OCC says derivatives revenues, notionals down
US commercial banks’ revenues from derivatives fell by $805 million, to $2.65 billion, from the third to the fourth quarters of 2001, according to figures released yesterday by the Office of the Comptroller of the Currency (OCC).
More than half the total notional volume, $23.2 trillion, is attributable to JP Morgan Chase, the report states. However, the report does not include data from non-US institutions, some of which, like Deutsche Bank, are among the world’s largest derivatives dealers.
Mike Brosnan, the OCC’s deputy comptroller for risk evaluation, attributed the drop in revenues to softening in the US economy, caused primarily by events of September 11th and the Enron debacle.
During the fourth quarter banks charged-off $296 million from credit exposures associated with derivatives. Apart from the third quarter 1998, when they wrote off $445 million due to the Long Term Capital Management crisis, this is the largest quarterly charge-off logged in the past 10 years.
The OCC’s Brosnan said that the charge-offs came as a result of the wider economic downturn as corporate bankruptcies and defaults increased. However he added that thus far the losses had been very small relative to bank earnings and capital levels.
Brosnan warned that continued credit worries in the market could mean more losses in 2002 and 2003. Total credit exposure, which consists of both the current mark-to-market exposure as well as potential future exposure, decreased by $77 billion in the fourth quarter, to $482 billion. This was largely due to the decline in notionals, caused by the JP Morgan Chase merger.
Interest rate contracts, which comprise 84% of the total notional amount, decreased by $4.8 trillion, to $38.3 trillion, from the previous quarter. Foreign exchange contracts decreased by $906 billion to $5.7 trillion, while equity, commodity and other contracts fell by $186 billion to $950 billion.
The only product to show an increase was credit derivatives, which grew by $35 billion to $395 billion.
“The recent spate of corporate bankruptcies have shown just how important credit derivatives can be as a risk hedging tool,” said Brosnan. “A number of banks have collected on these contracts, reducing the severity of the downturn’s impact on their overall asset quality. Contracts that triggered payments have been settled fairly smoothly, a further positive sign of the market’s development.”
Although credit derivatives volumes grew, they still only account for 0.87% of the overall market.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Regulation
European banks search for consensus on credit spread risk
New EBA guidelines spawn diverging interpretations of which products must be assessed for CSRBB
Dutch regulator in new push on algo manipulation
AFM teams up with Oxford Uni academics to develop data models that will identify “harmful” collusion in automated trading
Fed relief plan for G-Sib agency clearing welcomed
Rollback may revive interest in European FCM model, as principal clearing still treated punitively
Indian initial margin launch brings operational headaches
Conglomerates with multiple entities trading derivatives pose compliance challenges for dealers
Fed’s new liquidity rule spells more pain for regional banks
Limit on HTM assets follows move to deduct unrealised losses from capital buffers
Ruled out: can regulators settle the pre-hedging debate?
Market participants are at odds over the practice and whether regulation or principles can settle the score
SEC streamlines overhaul of stock trading rules
Tick size and access fee rules simplified from first draft, but Peirce still questions rationale
Supervisors use generative AI to tame ‘chaotic’ data
Officials merge credit databases with unstructured reports to sharpen bank oversight, explains Banco de España ex-deputy