The chief counsel of the Office of the Comptroller of the Currency offered vigorous arguments Tuesday for the use and continued development of derivatives to mitigate risk.
Julie Williams said the controversial financial instruments were partially responsible for banks' relative health despite recent events that included the largest corporate and sovereign defaults in history.
Derivatives "may thus have helped to play a decisive role in keeping the recent recession both shorter and milder than would otherwise have been the case," she said at a risk management conference in Boston. She noted the tremendous growth of derivatives over the past decade - to a notional $61.4 trillion at the end of the first quarter.
The OCC is not only expecting but encouraging, banks to use derivatives to manage risks for their customers, Ms. Williams said.
As a template for how it will determine when a particular derivative is permissible for one of its banks she cited recent decisions that first allowed a bank to write derivative contracts based on electricity prices and then underwrite transactions that involved transfer of title to electricity.
Beyond applying the traditional litmus test of whether the transaction is a banking activity or incidental to banking, she said, the OCC scrutinized the specific bank - in the case of electricity-title transfers, Bank of America Corp. - to verify that it could safely conduct the business.
"We did not reach a general conclusion that the activity was permissible for every national bank," Ms. Williams said. "We explicitly linked our conclusion about legal permissibility with our supervisory conclusion about the capacity and expertise of the particular bank to conduct the business in question."
Though banks must innovate to serve customers, she said, the OCC will require that "this evolution of activities continues to be coupled with appropriate financial risk controls, and internal checks and balances to ensure that these activities are conducted with integrity and due regard for the bank's good name."
