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OCC Reports Fourth Quarter 2012 Trading Revenue of $4.4 Billion


March 21 - The Office of the Comptroller of the Currency has reported that insured U.S. commercial banks and savings institutions reported trading revenue of $4.4 billion in the fourth quarter of 2012, down $908 million, or 17 percent, from $5.3 billion in the third quarter, but $1.8 billion, or 73 percent, higher than in the fourth quarter of 2011.

"Although trading revenues declined relative to the third quarter, a better measuring stick of trading performance is to compare fourth quarter results to the same period last year, due to the pronounced seasonal pattern in the trading business,” said Kurt Wilhelm, director of the financial markets group. Wilhelm noted that since 1997, trading revenues had fallen in the fourth quarter in 13 of the past 16 years.  “Trading revenues in the fourth quarter were actually quite strong, higher than any fourth quarter on record.  Reduced concerns about Europe and an improving U.S. economy led to increased risk appetite across the financial markets.”  

For all of 2012, banks reported trading revenues of $18 billion, down $7.8 billion (30 percent) from $25.8 billion in 2011. “The decline in trading revenues in 2012 was entirely a credit story,” said Wilhelm, who noted that banks reported losses of $7.6 billion from trading credit contracts in 2012, compared to revenues of $5.2 billion in 2011. “That swing of $12.8 billion in the credit component more than explained the overall $7.8 billion decline in trading revenues.” Wilhelm explained that “it’s not the intermediation of credit products that caused the losses in 2012. The poor performance resulted from some well-publicized individual bank activity and the continued tightening of credit spreads. Tighter credit spreads increase the credit-adjusted value of derivatives payables and banks report those higher liability amounts as trading losses.”

Credit exposures from derivatives fell in the fourth quarter. Net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $13 billion, or 3 percent, to $386 billion during the fourth quarter. “A slight uptick in interest rates during the fourth quarter helped to reduce the fair value of interest rate contracts and drive overall exposures lower,” said Wilhelm. The OCC noted that the fair value of interest rate contracts declined 4 percent, or $177 billion, causing the fair value of all derivatives contracts to decline $188 billion (4 percent).   

The report shows that the notional amount of derivatives held by insured U.S. commercial banks fell $3.8 trillion, or 2 percent, from the third quarter to $223 trillion, resuming a pronounced trend toward declining notional amounts that had been interrupted in the third quarter. Prior to the third quarter increase, derivatives notionals had fallen for four consecutive quarters, due to ongoing trade compression activities. Notional declines are being driven by compression efforts by banks seeking to reduce regulatory capital requirements and also to lower operational and risk burdens in their derivatives portfolios. Notionals fell for each category of derivatives contracts. Interest rate contracts fell $2.5 trillion, or 1 percent, to $179 trillion, while credit contracts fell $0.8 trillion (6 percent) to $13.2 trillion. Commodity and equity contracts fell 11 percent and 10 percent, respectively.

OCC also reported: