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News Release 2013-48 | March 20, 2013

OCC Reports Fourth Quarter 2012 Trading Revenue of $4.4 Billion

WASHINGTON — The Office of the Comptroller of the Currency reported today that insured U.S. commercial banks and savings institutions reported trading revenue of $4.4 billion in the fourth quarter of 2012, down $908 million, or 17 percent, from $5.3 billion in the third quarter, but $1.8 billion, or 73 percent, higher than in the fourth quarter of 2011.

"Although trading revenues declined relative to the third quarter, a better measuring stick of trading performance is to compare fourth quarter results to the same period last year, due to the pronounced seasonal pattern in the trading business,” said Kurt Wilhelm, Director of the Financial Markets Group.   Mr. Wilhelm noted that since 1997, trading revenues had fallen in the fourth quarter in 13 of the past 16 years.  “Trading revenues in the fourth quarter were actually quite strong, higher than any fourth quarter on record.  Reduced concerns about Europe and an improving U.S. economy led to increased risk appetite across the financial markets.”   

For all of 2012, banks reported trading revenues of $18.0 billion, down $7.8 billion (30 percent) from $25.8 billion in 2011.  “The decline in trading revenues in 2012 was entirely a credit story,” said Mr. Wilhelm, who noted that banks reported losses of $7.6 billion from trading credit contracts in 2012, compared to revenues of $5.2 billion in 2011.  “That swing of $12.8 billion in the credit component more than explained the overall $7.8 billion decline in trading revenues.”  Mr. Wilhelm explained that “it’s not the intermediation of credit products that caused the losses in 2012.  The poor performance resulted from some well-publicized individual bank activity and the continued tightening of credit spreads. Tighter credit spreads increase the credit-adjusted value of derivatives payables and banks report those higher liability amounts as trading losses.”

Credit exposures from derivatives fell in the fourth quarter.  Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $13 billion, or 3 percent, to $386 billion during the fourth quarter.  “A slight uptick in interest rates during the fourth quarter helped to reduce the fair value of interest rate contracts and drive overall exposures lower,” said Mr. Wilhelm.  The OCC noted that the fair value of interest rate contracts declined 4 percent, or $177 billion, causing the fair value of all derivatives contracts to decline $188 billion (4 percent).    

The report shows that the notional amount of derivatives held by insured U.S. commercial banks fell $3.8 trillion, or 2 percent, from the third quarter to $223 trillion, resuming a pronounced trend toward declining notional amounts that had been interrupted in the third quarter.   Prior to the third quarter increase, derivatives notionals had fallen for four consecutive quarters, due to ongoing trade compression activities.  Notional declines are being driven by compression efforts by banks seeking to reduce regulatory capital requirements and also to lower operational and risk burdens in their derivatives portfolios.  Notionals fell for each category of derivatives contracts.  Interest rate contracts fell $2.5 trillion, or 1 percent, to $179 trillion, while credit contracts fell $0.8 trillion (6 percent) to $13.2 trillion.  Commodity and equity contracts fell 11 percent and 10 percent, respectively.

OCC also reported:

  • Banks hold collateral to cover 71 percent of their NCCE.  The quality of the collateral is very high, as 78 percent is cash (U.S. dollar and non-dollar).
  • Trading risk exposure, as measured by value-at-risk (VaR), averaged $503 million across the top five dealer firms during 2012, 23 percent lower than $655 million in 2011.
  • Derivatives contracts are concentrated in a small number of institutions.  The largest four banks hold 93 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.
  • Derivative contracts remain concentrated in interest rate products, which represent 80 percent of total derivative notional values.  On a product basis, swap products represent 60 percent of total derivatives notionals.  Both measures are unchanged from the third quarter.
  • Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.
  • The number of commercial banks and savings associations holding derivatives was unchanged at 1,352.

A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Fourth Quarter 2012 is available on the OCC’s Website.  

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