WASHINGTON - Brandishing a new study of a decade's worth of bank regulatory filings, U.S. banking regulators asserted Wednesday that proprietary trading has been getting a bad rap.
"This is an educational document," said Douglas E. Harris, senior deputy comptroller for capital markets. "The main message is: Not only is (proprietary trading) not as bad as a lot of people may think, but it may not be what they think it is."
Proprietary trading - basically securities trading not connected to customer-related bank activities - has become controversial in the wake of some recent trading losses by Daiwa Bank and others.
In fact, Mr. Harris noted, the majority of U.S. bank trading volume occurs in the safest of securities: those backed by the U.S. government.
In contrast to Daiwa, which lost $1.1 billion over the last 11 years due to the actions of a rogue trader, the seven major U.S. dealer banks posted only six quarterly losses from trading activities from June 30, 1984, to June 30, 1995, according to the study.
Bankers Trust New York Corp. reported an overall first-quarter loss attributed to trading. But the study concluded that U.S. banks' trading losses were "minimal" in relation to their overall quarterly revenues.
It also noted that four of the losses occurred in one bank - First National Bank of Chicago. The study said J.P. Morgan & Co. reported a single quarterly trading loss in the period.
The media, lawmakers, and the general public often identify banks' trading activities solely with major derivatives losses, or losses caused by "rogue" traders, such as those at Daiwa Bank, Mr. Harris said.
But the study found that bank risk-management systems are generally adequate to prevent big trading losses.
"Notwithstanding the numerous press reports that focus on negative events, the major commercial banks have experienced long-term success in serving customers and generating revenues with these activities," the study said.
"The effectiveness of bank risk-management systems appear to be at least partially responsible for this experience."
The study also found that trading activities are an increasingly important source of revenue for banks.
For the 11 largest dealer banks, average trading revenue grew to 12.8% of total revenue in 1994. That's up from 5.85% in 1989. For all commercial banks, that figure increased to 3.7% of total revenue in 1994, from 2.3% in 1989.
Derivatives activities have been increasing at commercial banks as well, the study said. As of the second quarter of this year, commercial banks engaged in over $17.4 trillion of derivatives contracts. That's a 9% increase from the fourth quarter of 1994.
Additionally, trading activities can benefit other areas of a bank's business, the study said. Some banks have applied the risk management methods used in their trading activities to risks that crop up elsewhere, according to the study.
For example, some banks have extended the use of techniques developed to manage market risk to the management of credit risk in their loan portfolios.
"One of the big benefits of trading activities is that they have resulted in better control of risk throughout the bank," Mr. Harris said.
The study was conducted by the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corp.
