File this under Same Shit Different Day. I came across this article today on HuffPost:Banks Still Trading In Risky Derivatives. The articles is OK but the links to the Office of Comptroller of the Currency website are great.
I found a new report: OCC's OCC’s Quarterly Report on Bank Trading and Derivatives Activities Second Quarter 2009 (pdf file). I am kind of slow so this report may not be old news to most EP people.
First, the press release that accompanied the report:
U.S. commercial banks reported trading revenues of $5.2 billion in the second quarter of 2009, compared to record revenues of $9.8 billion in the first quarter of 2009, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.
“After such a strong first quarter, we expected to see a seasonal decline in trading revenues, and indeed that occurred,” Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. “Still, second quarter trading revenues were the sixth strongest since we’ve been keeping records.”
As Ms. Dick noted in previous quarters, trading results continue to be influenced by the reporting of fair value adjustments for derivatives payables and receivables. “On balance, trading results in the second quarter benefited from the significant tightening of corporate credit spreads, as the positive impact of increasing receivable values exceeded the negative impact of increasing payable values,” she said.
The OCC also reported that net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $140 billion, or 20 percent, to $555 billion. “Rising interest rates and falling credit spreads have combined to reduce the fair values of both derivatives receivables and payables,” Ms. Dick said. “As a result, we have seen material reductions in net current credit exposure over the past two quarters, although by any standard these exposures remain very high.”[Emphasis added]
Now, on to the report. This is from the Executive Summary:
- The notional value of derivatives held by U.S. commercial banks increased $1.5 trillion in the first quarter, or 0.7%, to $203.5 trillion.
- U.S. commercial banks reported revenues of $5.2 billion trading cash and derivative instruments in the
second quarter of 2009, compared to a record $9.8 billion in the first quarter.
- Net current credit exposure decreased 20% to $555 billion.
- Derivative contracts remain concentrated in interest rate products, which comprise 85% of total derivative notional values. The notional value of credit derivative contracts decreased by 8% during the quarter to $13.4 trillion.
Then this information regarding Credit Derivatives:
Credit derivatives grew rapidly over the past several years as dealers increasingly used them to structure securities to help meet investor demand for higher yields. From year-end 2003 to 2008, credit derivative contracts grew at a 100% compounded annual growth rate. However, notional credit derivatives volume has fallen $2.5 trillion, or 15.5%, since peaking at $15.9 trillion in the fourth quarter of 2008. Industry efforts to eliminate offsetting trades (“trade compression”), as well as reduced demand for structured products, has led to a decline in credit derivative notionals. In the second quarter, credit derivatives notionals fell 8% to $13.4 trillion.
Credit default swaps consisted of 98% of all credit derivative notional value. Granted, notional values can be misleading but wow - 98% of $13.4 trillion. And what about counterparty risk? What happens if Citigroup or Bank of America or Wells Fargo or some other zombie bank is one of the parties to credit default swaps? Sure there is collateral, but who is monitoring the quality of the collateral - is it more mortgage-backed securities.