WASHINGTON - Trading revenues at commercial banks and thrifts took a dive in the fourth quarter but largely because of seasonal trends, the Office of the Comptroller of the Currency said Wednesday.
Financial institutions reported $4.4 billion in trading revenue in the fourth quarter, down 22% from the previous quarter but up 52% from a year earlier, according to the OCC's quarterly report on bank trading and derivatives activity. The decline in the last quarter of 2014 followed similar trends for yearend trading in all but one year since 2000.
"The year finished on a weak note, which is true almost every year," said Kurt Wilhelm, director of the OCC's Financial Markets Group, in a press release. "The dealing firms and their clients generally reduce their risk appetite at the end of the year. As the calendar runs out, market participants don't want to take risks that could create losses that jeopardize income forecasts."
However, Wilhelm also said that there were steeper fair value credit adjustments which caused a more negative impact in the fourth quarter of 2014 when compared to years past. Still, trading revenue in the fourth quarter was 22% higher than the $3.6 billion average set for the five fourth quarters since the financial crisis ended, the OCC said.
"Given the headwinds from credit valuation adjustments, and normal seasonal weakness, trading performance in the fourth quarter was actually fairly strong," Wilhelm said.
Trading revenue for all of 2014 was up 3% from the previous year to $22.7 billion.
"The modest increase in trading revenue during 2014 was due to better results from trading equity and commodity products, as interest rates and foreign exchange income, which drive bank trading revenue, didn't really change much," Wilhelm said.
Meanwhile, credit exposure from derivatives rose. The metric used by the OCC to gauge derivative credit risk - known as the net current credit exposure - increased 12% in the fourth quarter to $445 billion. Wilhelm said this was because about 80% of the total derivatives contracts are rate contracts which are "very sensitive to interest rates."
"At the end of the year, we saw interest rates in the U.S. fall fairly sharply, in sympathy with even larger declines in foreign interest rates, as markets priced in lower inflation and growth expectations," Wilhelm said.
There were 1,397 commercial banks and thrifts holding derivatives in the fourth quarter, an increase of eight institutions from the prior quarter.