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Report finds that smaller credit spreads helped lower the exposure in the first quarter of the year, but the continuing risks from the European debt crisis have some traders interested in higher returns.
June 22 -
Trading revenues at commercial banks fell sharply in the fourth quarter as concerns about sovereign debt and economic uncertainty in Europe kept many banks and their clients on the sidelines.
March 20
WASHINGTON — The massive trading losses at JPMorgan Chase earlier this year caused trading revenues at commercial banks to tank in the second quarter, the Office of the Comptroller of the Currency said Friday.
Trading revenues fell 73%, to $2 billion from $7.4 billion in the second quarter of 2011, according to the agency's quarterly report on bank trading and derivatives activities. They declined 69% from the first quarter, when banks generated $6.9 billion of trading revenues.
"While both normal seasonal weakness and reduced client demand played a role, it was clearly the highly-publicized losses at JPMorgan Chase that caused the sharp drop in trading revenues," Martin Pfinsgraff, the OCC's deputy comptroller for credit and market risk, said in a press release.
JPMorgan reported a $3.7 billion loss from credit trading activities, causing the bank to report an aggregate $420 million trading loss for the quarter, Pfinsgraff said.
Credit exposure from derivatives increased 9%, or $32 billion, to $410 billion at the end of the second quarter, primarily the result of the continued decline in interest rates, the agency said.
"Since interest rate contracts are 80% of total notionals, credit exposure on derivatives is sensitive to interest rate moves, and the continued decline in interest rates drove the credit exposure numbers higher again in the second quarter," Pfinsgraff said.
But he said banks' net current credit exposure has narrowed over time, and is much lower than the $800 billion peak it reached at the end of 2008.
The notional amount of derivatives held by commercial banks decreased 2.4%, to $222 trillion, as banks sought to reduce their regulatory capital requirements, as well as operating and risk burdens in their portfolios, the OCC said. Interest rate contracts decreased $5 trillion, or 3%, to $179 trillion, while credit contracts decreased 3% to $13.6 trillion.
The report also found that banks hold enough collateral to cover 70% of their credit exposure — up from 67% in the first quarter — and that 79% of the collateral is cash.
The agency said 93% of derivatives are held by the four largest banks, while the largest 25 banks hold nearly 100%.
