WASHINGTONDerivatives
held by U. S. commercial banks increased $2.9 trillion in the fourth quarter,
to $56.1 trillion, the Office of the Comptroller of the Currency reported today
in its quarterly Bank Derivatives Report.
Large,
sophisticated commercial banks continue to serve in a financial intermediary
capacity for corporate customers using derivatives to manage their financial
risks, said Kathryn E. Dick, the OCCs Deputy Comptroller for Risk
Evaluation. When used properly,
derivatives add an element of financial flexibility to the menu of financial
market products used by bank institutional customers seeking to manage earnings
and capital volatility.
Ms. Dick noted that
while the record 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
transaction.
The OCC also
reported that earnings attributable to the trading of cash instruments and derivatives
activities decreased by $508 million in the three-month period, to $1.86
billion.
While the fourth
quarter certainly was not a real strong revenue quarter, it was not as weak as
these numbers suggest, Ms. Dick said. The tightening of corporate credit
spreads caused a decline in the value of credit derivative hedges banks use to
manage risk in their loan portfolios.
Even though this activity is hedging and not trading, regulatory
reporting instructions require banks to report the value changes of their
credit hedges in trading revenues.
This was a major factor in comparing the revenues for the two
quarters.
The report also
noted that total credit exposure, which consists of both the current
mark-to-market exposure (after netting benefits), as well as potential future
exposure, increased $24 billion to $594 billion.
The increase in
credit exposure resulted primarily from the growth in notional amounts,
particularly for interest rate contracts maturing beyond five years, said Ms.
Dick. With rates on swap contracts
having again declined in the fourth quarter, its not surprising to see
increased credit exposure. The ongoing assessment of credit risk exposure is a
fundamental part of our supervisory process in large banks.
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 $36 million, or .006 percent of
total credit exposure from derivative contracts. Ms. Dick pointed out that derivatives charge-offs for the quarter
increased $4 million to $74 million, while noting that the charge-off rate for
derivatives is .012 percent, well below the 1.81percent for C&I loans.
The economic
uncertainty of recent quarters has caused the derivatives charge-off numbers to
bounce around a bit and we expect that this may continue for the next several
quarters, Ms. Dick said.
The derivatives
business is all about credit risk, she added. Derivatives are simply another
line of business contributing to the overall credit exposures at our large
commercial banks, but to properly assess the credit risk from derivatives, you
have to look beyond the raw numbers, and consider risk mitigants such as
netting and collateral, in addition to the fact that derivatives counterparties
on balance have stronger credit ratings than other credit businesses.
For example, Ms.
Dick pointed out that the benefits achieved from legally enforceable bilateral
netting reduced current credit exposures by 81.3 percent in the fourth quarter.
During the fourth
quarter, the notional amount of interest rate contracts increased by $2.7
trillion, to $48.3 trillion. Foreign
exchange contracts increased by $240 billion to $6.1 trillion. This figure excludes spot foreign exchange
contracts, which decreased by $313 billion, to $196 billion. Equity, commodity and other contracts
decreased by $66 billion, to $1 trillion.
Credit derivatives increased by $62 billion, to $635 billion.
Overall, 86 percent
of the notional amount of derivatives positions was comprised of interest rate
contracts with foreign exchange accounting for an additional 11 percent. Equity, commodity and credit derivatives
accounted for only three percent of the total notional amount.
Ms. Dick said that
the number of commercial banks actively engaging in derivatives remains
small. The top seven commercial banks
account for almost 96 percent of the total notional amount of derivatives in
the commercial banking system, with more than 99 percent held by the top 25
banks.
The OCC fourth
quarter derivatives report also noted that:
·
Revenues from interest rate positions decreased by $476
million, to $752 million, and revenues from foreign exchange positions
increased by $107 million, to $1.1 billion.
Revenues from equity trading positions increased by $108 million, for a
loss of $64 million. Revenues from
commodity and other trading positions decreased by $248 million to $30 million.
·
Long-term contracts (those with maturities of five
years or more) increased by $1 trillion, to $10.2 trillion. Contracts with remaining maturities of one
to five years grew by $775 billion to $15.5 trillion. Short-term contracts (those with maturities of less than one
year) increased by $667 billion to $17.2 trillion.
·
The number of commercial banks holding derivatives
increased by 19, to 427.
A copy of OCC
Bank Derivatives Report: Fourth Quarter 2002 is available on the OCC Web
site: www.occ.treas.gov.
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The OCC charters, regulates and examines
approximately 2,100 national banks and 52 federal branches of foreign banks
in the U.S., accounting for more than 55 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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