WASHINGTONDerivatives held by U. S. commercial banks
increased $4.5 trillion in the second quarter, to $81 trillion, the Office of
the Comptroller of the Currency reported today in its quarterly Bank
Derivatives Report.
Kathryn Dick, the OCCs Deputy Comptroller for Risk
Evaluation, pointed out that the notional amount of derivatives outstanding is
a new record. Ms. Dick noted that,
notional volumes are a useful indicator of business activity. Periods of rate uncertainty, such as what we
saw in the second quarter, tend to result in higher notional amounts because
bank customers will often use financial derivative contracts to manage risk
exposures. At the same time, she
cautioned, notional volumes tell us little about risk, since notional amounts
are seldom exchanged in bank derivative contracts. 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 imported or exported
commercial goods.
The OCC also indicated that revenues reported by banks
trading cash and derivatives instruments decreased by $1.2 billion in the
second quarter, to $2.6 billion. Once
again, we see the typical fall off in revenues during the second quarter, and
this year, the decline appears particularly pronounced because the first
quarter revenue performance was exceptionally strong. In particular, it was not a good quarter for revenues from
interest rate trading, some of which may be related to rebalancing portfolios
and other risk management adjustments.
Interest rate revenues decreased by $1.4 billion in the second quarter
to $124 million. Revenues from foreign
exchange positions increased by $199 million, to $1.6 billion. Revenues from equity trading positions decreased
by $352 million, to $497 million.
Revenues from commodity and other trading positions increased by $316
million, to $405 million. While these
are large numbers, cautioned Ms. Dick, trading revenues represent a small
portion of total revenues for most of these banks.
The report also
noted that total credit exposure, the sum of netted current exposure plus
potential future exposure, decreased $27 billion in the second quarter to $752
billion. The modest decline in total
credit exposure masks a lot of very large changes in the individual components
that make up this number, said Ms. Dick.
The rise in interest rates caused a very large decline in both
derivatives receivables and payables."
The mark-to-market gain on derivatives receivables (gross positive fair
values), declined $307 billion, or 23.5%, to $1 trillion. The mark-to-market loss on derivatives
payables (gross negative fair values), declined by $312 billion, or 24.3%, to
$971 billion. Because both receivables
and payables declined so significantly, so too did netting benefits. When payables and receivables both fall,
netting benefits tend also to fall, because banks are not only owed less by
their big clients, but they also owe those same clients less, noted Ms. Dick.
Potential future exposure, which is an estimate of how high
credit exposure on existing contracts can become over time, increased $7
billion, largely due to increases in the notional amounts of derivatives
contracts over 5 years.
Credit risk performance indicators confirmed the positive
view of credit quality as reflected by narrow 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 $72 million, or .065 percent of total
credit exposure from derivative contracts.
Derivatives charge-offs for the quarter were $40 million, and represent
.00531 percent of total derivative exposures, well below the .12 percent for
C&I loans.
During the second quarter, the notional amount of interest
rate contracts increased by $4.4 trillion, to $70.6 trillion. Foreign exchange contracts decreased by $187
billion to $7.8 trillion. This figure
excludes spot foreign exchange contracts, which decreased by $28 billion, to
$672 billion. Equity, commodity and other
contracts decreased by $18 billion, to $1.2 trillion. Credit derivatives increased by $284 billion, to $1.5
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 second quarter derivatives report also noted that
the number of commercial banks holding derivatives increased by 36, to 637.
A copy of OCC Bank Derivatives Report: Second 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.