OCC says derivatives revenues, notionals down

US commercial banks’ revenues from derivatives fell by $805 million, to $2.65 billion, from the third to the fourth quarters of 2001, according to figures released yesterday by the Office of the Comptroller of the Currency (OCC).

The OCC’s quarterly Bank Derivatives report, which compiles data from 369 US commercial banks, also showed that the JP Morgan Chase merger caused the overall notional value of derivatives to decrease by $5.9 trillion, to $45.4 trillion, during the same period. However, the combined notional volumes of all other banks actually increased by $1 trillion.

More than half the total notional volume, $23.2 trillion, is attributable to JP Morgan Chase, the report states. However, the report does not include data from non-US institutions, some of which, like Deutsche Bank, are among the world’s largest derivatives dealers.

Mike Brosnan, the OCC’s deputy comptroller for risk evaluation, attributed the drop in revenues to softening in the US economy, caused primarily by events of September 11th and the Enron debacle.

During the fourth quarter banks charged-off $296 million from credit exposures associated with derivatives. Apart from the third quarter 1998, when they wrote off $445 million due to the Long Term Capital Management crisis, this is the largest quarterly charge-off logged in the past 10 years.

The OCC’s Brosnan said that the charge-offs came as a result of the wider economic downturn as corporate bankruptcies and defaults increased. However he added that thus far the losses had been very small relative to bank earnings and capital levels.

Brosnan warned that continued credit worries in the market could mean more losses in 2002 and 2003. Total credit exposure, which consists of both the current mark-to-market exposure as well as potential future exposure, decreased by $77 billion in the fourth quarter, to $482 billion. This was largely due to the decline in notionals, caused by the JP Morgan Chase merger.

Interest rate contracts, which comprise 84% of the total notional amount, decreased by $4.8 trillion, to $38.3 trillion, from the previous quarter. Foreign exchange contracts decreased by $906 billion to $5.7 trillion, while equity, commodity and other contracts fell by $186 billion to $950 billion.

The only product to show an increase was credit derivatives, which grew by $35 billion to $395 billion.

“The recent spate of corporate bankruptcies have shown just how important credit derivatives can be as a risk hedging tool,” said Brosnan. “A number of banks have collected on these contracts, reducing the severity of the downturn’s impact on their overall asset quality. Contracts that triggered payments have been settled fairly smoothly, a further positive sign of the market’s development.”

Although credit derivatives volumes grew, they still only account for 0.87% of the overall market.