spreads, poor liquidity, and ineffective hedging during the quarter.”

The OCC reported that revenues from credit intermediation declined $3.5 billion to a loss of $2.7 billion. Revenues from interest rate contracts increased $102 million to a record $3.1 billion, and revenues from foreign exchange transactions increased 59 percent to $2.0 billion.

“Strong client demand for both interest rate and foreign exchange products boosted revenues in these sectors and helped to soften the impact of the poor performance of credit products,” Ms. Dick said.

The OCC also reported that the notional amount of derivatives held by insured U.S. commercial banks increased $19.7 trillion in the quarter to a record $172 trillion. The third quarter derivatives total is 36 percent higher than in the same period in 2006. Credit derivatives, the fastest growing product in the derivatives market, increased 19 percent during the quarter to a notional level of $14.0 trillion, 77 percent higher than a year ago.

The OCC reported that the net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, rose $53 billion during the quarter to $252 billion.

The report also noted that:

• Derivatives contracts are concentrated in a small number of institutions. The largest five banks hold 97 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.
• Credit default swaps are the dominant product in the credit derivatives market, representing 98 percent of total credit derivatives.
• The number of commercial banks holding derivatives decreased by 31 in the third quarter to 937.