Fueled by continued concern over Asian economies, banks' derivatives revenue soared to a record $2.7 billion during the first quarter, the Office of the Comptroller of the Currency reported Monday.
The derivatives business rebounded strongly from the fourth quarter, when losses on equities trading and emerging market debt caused revenue to plunge 52%, to $1.2 billion.
"The first-quarter recovery primarily reflects efforts to hedge currency and interest rate risks after the volatility in Asia and elsewhere since last fall," said Michael L. Brosnan, deputy comptroller for risk evaluation.
Heinz Binggeli, president of Global Investment and Risk Advisors, a risk management firm in Long Island, predicted that the need to hedge against a variety of risks will keep demand for derivatives strong. "People are a little more nervous," he said. "The Asian market has been quite volatile."
Commercial banks charged off $157 million in credit losses from derivatives during the quarter, an increase of 64% from the fourth quarter.
The increase was expected because derivatives portfolios are maturing, Mr. Brosnan said. "Overall, the quality of derivatives portfolios is still superior to the typical loan portfolio," he said. "But I see that gap closing."The eight largest commercial banks accounted for 94% of derivatives trading. The notional amount of derivatives activity increased to a record $26 trillion, up 4% from yearend 1997 and up 20% since first quarter 1997.
The fastest-growing sector is credit derivatives, which grew to a notional amount of $91 billion, from $19 billion in first quarter 1997-an increase of 379%.
Interest rate contracts continued to be the most prevalent form of derivatives instrument, growing 7.5% in the first quarter, to a notional amount of $18.4 trillion. Foreign exchange contracts fell 4.9% from the end of 1997, to $7.1 trillion. Equity, commodity, and other derivatives increased $35 billion, to $529 billion in the first quarter.
Revenue from interest rate contracts was $1.1 billion, and foreign exchange derivatives generated $1.4 billion.
In the 12 months ending March 31, the number of banks holding derivatives has dropped 10%. "It concerns me that only 451 out of some 9,000-odd banks are using derivatives to manage risks," Mr. Brosnan said. "This is an important tool."