Re: Greenspan' and Derivatives

["Gary Santos" <evs@xxxxxxxxxxxx>]

FOR IMMEDIATE RELEASE Contact: Kevin Mukri
March 12, 2003 (202) 874-5770


OCC Reports Derivatives Volume Grows $2.9 Trillion



WASHINGTON—Derivatives held by U. S. commercial banks increased $2.9
trillion in the fourth quarter, to $56.1 trillion, the Office of the
Comptroller of the Currency reported today in its quarterly Bank Derivatives
Report.



“Large, sophisticated commercial banks continue to serve in a financial
intermediary capacity for corporate customers using derivatives to manage
their financial risks,” said Kathryn E. Dick, the OCC’s Deputy Comptroller
for Risk Evaluation. “When used properly, derivatives add an element of
financial flexibility to the menu of financial market products used by bank
institutional customers seeking to manage earnings and capital volatility.”



Ms. Dick noted that while the record notional amount of derivatives is a
reasonable reflection of business activity, it does not represent the amount
at risk for commercial banks. The risk in a derivatives contract is a
function of a number of variables, such as whether counterparties exchange
notional principal, the volatility of the currencies or interest rates used
as the basis for determining contract payments, the maturity and liquidity
of contracts, and the creditworthiness of the counterparties in the
transaction.



The OCC also reported that earnings attributable to the trading of cash
instruments and derivatives activities decreased by $508 million in the
three-month period, to $1.86 billion.



“While the fourth quarter certainly was not a real strong revenue quarter,
it was not as weak as these numbers suggest,” Ms. Dick said. “The tightening
of corporate credit spreads caused a decline in the value of credit
derivative hedges banks use to manage risk in their loan portfolios. Even
though this activity is hedging and not trading, regulatory reporting
instructions require banks to report the value changes of their credit
hedges in trading revenues. This was a major factor in comparing the
revenues for the two quarters.”



The report also noted that total credit exposure, which consists of both the
current mark-to-market exposure (after netting benefits), as well as
potential future exposure, increased $24 billion to $594 billion.



“The increase in credit exposure resulted primarily from the growth in
notional amounts, particularly for interest rate contracts maturing beyond
five years,” said Ms. Dick. “With rates on swap contracts having again
declined in the fourth quarter, it’s not surprising to see increased credit
exposure. The ongoing assessment of credit risk exposure is a fundamental
part of our supervisory process in large banks.”



The report noted that only a small fraction of derivatives contracts were 30
days or more past due. For all banks, the fair value of contracts past due
30 days or more totaled only $36 million, or .006 percent of total credit
exposure from derivative contracts. Ms. Dick pointed out that derivatives
charge-offs for the quarter increased $4 million to $74 million, while
noting that the charge-off rate for derivatives is .012 percent, well below
the 1.81percent for C&I loans.


“The economic uncertainty of recent quarters has caused the derivatives
charge-off numbers to bounce around a bit and we expect that this may
continue for the next several quarters,” Ms. Dick said.



“The derivatives business is all about credit risk,” she added. “Derivatives
are simply another line of business contributing to the overall credit
exposures at our large commercial banks, but to properly assess the credit
risk from derivatives, you have to look beyond the raw numbers, and consider
risk mitigants such as netting and collateral, in addition to the fact that
derivatives counterparties on balance have stronger credit ratings than
other credit businesses.”



For example, Ms. Dick pointed out that the benefits achieved from legally
enforceable bilateral netting reduced current credit exposures by 81.3
percent in the fourth quarter.



During the fourth quarter, the notional amount of interest rate contracts
increased by $2.7 trillion, to $48.3 trillion. Foreign exchange contracts
increased by $240 billion to $6.1 trillion. This figure excludes spot
foreign exchange contracts, which decreased by $313 billion, to $196
billion. Equity, commodity and other contracts decreased by $66 billion, to
$1 trillion. Credit derivatives increased by $62 billion, to $635 billion.



Overall, 86 percent of the notional amount of derivatives positions was
comprised of interest rate contracts with foreign exchange accounting for an
additional 11 percent. Equity, commodity and credit derivatives accounted
for only three percent of the total notional amount.



Ms. Dick said that the number of commercial banks actively engaging in
derivatives remains small. “The top seven commercial banks account for
almost 96 percent of the total notional amount of derivatives in the
commercial banking system, with more than 99 percent held by the top 25
banks.”



The OCC fourth quarter derivatives report also noted that:



·        Revenues from interest rate positions decreased by $476 million, to
$752 million, and revenues from foreign exchange positions increased by $107
million, to $1.1 billion. Revenues from equity trading positions increased
by $108 million, for a loss of $64 million. Revenues from commodity and
other trading positions decreased by $248 million to $30 million.



·        Long-term contracts (those with maturities of five years or more)
increased by $1 trillion, to $10.2 trillion. Contracts with remaining
maturities of one to five years grew by $775 billion to $15.5 trillion.
Short-term contracts (those with maturities of less than one year) increased
by $667 billion to $17.2 trillion.



·        The number of commercial banks holding derivatives increased by 19,
to 427.



A copy of OCC Bank Derivatives Report: Fourth Quarter 2002 is available on
the OCC Web site: www.occ.treas.gov.