Alea

Q4-2007

Insured U.S. commercial banks lost $9.97 billion trading cash and derivative instruments in the fourth quarter, down $12.3 billion from third quarter revenues of $2.3 billion.

“The large losses in the fourth quarter are the result of well-publicized write-downs on the super senior tranches of collateralized debt obligations backed by subprime residential mortgage securities,” said Deputy Comptroller for Credit and Market Risk Kathryn E. Dick. “We expected to see an adverse effect on trading results given current turbulent conditions in the credit and capital markets, particularly in light of the deterioration in market liquidity.”

The report shows that the notional amount of derivatives held by insured U.S. commercial banks decreased $8.0 trillion in the fourth quarter to $164 trillion. The fourth quarter derivatives total is 25 percent higher than a year ago.

Total interest rate contracts fell $9.2 trillion in the fourth quarter, due to a $9.8 trillion decline in contracts with maturities less than one year. Credit derivatives increased 3 percent during the quarter to a notional level of $14.4 trillion, 60 percent higher than a year ago.

The OCC also reported that the net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, increased $57 billion, or 22 percent, during the quarter to $309 billion. The measure is 67 percent higher than at the end of 2006.

“The decline in interest rates and widening credit spreads have caused sharp increases in derivatives fair values, and netting benefits have not kept pace the past two quarters,” said Ms. Dick. The percentage of gross fair values offset by netting, which reached a peak of 86.4 percent in the second quarter of 2007, has declined to 83.8 percent in the fourth quarter.

Note: The $8 trillion decrease is due to one bank, JPM.
OCC Reports Fourth Quarter Bank Trading Loss of $9.97 Billion

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Posted by jck at 11:22 am EST on April 2nd, 2008 |