Bank revenue from derivatives rebounded sharply in the fourth quarter as turmoil in the capital markets subsided, the Office of the Comptroller of the Currency reported Thursday.
Revenue from trading derivatives and other types of cash instruments hit $2 billion in the fourth quarter, up from $614 million in the third quarter.
But regulators still cautioned banks to hone their risk management techniques.
"The fourth quarter marked a return to stability," said Michael L. Brosnan, deputy comptroller for risk evaluation. "Risk managers would be wise to adjust stress testing, risk limits, and other risk control tools to recognize the reality that such extreme conditions will perhaps arise."
Much of the rebound was tied to a surge in revenue from interest rate swaps. Banks lost $284 million on interest rate instruments during the third quarter, but they took in $669 million in the fourth quarter.
All other types of derivatives measured by the OCC, including foreign exchange, equity, and commodities contracts, also posted increases, though not as large.
Chargeoffs, or losses from derivatives, totaled $107 million in the fourth quarter, a vast improvement from the third quarter, when chargeoffs hit $445 million.
However, chargeoffs were still high compared with early 1997, when they were just $50,000. That's because the world economy is still unstable, the OCC concluded.
"The loss figures ... reflect the volatile economic environments in Asia, Eastern Europe, and Latin America, which have negatively affected the ability of some counterparties to perform," according to the agency's report.
Banks increased their derivatives activities to record levels, but the rate of growth slowed in the fourth quarter. The notional amount of derivatives held by commercial banks was $32.9 trillion at yearend, 1.2% higher than in the third quarter. The notional amount grew 16% in the third quarter.
Seven commercial banks accounted for 94% of the total notional amount.
