WASHINGTON — National banks' derivatives trading revenue was the latest area to feel the impact of the credit crunch, dropping 62% in the third quarter from the previous quarter, according to a report from the Office of the Comptroller of the Currency.
Banks generated only $2.3 billion of trading revenue in the three months, a far cry from the second quarter's $6.2 billion. Kathy Dick, deputy comptroller for credit and market risk, blamed recent turmoil in the credit market, including rising credit spreads, poor liquidity, and ineffective hedging.
"The weak performance in the third quarter from a revenue standpoint is virtually entirely attributed to the credit crisis," she said. "The real factor influencing bank derivatives portfolios in the third quarter I think was the widening of credit spreads. As credit spreads widen so dramatically … it makes it more challenging for a bank to hedge their own risk exposures."
The report, released Friday, also showed growth in the net current credit exposure, which the OCC uses to measure credit risk for derivatives. It rose 27% from the previous quarter, to $252 billion, and again the OCC said market volatility was to blame.
Past-due derivatives contracts and derivatives chargeoffs also rose, but the agency emphasized that the amount was an overall average and that it was still at a low level.
Banks had a fair-value total of $223 million in contracts at least 30 days past due. That compares with $48 million in the second quarter but is still only 0.09% of net current credit exposure from derivatives contracts. Additionally, banks charged off $119 million of derivatives receivables, or 0.05% of the net current credit exposure of derivatives contracts.
Despite the trading revenue problems, there was a healthy amount of derivatives for the quarter, the OCC said.
The notional amount of derivatives held by banks rose 13%, to $172 trillion. Bank derivatives contracts remain concentrated in interest rate products, which helped boost revenue and mitigate credit products' poor performance.
Revenue from interest rate contracts rose 3%, to a record $3.1 billion, and revenue from foreign exchange transactions rose 59%, to $2 billion.
Credit derivatives, the fastest-growing product in the derivatives market, rose 19% from the second quarter and 77% from a year earlier, to a notional level of $14 trillion.
Ms. Dick said she expects trading revenue to continue to decline, but she said the derivatives market as a whole is in good shape.
"My expectation is that we are going to see weak performance just in credit trading again into the fourth quarter and it likely could carry over into some aspect of the first quarter of next year as well," she said.
"On the other hand, interest rate trading revenues, foreign exchange have been very strong, so I don't think any of this is indicative of problems in the derivatives market. I think it's very specific issues with respect to a handful of credit markets that are just important to banks."
Banks should be able to handle the difficult stretch, Ms. Dick said.
"The credit markets are going to be challenging, because again we're essentially through the fourth quarter and it's been another tough quarter for banks, so I think that credit trading number is going to be challenging for them," she said. "But we have no reason to think that the quarterly trading revenues are not going to be meaningful for these banks, because they really have been quarter after quarter."
