Taking advantage of recent volatility in interest and exchange rates, banks racked up a record $2.5 billion of derivatives trading revenue in the third quarter, 26% more than in the second, the Office of the Comptroller of the Currency said Monday.
"Profits have been incredibly strong recently," said Michael L. Brosnan, the agency's director of treasury and market risk. "Customers are more conscious about hedging these risks and, to a lesser extent, the market volume is giving bank traders an opportunity to make money in their own accounts."
Eight institutions accounted for 85% of the industry's derivatives revenues: Morgan Guaranty Trust Co., Bankers Trust Co., Citibank, Chase Manhattan Bank, Republic National Bank, Bank of America, NationsBank, and First National Bank of Chicago. That's virtually unchanged from earlier this year.
Derivatives trading was responsible for 7.5% of total revenue at those banks. Industrywide, derivatives contributed nearly 3% of revenue.
Citibank led the way with $599 million in revenue, followed closely by Morgan Guaranty, with $575 million.
Chase Manhattan held the largest portfolio, with $7.631 trillion in notional amount of derivatives. Morgan's portfolio placed second, with $6.08 trillion.
The number of commercial banks holding derivatives increased by 11 during the quarter to 475, with total holdings of $25 trillion in notional amount. This is up 7.3% from the third quarter. The eight leading institutions accounted for 94% of derivatives held, with the top 25 banks accounting for 99%.
Banks with the 25 largest derivatives portfolios held 95% of the contracts for trading purposes, while the remaining 5% were for their own risk management needs.
The rest of the banks hold two-thirds of their contracts for risk management and other nontrading purposes.
Revenue from interest rate contracts was $1.2 billion, up $234 million from the second quarter, while revenue from foreign exchange contracts increased to $1.1 billion, a $162 million rise.
Revenue from other trading positions, including equities and commodities contracts, increased to $228 million, a $112 million jump.
The news may not be as bright next quarter. Mr. Brosnan warned that recent turmoil in Asia is likely to break nearly two years of uninterrupted increases in derivatives profits.
"On the one hand, banks are benefiting as customers become more interested in risk management," he said. "However, to date those benefits are more than offset by losses that resulted at some banks from sudden and severe shifts in equity values, currency rates, and debt prices at the end of October."
Mr. Brosnan said regulators also are concerned that banks will enter more risky derivatives contracts as the hedging instruments become more popular.
"Right now at major national banks the quality of derivatives transactions is better than traditional loan exposures-there are very few losses and very few past dues," he said. "But as this business gets bigger, institutions will slowly migrate to a larger number of customers and the quality will not be as good."
For all banks, the book value of contracts 30 days past due totaled only $8.1 million, or 0.3 basis points of total derivatives credit exposure. Through the first three months of 1997, credit losses from derivatives totaled only $59 million.
The third quarter's performance slightly topped the previous record of $2.38 billion earned in the first quarter. Revenues dipped in the second quarter because markets stabilized and competition increased, the agency said. The OCC conducts the survey quarterly by examining call report data.
