Friday, March 27, 2009

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

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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.

OCC chart of credit exposure of US commercial banks

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 (click to enlarge):

OCC table of trading revenues (small)

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.

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