Volatility in stocks and in foreign exchange markets has led to a boom in trading revenue for banks, up 44% year on year and an astonishing 334.8% over the last quarter.
The Office of the Comptroller of the Currency (OCC), one of the regulators that oversees banks, said:
“Consolidated bank holding company (BHC) trading performance provides a more complete picture of trading revenue in the banking system…
Consolidated holding company trading revenue of $24.9 billion in the first quarter of 2019 was $19.1 billion (334.8 percent) higher than in the previous quarter.
The quarter-over-quarter increase in trading revenue was driven by an $8.7 billion increase in revenue from equity derivatives as well as a $6.5 billion increase in combined interest rate and FX derivatives.
Year-over-year holding company trading revenue increased by $7.6 billion (44.3 percent).”
The first quarter’s trading revenue is the highest since 2012, with four banks dominating by far. OCC says:
“The notional amount of derivative contracts held by banks in the first quarter increased by $24.9 trillion (14.1 percent) to $201.3 trillion from the previous quarter.
The increase in the notional amount of derivative contracts by underlying risk exposure was primarily driven by a $21.0 trillion increase in interest rate notional amounts.
Interest rate notional amounts continued to represent the majority of banks’ derivative holdings at $149.2 trillion, or 74.1 percent of total derivatives.”
Interest-rate derivative are a financial instrument with a value that increases and decreases based on movements in interest rates.
They’re usually used as a hedge, but can also be used to bet on movements in interest rates with FED providing plenty of such movements recently.
“The four banks with the most derivative activity hold 88.3 percent of all bank derivatives, while the largest 25 banks account for nearly 100 percent of all contracts,” OCC says.
JP Morgan accounts for $59 trillion in derivatives. Citibanks at $51 trillion. Goldman Sachs at $49 trillion, then Bank of America way lower at $20 trillion followed by Wells Fargo at $11 trillion, then HSBC at $5 trillion, with the rest at $1 trillion or less.
Meaning it is really just three banks that dominate the market, with too big to fail seemingly becoming even bigger.
Derivatives have ballooned up to 2009 and kept increasing a bit more even amidst the then banking crisis.
Very interestingly, they have stayed at roughly the same level, with little appearing to have changed except for even further consolidation in the banking system.
Credit derivatives outstanding however remain well below the peak of $16.4 trillion in the first quarter of 2008, further decreasing by $132.0 billion (3.1 percent) to $4.1 trillion.
Suggesting there aren’t as many defaults by borrowers or banks are not passing on at the same scale the risk that a borrower might not repay.
Hence they appear to be back to the good times with tens of billions in revenue just for trading and just for the first quarter.