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Banks’ Derivatives Use Grows by 21%
New Data from the Office of Comptroller of the Currency
Financial Policy Forum
October 12, 2004
The Office of Comptroller of the Currency (OCC) recently released new figures for the holding of derivatives by U.S. commercial banks. The amount of derivatives outstanding rose to $76.5 trillion at the end of the first quarter of 2004, and this represents a 21.2% increase from $63.1 trillion for the first quarter of 2003.
The outstanding amount of swaps grew by 33.8% over the year ending with the first quarter of 2004 to $47.8 trillion, and that compares to a 20.0% growth in options (including both exchange traded and OTC traded options). By far the fastest growing derivative product was the credit derivative which grew by 69.3% over the same 12 months to reach $1.2 trillion by the end of March 2004.
Although the amount of outstanding interest rate derivatives is more than eight times that of foreign exchange derivatives, the later grew faster over the 12 month period – 27.4% compared to 23.8%. Nonetheless trading profits on interest rate derivatives and fixed income securities grew much faster than those for trading foreign exchange derivatives and spot foreign exchange. This suggests that trading volume is driven more by underlying market volatility, and hence the need to hedge and reposition portfolios in response to this volatility, than by dealer profits.
INDUSTRY CONCENTRATION. The OCC data also shows that more banks are now using derivatives. Their data now covers 601 reporting banks compared to 488 for the first quarter in 2003. Despite the increase in the number of banks reporting derivatives positions, the degree of concentration amongst banks in the derivatives market was not phased – the top seven banks’ share of all banks’ derivatives holdings rose from 95.7% to 96.0%.
CREDIT EXPOSURE. While the netting of derivative contracts continues to reduce banks’ exposure to credit risk on their derivatives holdings, their total credit exposure due to derivatives positions still remains a large multiple of their capital. Risk exposure as a percent of risk based capital for J.P. Morgan Chase remains the highest at 890%, that for HSBC is next at 291%, Citibank is 264%, Bank of America in next at 216% and the average for the largest seven banks is 268%. These figures assume that netting provisions are legally binding, but they do not account for collateral held against the contracts or counterparties. The measure of total credit exposure includes both current levels of credit exposure plus an estimate of potential future exposure.
Another related credit exposure item is the amount of charge-offs by banks from defaults or “failures” of derivatives with their counterparties. The amount of charge-offs jumped in the first quarter of 2004 to $120 million in comparison to credit losses of $30 million in the first quarter of 2003.
EQUITY DERIVATIVES. Although equity derivatives are a small share of banks’ overall derivatives positions, they are of special interest to those concerned with Glass-Steagall provisions because equity derivatives offer banks the same or similar risks and returns from directly holding equity shares. The most recent OCC data reports that banks’ equity derivatives holdings rose 37.1% over the 12 months ending in the first quarter of 2004 to reach $1.045 trillion.
BACKGROUND ON DATA. The OCC was established as a Bureau of the U.S. Treasury Department as part of the National Bank Act of 1863. The Act created national bank charters and a national currency in order to improve the ability of the Union to finance its war efforts. Today, the OCC, amongst other bank regulatory responsibilities, compiles data from quarterly Call Reports from banks operating in the U.S. and produces a quarterly report on their derivatives activities. The OCC then makes this aggregated information available in PDF format on its website (see below).
Information from these data releases has been, in part, entered into spreadsheets available on the Derivatives Study Center website:
The original OCC data is available at:
THIS REPORT IS ALSO AVAILABLE AT
 The term commercial bank is used in refer to banks whose deposits are federally insured.
 OTC stands for over-the-counter. The definition of this and other terms used in the Brief can be found at www.financialpolicy.org/dscglossary.htm
 Figures include “trading revenue” for both cash instruments and derivatives contracts.