WASHINGTON (CN) - U.S. Banks and savings associations reported trading revenues of $7 billion in the first quarter of 2012, a decline of 5 percent from the first quarter of 2011, the Office of the Comptroller of the Currency reports.
The OCC says the drop was the result of weaker demand for credit swaps and instruments which federal regulators have taken a keen interest in since the financial crisis in 2008.
Despite the comparative decline from a year ago, the first quarter results were a 178 percent rise over the preceding quarter. This was due in part to improvements in the general economy and a normal rebound after the seasonally slow year-end period.
The slight decline in bank revenues was made up however at the holding companies, which often control banks, where trading revenue was up 151 percent despite heavy losses from their foreign exchange trading desks.
If trading revenue was slightly down at banks, the risks they faced, both from market volatility and credit exposure from derivatives fell dramatically since the first quarter of 2011.
Credit exposure to derivatives fell 12 percent in part due to banks holding more collateral against their exposure and taking more conservative positions. The OCC says the banks it regulates have a net current credit exposure of just $377 billion compared with $800 billion at the peak of the financial crisis near the end of 2008.
Banks also say they face much lower potential trading losses. Using Value-at-Risk analysis, which estimates what a bank believes it could lose in a normal market over a set period of time, in aggregate, the five largest banks report their estimate of potential losses is down 16.7 percent since 2011. VaR models vary from bank to bank and are reported quarterly to the SEC.
The aggregate estimate went down despite the sharp rise in estimated potential losses from JPMorgan Chase after it switched its VaR model in light of its so-called London Whale trading losses reported in May.
The value of credit derivatives, including the now infamous credit default swap, fell 5 percent in the first quarter to $14 trillion. The OCC says this was mostly due to reduced demand for the products as well as an industry effort to reduce the volume of such trades by aggregating them.
While the value of swaps contracts also declined by 5 percent in the first quarter they still represent 61 percent of the derivatives market and remain the subject of intense scrutiny by the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The OCC's quarterly report on trading revenues and bank derivatives activities is based on reports from all federally insured U.S. commercial banks, trust companies and financial holding companies.
While over 1,200 banks and savings associations reported derivatives activity in the first quarter, the OCC says the four largest commercial banks represent 93 percent of activity and 81 percent of the net current credit exposure.