WASHINGTON — Third quarter bank trading revenue fell 5% from last year to $5.3 billion as equity trading underperformed, according to a report issued Monday by the Office of the Comptroller of the Currency.
The revenue from equity trading totaled just $56 million in the third quarter, down from $129 million a quarter earlier and $654 million a year before.
"It's not much of a surprise that trading revenue fell in the third quarter," said Kurt Wilhelm, senior advisor for market risk at the OCC. "What is a bit of a surprise, however, is that it was weakness in revenue from trading equity contracts that caused the decline relative to the last quarter and the third quarter of 2014. Revenue from equities normally isn't a major factor in overall bank trading revenue."
By comparison, interest rate and foreign exchange rate trading, which is the primary catalyst of bank trading revenue, was $4.5 billion, up $200 million from the second quarter and higher than the $4 billion seen in the third quarter of last year.
Interest rate trading revenue was up 24% in the third quarter, totaling $2.6 billion but down from $3.4 billion in the third quarter of 2014. Foreign exchange trading revenue increased from $855 million in the second quarter to $1.9 billion in the third quarter, but was less than the $4.8 billion seen in the third quarter of last year.
"Trading revenue in both the second and third quarters were weaker in 2015 than in 2014, so the stronger performance this year is a reflection of the very strong performance in the first quarter," Wilhelm said. "It appears that trading revenue is slowing somewhat."
The notional value of derivative positions held by U.S. commercial banks fell 3% to $192 trillion in the third quarter but "the decline is not really reflective of current activity," Wilhelm said. "There's still a lot of business at the dealer firms. Trade compression is simply more than offsetting normal growth."
Banks' net credit exposure from derivative positions increased 10%, or $39 billion, during the quarter to $445 billion. That was largely the result of concerns about a slowdown in the global economy, which led to declines in the Chinese stock market and a decline in interest rates. "That decline caused a large increase in receivables from interest rate contracts" Wilhelm said.
Banks' value-at-risk, which quantifies maximum expected losses, increased during the quarter as market volatility also picked up. Two of the largest five dealers — JPMorgan and Citigroup saw an uptick in value-at-risk while Bank of America, Goldman and Morgan Stanley experienced a decrease.
The number of commercial banks and saving associations holding derivatives fell from 1,425 in the second quarter to 1,411 in the third quarter according to the report.