WASHINGTON — Banks reported $6 billion in trading revenue in the third quarter — more than triple the level three months earlier — largely due to an accounting change, the Office of the Comptroller of the Currency said Monday.
Despite the apparent good news, agency officials noted a "deterioration in credit spreads during the third quarter" and said more bad news was probable for the fourth quarter.
"Since credit spreads have tightened substantially in the fourth quarter, we can expect to see more trading revenue volatility when fourth-quarter numbers are released," said Kathy Dick, the deputy comptroller for credit and market risk.
Ms. Dick attributed much of the revenue increase to a rule change for Financial Accounting Standard No. 157, which was adopted in November 2007 but did not take effect until 2008.
Under the rule, when a bank has a trading liability and its credit spreads narrow, the fair value of the liability declines and is reflected through trading revenue.
"It's just with this accounting adjustment it makes it look as though they had a really strong quarter," Ms. Dick said. "I don't think they had a strong quarter. They had a good quarter. There's client demand out there, but with the market disruption there's less client demand and generally speaking less liquidity in these markets."
The notional value of derivatives held by banks fell by $6.3 trillion in the third quarter, or 3%, to $176 trillion. Interest rate contracts also shrank by $7.7 trillion, to $137 trillion, which the OCC attributed to acquisition-related elimination of contracts. Credit derivative contracts grew by 4%, to $16 trillion.
Banks incurred losses from equity trading totaling $954 million, the largest loss ever. They had made $183 million in the second quarter on equity trading.
Ms. Dick attributed the third-quarter loss to writedowns banks took on preferred shares of Fannie Mae and Freddie Mac after they were put in conservatorship in early September.
"The uncertain credit environment created demand for credit hedges, particularly for counterparty credit risk," Ms. Dick said.
The net current credit exposure — the primary way the OCC measures banks' risk in derivatives activities — rose 7%, to $435 billion.
Banks charged off $92 million of derivatives receivables, or 0.02% of the net current credit exposure, down from $120 million in the second quarter.
The number of banks holding derivatives grew by two in the third quarter, to 977 institutions.