WASHINGTON Trading revenue at banks and thrifts remained strong in the second quarter, despite falling off slightly from the first quarter, according to the Office of the Comptroller of the Currency.
The OCC's quarterly trading and derivatives report, released Friday, said revenue totaled $7.3 billion in the second quarter. Even though that was 3% below the total set in the first quarter, it was still the second highest revenue mark set in a second quarter ever. The second-quarter total was also more than 200% higher than quarterly revenue a year earlier.
"The decline in trading revenue was not a surprise, given the well-established seasonal pattern," said Kurt Wilhelm, the OCC's director of the financial markets group, in a press release. "What is a bit surprising, however, is how small the decline was."
The only second quarter with a higher mark was that in 2007, when trading revenue for the three months ending March 31 reached $7.4 billion.
Typically, trading revenue between the first and second quarters falls an average of $1.3 billion, rather than the mere $200 million decline this past quarter. "There was strong demand for interest rate products, as investors increased their hedging and positioning activity after the Fed stated it may taper its bond purchases," Wilhelm said.
The primary metric that the OCC uses to measure credit risk in derivatives activities, called the net current credit exposure, fell 5% to $339 billion from the first quarter. That was the lowest level reported since late 2007. Derivatives charge-offs also fell by $22 million from the first quarter to $61 million in the second quarter.
"Charge-offs of derivatives exposures usually result from swaps that are connected to defaulted loans," Wilhelm said.
Interest rate products are still by far the most prevalent type of derivatives contract, accounting for more than 80% of the notional values of total derivatives. But the gross fair value of interest rate-related contracts fell 16% to $2.9 trillion due to rising interest rates.
"The rise in market interest rates during the second quarter caused a sharp decline in receivables on interest rate contracts," Wilhelm said. "After a long period of very low and stable rates, investors were reintroduced to interest rate risk in the second quarter, when the yield on the 10-year Treasury Note increased 66 basis points."
There was a 10% increase in banks and thrifts that reported derivatives trading data to the OCC during the second quarter, bringing the total to 1,400 insured institutions.