Bank Trading Revenue Falls as Demand Slows: OCC

Trading revenue at banks and thrifts fell in the fourth quarter because of weak demand as well as seasonal patterns, the Office of the Comptroller of the Currency said Friday.

Trading revenue dipped to $2.9 billion — down 34% from the third quarter and 32% from the fourth quarter of 2012, the agency said in a report. While the OCC had predicted the decline from the third quarter based on seasonal factors, softening demand was the main reason for the year-over-year decrease.

"Trading revenue, particularly for interest rate products, has trended lower," Kurt Wilhelm, director of the OCC's financial markets group, said in a press release. Lower demand also showed up in foreign exchange products. The combined revenue for interest rate and foreign exchange products was $2 billion in the fourth quarter, down 44% from the previous quarter and 59% lower than the same period a year ago.

For the full-year 2013, banks reported $22.2 billion in trading revenue, up 24% from 2012. But core trading revenue was actually higher in 2012. Total profits were held back that year by "well-publicized credit derivative losses at one large bank" — an apparent reference to JPMorgan Chase's (JPM) $6 billion in losses stemming from the London Whale scandal — and by material losses from valuation adjustments, according to the report.

"The narrowing bank credit spreads in 2012 led to large losses from adjusting the fair value of derivative payables, an accounting risk that banks often do not hedge," Wilhelm said in the release.

The metric that the OCC uses for credit risk from derivatives trading, called net current credit exposure, fell for the sixth consecutive quarter. At $298 billion, credit risk was down 2% from the previous period.

Banks are also holding lower notional amounts of derivatives in response to the drop in client demand, according to the OCC. The notional amount of derivatives fell 1% from the third quarter, to $237 trillion.

"It's too soon to tell whether the decline is the resumption of a trend we had witnessed in 2012," Wilhelm said. In 2012, banks cut back on the notional amount of derivatives they held in an attempt to reduce their regulatory capital requirements and lessen operational risk.