A report released by the OCC last week showed that trading revenue at insured commercial banks and savings associations fell three percent from the first quarter to $7.5 billion in the second quarter.
Second quarter trading revenue, however, rose $5.3 billion from the second quarter of 2012 — an increase of 268 percent.
“The decline in trading revenue was not a surprise, given the well-established seasonal pattern,” Kurt Wilhelm, the director of the Financial Markets Group, said. “What is a bit surprising, however, is how small the decline was.”
Wilhelm said that second quarter training revenue is the second highest of any second quarter, just behind the $7.4 billion reported in 2007.
“There was strong demand for interest rate products, as investors increased their hedging and positioning activity after the Fed stated it may taper its bond purchases,” Wilhelm said.
Net current credit exposure, which is used to measure credit risk in derivatives activities, fell $19 billion to $339 billion in the second quarter. The gross fair value of interest rate contracts fell 16 percent, while receivables on all other derivatives contracts rose by $46 billion, resulting in a $498 billion decline in gross derivatives receivables.
Credit charge-offs fell $22 million during the second quarter to $61 million. Wilhelm said charge-offs of derivatives exposures usually originate from swaps connected to defaulted loans, noting slippage in the quality of collateral held against derivatives exposures.
“Collateral quality on derivatives exposures is very high, as 77 percent of it is cash,” Wilhelm said. “That explains why the charge-off rate on derivatives is so much lower than it is on loans.”
The report also showed that banks’ collateral covers 75 percent of their NCCE, while collateral covers 88 percent of banks and securities exposure and 325 percent of hedge fund exposure.
Trading risk exposure averaged $376 million across the top five dealer firms during the first quarter of the year — a nine percent decrease from $411 million in the first quarter.