WASHINGTONDerivatives held by U. S. commercial banks
increased $5.3 trillion in the first quarter, to $61.4 trillion, the Office of
the Comptroller of the Currency reported today in its quarterly Bank
Derivatives Report.
All market participants have risks they have to manage,
said Kathryn E. Dick, the OCCs Deputy Comptroller for Risk Evaluation. When used properly, derivatives are a
valuable risk management tool 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.
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 increased by $1.2
billion in the three-month period, to $3 billion.
As is typically the case, first quarter revenues were
strong, noted Ms. Dick. However,
actual trading profitability is understated due to risk management
adjustments. The most significant
revenue adjustment arises from the impact of continued tightening of credit
spreads. Narrowing corporate credit
spreads reflects reduced investor concern about credit risk, resulting in a
decline in the mark-to-market value of credit protection banks have in
place. Even though this activity is
hedging and not trading, banks typically report the value changes of their
credit hedges in trading revenues, said Ms. Dick.
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 to counter parties, increased $68 billion
to $662 billion. Ms. Dick noted that
the calculation used to determine the potential future credit exposure in bank
derivatives portfolios is greatly influenced by the current low interest rate
environment. If rates stay at these
historically low levels, we expect the credit exposure numbers will remain
high. Credit risk is the largest
financial risk in commercial bank
derivatives activities, so naturally our examination process
focuses on assessing the ability of banks active in derivatives markets to
measure, monitor and control credit exposures, Ms. Dick said.
Not withstanding the increase in credit exposure, credit
risk performance indicators confirmed the positive view of credit 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
.008 percent of total credit exposure from derivative contracts. Derivatives charge-offs for the quarter
decreased $44 million to $30 million, and represent .004 percent of total
derivative exposures, well below the .35 percent for C&I loans.
During the first quarter, the notional amount of interest
rate contracts increased by $5.1 trillion, to $53.4 trillion. Foreign exchange contracts increased by $167
billion to $6.2 trillion. This figure
excludes spot foreign exchange contracts, which increased by $269 billion, to
$465 billion. Equity, commodity and
other contracts increased by $7 billion, to $1 trillion. Credit derivatives increased by $75 billion,
to $710 billion.
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 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, said Ms. Dick. These large, sophisticated financial institutions are held to
the highest credit and liquidity risk management standards, said Ms. Dick.
The OCC first quarter derivatives report also noted that:
Revenues from foreign exchange positions increased by $220
million, to $1.4 billion. Revenues from
commodity and other trading positions increased by $25 million to $55 million.
Long-term contracts (those with maturities of five years or
more) increased by $954 billion, to $11.2 trillion. Contracts with remaining maturities of one to five years grew by
$1.5 trillion to $16.9 trillion.
Short-term contracts (those with maturities of less than one year)
increased by $1.7 trillion to $19 trillion.
The number of commercial banks holding derivatives increased
by 61, to 488.
A copy of OCC Bank Derivatives Report: First Quarter 2003
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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