Banks’ Credit Exposure is Much Less Risky These Days

The Office of the Comptroller of the Currency (OCC), in its Quarterly Report on Bank Trading and Derivatives Activities for Q3 2016, found that trading revenue for commercial banks and savings associations declined over-the-quarter but rose substantially over-the-year in the third quarter last year.

The OCC reported that bank trading revenue dropped by nearly 9 percent from Q2 to Q3 in 2016, from $7 billion down to $6.4 billion—but at the same time, which “reflects a decline in combined interest rate and foreign exchange revenue,” according to the OCC. At the same time, bank trading revenue shot up by nearly 20 percent from Q3 2015 to Q3 2016, an increase of approximately $1.1 billion.

According to the OCC, bank trading results in the second and third quarters were the second-highest since 2000 for each quarter.

While trading revenue was way up for banks, net current credit exposure (NCCE), the metric the OCC uses to evaluate credit risk in bank derivative activities, was way down over-the-quarter. The OCC reported that NCCE for banks and savings associations in the U.S. declined by 4.7 percent (approximately $24 billion) over-the-quarter in Q3, down to approximately $481.7 billion at the end of the quarter.

NCCE is down substantially from its peak of $804.1 billion at the end of 2008 in the midst of the financial crisis at a time when interest rates were very low and credit spreads were very high, according to the OCC.

“The significant decline in NCCE since 2008 has largely resulted from declines in the gross positive fair value (GPFV) of interest rate and credit contracts,” OCC reported.

Also according to the OCC, 1,438 commercial banks and savings associations in the United States held derivatives in the third quarter while four banks held almost 90 percent of the notional amount of derivatives, defined by the OCC as the “nominal or face amount that is used to calculate payments made on swaps and other risk management products.”

Click here to view the OCC’s complete report.