Magazine article American Banker

Corporate Debt Led to Derivatives Profit Rise

Magazine article American Banker

Corporate Debt Led to Derivatives Profit Rise

Article excerpt

Bank profits from derivative contracts in the first quarter rose 45% from the previous period, to a record $4 billion, thanks largely to transactions related to corporate debt offerings, the Office of the Comptroller of the Currency reported Monday.

Michael Brosnan, deputy comptroller for risk evaluation, attributed the "eye-popping" gain to business from corporations, which issued large amounts of fixed-rate debt and then turned to banks to convert much of that to floating-rate debt to hedge against losses. Corporations are vulnerable to interest rate changes, so they buy swaps to lock in spreads, Mr. Brosnan explained.

The seven largest banks in the derivatives business, which represent nearly the entire market, significantly exceeded their four-year average shares of gross revenue from derivatives earnings.

Morgan Guaranty Trust Co., for instance, has earned 20% of its gross revenue from derivatives since the first quarter of 1997, but in this year's first quarter it took in 23.5% from that source. Bank of America Corp.'s derivatives revenue jumped from 2.3% to 4.1% of gross revenue. Chase Manhattan Bank, which had averaged 7.4%, tallied 9%, and Citibank earned 10.7% of its gross revenue from derivatives, compared with its four-year average of 7.2%.

Businesses and individuals alike use derivatives to hedge against price fluctuations of almost any asset, such as currencies and commodities.

The notional amount of interest rate contracts, $35.7 trillion, was the bulk of derivatives contracts; foreign exchange positions totaled $6.8 trillion. Commodity, equity, and other derivatives totaled $1.1 trillion, including $352 billion of credit derivatives.

"This was the strongest performance on record," Mr. Brosnan said of the impressive volume. "It was a very substantive and important quarter for the banking system. …

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