Stung by the recession in Southeast Asia, bank revenue from securities trading plunged 52%, to $1.2 billion, in the fourth quarter, the Office of the Comptroller of the Currency announced Wednesday.
The drop from the third quarter was primarily "a result of volatility, notably in the Asian markets," said Michael L. Brosnan, OCC's director of treasury and market risk. "It was a poor quarter no matter how you look at it."
Although credit losses on derivatives remain low-just $61.2 million in the quarter and $125 million for the year-banks are losing more money in this business than ever before. In 1996, bank losses attributed to derivatives totaled $37 million.
"The losses, although small, are growing, and that reflects a maturing business," Mr. Brosnan said in an interview. "We are likely to see more and more losses going forward."
The number of commercial banks that hold derivatives decreased by 16, to 459. Eight large banks hold 95% of the total notional amount of derivatives in the banking system.
None of these eight banks increased trading revenues during the fourth quarter, and three even lost money: First Chicago NBD Corp., Bankers Trust New York Corp., and Chase Manhattan Corp.
Mr. Brosnan said losses would have been much larger in the fourth quarter had banks not made so much money selling hedging instruments.
Of the $1.2 billion banks made on cash securities and derivatives during the quarter, foreign exchange revenue rose $211 million, to $1.3 billion, while revenue from interest rate positions fell $639 million, to $534 million.
Subtract from that the $625 million banks lost trading equities and emerging market debt. Those losses break down as $305 million lost on equity positions and $320 million primarily in emerging market debt. The OCC said these declines came mainly from eastern Europe, Asia, and Latin America.
The notional amount of derivatives in commercial bank portfolios nudged up less than 1% to $25.1 trillion in the fourth quarter.
The notional amount of interest rate contracts slid $185 billion, to $17.1 trillion, while foreign exchange contracts increased $162 billion, to $7.4 trillion. Commodity and equity contracts rose $42 billion, to $494 billion, and credit derivatives jumped 41%, to $55 billion.