Thanks, Subprime! Banks Lost $9.97 Billion on Derivatives in Q4
Insured U.S. commercial banks lost $9.97 billion trading cash and derivative instruments in the fourth quarter, down $12.3 billion from third quarter revenues of $2.3 billion, according to a report released Wednesday by the Office of the Comptroller of the Currency. For the full year, the OCC reported that banks recorded $5.5 billion in trading revenues, down $13.3 billion from the record of $18.8 billion in 2006. The report provides insight into how the credit crunch affected a critical area of the banking industry. We'll give HW readers one guess on the root of the fourth quarter losses. Don't think too hard. "The large losses in the fourth quarter are the result of well-publicized write-downs on the super senior tranches of collateralized debt obligations backed by subprime residential mortgage securities," said deputy comptroller for credit and market risk Kathryn Dick. "We expected to see an adverse effect on trading results given current turbulent conditions in the credit and capital markets, particularly in light of the deterioration in market liquidity." The report found that the notional amount of derivatives held by insured U.S. commercial banks decreased $8.0 trillion in the fourth quarter to $164 trillion, although that amount was still 25 percent higher than a year ago. The OCC also reported that the net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, had increased $57 billion, or 22 percent, during the quarter to $309 billion -- 67 percent higher than at the end of 2006. Derivatives contracts are concentrated in a small number of institutions, the OCC said. The largest five banks hold 97 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent. For more information, visit http://www.occ.gov.