WASHINGTON — The growing number of corporate scandals fueled a near-record high last quarter in the value of derivatives contracts that commercial banks held for themselves and their customers, the Office of the Comptroller of the Currency reported Thursday.
The notional, or total, value of those contracts was $50.1 trillion on June 30, 8% more than on March 31 and second only to the $51.3 trillion last Sept. 30, according to agency records that reach back to 1991.
Michael L. Brosnan, the OCC’s outgoing deputy comptroller for risk evaluation, said that traditionally the second quarter is quieter than the first, but that banks and their customers felt pressure to mitigate risk.
“All of the corporate governance issues that have dominated the business pages over the past few months created greater uncertainty in the financial markets,” he said. “Risk managers typically respond … by reshaping their risk profiles, and that explains the fairly sharp rise in derivative notional volumes during the second quarter.”
Mr. Brosnan, who gave his last derivatives briefing before shifting full-time to Charlotte to become the agency’s examiner-in-charge at Bank of America, said expectations that the Federal Reserve Board would increase interest rates also drove the notional value up as banks and businesses scrambled to adjust their positions when the central bank did not take action.
Bank earnings from derivatives rose 7.1%, to $3.4 billion, from the first quarter. That was highly unusual, Mr. Brosnan said.
“This is the first time we’ve been looking at the data that second-quarter revenues increased from the first quarter,” he said. “The big increase in notional volume drove revenues, and so we didn’t see the typical second-quarter decline in revenues.”
Chargeoffs from derivative exposures dropped 63%, to $25 million. However, when banks lose money on derivative contracts, the writeoffs usually occur some time after the contract goes sour.
“We still don’t think we’re out of the woods yet on chargeoffs, but the second-quarter performance is certainly encouraging,” Mr. Brosnan said.
