WASHINGTON Bank trading revenues jumped to $7.5 billion in the first quarter, marking the fourth highest level on record, the Office of the Comptroller of the Currency said Friday.
"The improvement in the U.S. economy and low interest rates led to significant capital raising activity in the bond markets," said Kurt Wilhelm, the OCC's director of the Financial Markets Group, in a press release. "That led to strong client demand for risk management products, as investors increased their hedging and positioning against potential changes in monetary policy."
Trading revenues were up 72% from the fourth quarter the typically slowest part of the year and up 7% from the first quarter of last year. Trading revenues have been the strongest for eight years among the last 13 years.
Commercial banks are also holding a greater notional amount of derivatives, reversing the declining trend seen since the second quarter of 2011. The notional amount held in the first quarter was $8.5 trillion, up 4% from the fourth quarter.
The declines seen in the last two years were largely driven by banks trying to reduce regulatory capital requirements and operating risk from their derivatives portfolio. "Notionals increased across-the-board, for all asset classes and all products," Wilhelm said.
Despite holding more derivatives, the net current credit exposure fell 7% from the fourth quarter to $358 billion in the first quarter. Wilhelm attributed that decline to higher interest rates which caused the fair value of interest rate contracts to drop. The fair value of all derivative contracts fell 11% to $4.2 trillion from the fourth quarter.
Still, Wilhelm said the net impact from valuation adjustments, which typically harmed trading revenues in prior quarters, has abated. "While bank credit spreads continued to tighten in the first quarter, the net impact of adjustments to derivatives receivables and payables did not have a material impact on trading revenues," he said.
The number of banks and savings associations that held derivatives increased by 38 from the fourth quarter to 1,390 in the first quarter, but the four largest commercial banks in the country continue to dominate the space, representing 93% of the notional amounts.