Scary: “OCC’s Quarterly Report on Bank Trading and Derivatives Activities First Quarter 2009″
By Daniel at 24 July, 2009, 6:53 pm
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Total outstanding derivatives for the top 25 commercial banks was $201,502,177 Million (translated….$201.5 TRILLION)
Total Assets for the top 25 commercial banks was $7,707,703 Million (translated….$7.7 TRILLION)
The top three banks are summarized below (in $millions)
JPMORGAN CHASE BANK NA OH….. Total Assets: $1,688,164 ($1.6 TRILLION)…..Total Derivatives $81,161,463 ($81.1 TRILLION)
GOLDMAN SACHS BANK USA NY……Total Assets $161,455…..Total Derivatives $39,927,511
BANK OF AMERICA NA NC…..Total Assets……$1,434,037…..Total Derivatives $38,864,033
NOW THE SCARY PART! (verbatim from the OCC report)
“Market Risk”
“Banks control market risk in trading operations primarily by establishing limits against potential losses. Value at Risk (VaR) is a statistical measure that banks use to quantify the maximum loss that could occur, over a specified horizon and at a certain confidence level, in normal markets. It is important to emphasize that VaR is not the maximum potential loss; it provides a loss estimate at a specified confidence level. A VaR of $50 million at 99% confidence measured over one trading day, for example, indicates that a trading loss of greater than $50 million in the next day on that portfolio should occur only once in every 100 trading days under normal market conditions. Since VaR does not measure the maximum potential loss, banks stress test their trading portfolios to assess the potential for loss beyond their VaR measure.”
“To test the effectiveness of their VaR measurement systems, trading institutions track the number of times that daily losses exceed VaR estimates. Under the Market Risk Rule that establishes regulatory capital requirements for U.S. commercial banks with significant trading activities, a bank’s capital requirement for market risk is based on its VaR measured at a 99% confidence level and assuming a 10-day holding period. Banks back-test their VaR measure by comparing the actual daily profit or loss to the VaR measure. The results of the back-test determine the size of the multiplier applied to the VaR measure in the risk-based capital calculation. The multiplier adds a safety factor to the capital requirements. An “exception” occurs when a dealer has a daily loss in excess of its VaR measure. Some banks disclose the number of such “exceptions” in their published financial reports. Because of the unusually high market volatility and large write-downs in CDOs in the recent quarters, as well as poor market liquidity, a number of banks experienced back-test exceptions and therefore an increase in their capital multiplier.”
Following is the “VaR” or value at risk for the banks cited in the report (I find it rather curious that Goldman, one of the top three holders, of Derivatives, is not on this list). Figures are in $Millions.
JPMorgan & Co……VaR $289……Citigroup Inc…….VaR $291…….Bank of America VaR $245
So J.P Morgan, based on their “model” and back-testing has a “Value at Risk” of $289 Million. But wait! They hold $81.1 TRILLION in derivatives. So they are saying that their “Value at Risk” is just 0.0004% of the value of the derivatives they hold? BULLSHIT__
Bank of America….$245 Million VaR…..0.0006% of the value of the derivatives they hold
I am 99% confident that JPM and BAC have far more at risk than just 4/10000% or 6/10000%
This is frickin’ SCARY!!!!!!!
One final excerpt from the report:
“Revenues”
“Bank trading results rebounded sharply in the first quarter, consistent with the historical trend for strong first quarter revenues. Banks reported a record $9.8 billion in first quarter trading revenues, compared to a loss of $9.2 billion in the fourth quarter of 2008. Bank trading results benefited from solid core financial intermediation business flows, with continued wide bid/offer spreads, as well as fewer write-downs on legacy credit assets. As noted in previous quarterly reports, another factor that drove revenues was the recognition of changes in the value of trading liabilities. When bank credit spreads increase, as they did in the first quarter, banks reflect the declining value of their liabilities as trading revenues. While trading performance was strong even without the liability value changes, this source did add materially to first quarter trading performance.”
Watch out for future earnings!!
Link for report:
http://www.occ.treas.gov/ftp/release/2009-72a.pdf
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Daniel needs to get his facts straight before he expresses outrage. The $81.1 Trillion in derivatives is NOT the market value of their derivatives. It is the notional value of their derivatives. The market value will be a VERY TINY FRACTION of the notional value.