US commercial banks lost $9.2bn on derivatives trades in Q4 08

Discussion in 'Wall St. News' started by ASusilovic, Mar 29, 2009.

  1. The Office of the Comptroller of the Currency is an under-remarked institution, given its mandate:

    The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all national banks. It also supervises the federal branches and agencies of foreign banks. Headquartered in Washington, D.C., the OCC has four district offices plus an office in London to supervise the international activities of national banks.

    The OCC also produces useful quarterly reports on the trading and derivatives activities of the banks it supervises - like this one, released on Friday, which details just how poorly commercial banks fared in the fourth quarter of last year:

    U.S. commercial banks lost $9.2 billion trading in cash and derivative instruments in the fourth quarter of 2008 and for the year they reported trading losses of $836 million. The poor results in 2008 reflect continued turmoil in financial markets, particularly for credit instruments.

    Other interesting factoids from the report include (emphasis FT Alphaville’s):
    The notional value of derivatives held by U.S. commercial banks increased $24.5 trillion in the fourth quarter, or 14%, to $200.4 trillion, due to the migration of investment bank derivatives business into the commercial banking system

    Derivative contracts remain concentrated in interest rate products, which comprise 82 per cent of total derivative notional values. The notional value of credit derivative contracts decreased by 2% during the quarter to $15.9 trillion. Credit default swaps are 98% of total credit derivatives.

    Derivatives activity in the U.S. banking system is dominated by a small group of large financial institutions. Five large commercial banks represent 96% of the total industry notional amount and 81% of industry net current credit exposure.

    Foreign exchange trading revenues rose 32% to a record $4,093 million. Foreign exchange contracts continue to provide the most consistent source of trading revenues.

    Credit trading continues to drive trading losses, as banks lost $9.0 billion in the fourth quarter, compared to $2.5 billion in third quarter gains. Banks had record losses trading both interest rate and equity contracts, losing $3,420 million and $1,229 million respectively.

    Revenues from commodity trading activities fell 1% to $338 million.

    There is also fascinating detail on credit risk and net current credit exposure, which increased by $364bn - or 84 per cent - in the fourth quarter to a record $800bn. Note, however, that gross credit exposure declined by almost 90 per cent from $7,100bn due to bilateral netting agreements.


    There’s quite a lot of chart porn in the report for those of you so inclined, but FT Alphaville thinks one of the best bits of the report is table one on page 22, which shows the notional amount of derivative contracts held by the top 24 commercial banks and trust companies as of Dec 31 2008, in $m.
    And the top five, ranked by total derivatives, are:

    JP Morgan Chase Bank NA - $87,362,762
    Bank of America NA- $38,304,564
    Citibank National ASSN - $31,887,869
    Goldman Sachs Bank USA - $30,229,614

    The fifth-ranked bank, HSBC Bank USA National ASSN, clocks in with a comparatively minor $3,713,075.

    When ranked by holding companies, the ranking is as follows:

    JP Morgan Chase & Co - $87,780,914
    Bank of America Corporation - $39,081,848
    Citigroup Inc - $33,424,365
    Wells Fargo & Company - $$5,105,850
    HSBC North America Holdings Inc - $3,660,305

    And then there’s Table 7, reproduced below :


    Of the top five banks listed in that table, only one made money from trading cash instruments and credit derivatives.

    No prizes for guessing that bank was Goldman Sachs.

    Now, go download the report, not least because the OCC saved the best table for last.

    :D :D :D

  2. thanks for posting.

    Did you notice the record high netting benefit @ 88%?

    Also although Q4 2008 was ugly, it was similar to Q4 2007. And after Q4 2007 trading revenues bounced right back.
  3. I am more interested in this little detail :

    A bank’s net current credit exposure across all counterparties will therefore be the sum of the gross positive fair
    values for counterparties lacking legally certain bilateral netting arrangements (this may be due to the use of
    non-standardized documentation or jurisdiction considerations) and the bilaterally netted current credit
    exposure for counterparties with legal certainty regarding the enforceability of netting agreements.

    This “net” current credit exposure is the primary metric used by the OCC to evaluate credit risk in bank
    derivatives activities. A more risk sensitive measure of credit exposure would also consider the value of
    collateral held against counterparty exposures. While banks are not required to report collateral held against
    their derivatives positions in their Call Reports, they do report collateral in their published financial statements.
    Notably, large trading banks tend to have collateral coverage of 30-40% of their net current credit exposures
    from derivatives contracts.

    Net current credit exposure (NCCE) for U.S. commercial banks increased $364 billion, or 84% in the fourth
    quarter to a record $800 billion. Net current credit exposure is 159% higher than the $309 billion in the fourth
    quarter of 2007. Gross positive fair values (derivatives receivables) increased $4,328 billion in the quarter.
    Legally enforceable bilateral netting agreements allowed banks to reduce the gross credit exposure of $7,100
    billion by 88.7% to $800 billion in net current credit exposure.

    Net Current Credit Exposure (NCCE): For a portfolio of derivative contracts, NCCE is the gross positive fair
    value of contracts less the dollar amount of netting benefits. On any individual contract, current credit exposure
    (CCE) is the fair value of the contract if positive, and zero when the fair value is negative or zero. NCCE is also
    the net amount owed to banks if all contracts were immediately liquidated.