WASHINGTON — Derivatives trading by commercial banks dropped sharply in the third quarter as net current credit exposures increased, according to a report issued Friday by the Office of Comptroller of the Currency.
Banks reported $4.2 billion in revenue from derivatives, 27% lower than the third quarter of 2009 and 37% lower than the second quarter of 2010. The OCC attributed the decrease to seasonal lower client demand.
"Client demand for risk management products often tails off later in the year, and the economic uncertainty both here in the U.S. and around the world exacerbated that seasonal trend this quarter," said Dave Wilson, deputy comptroller for credit and market risk, in a press release. "As a result, trading revenues were a bit weaker than typically is the case in third quarters."
Trading revenues at bank holding companies in the third quarter were 43% lower than in the same quarter in 2009.
At the same time, net current credit exposure, the primary metric to measure credit risk in derivatives activities, increased by 11% to $440 billion.
Such exposures peaked at $800 billion at the end of 2008 and have fallen sharply since then. Still, net credit exposure has increased in each of the last two quarters. Wilson attributed this trend to lower interest rates that cause increases in the value of interest rate contracts.
"Since interest rate contracts make up the vast majority of the derivatives market, the credit exposure numbers are very sensitive to changes in interest rates," he said.
The OCC also reported that banks hold collateral to cover 69% of their net current credit exposure, adding that 82% of such collateral was cash.
Banks charged off $284 million in derivatives exposure in the third quarter, up by 139% from $119 million in the second quarter.
The notional amount of derivatives held by banks increased by $11.3 trillion, or 5%, in the third quarter to $234.7 trillion. Interest rate contracts increased $7.9 trillion, or 4%, to $196.5 trillion.
The number of banks holding derivatives increased by 41 to 1,105. The largest five banks hold 96% of the total notional amount of derivatives.
