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Derivatives Exposure Wanes, Yet Remains Massive
When risk exposures are in the hundreds of billions — with a “B” — any reduction in net risk deserves attention.
Last Friday, the Office of the Comptroller of the Currency reported that net credit exposure from derivatives activities declined 18% in the fourth quarter of 2009, and by 50 percent during the year. That’s good news — until you realize that $398 billion of credit exposure is still floating around the system, 98% of which are credit-default swaps, the likes of which sank AIG.
From the report:
The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $86 billion, or 18 percent, to $398 billion. At the end of 2008, NCCE peaked at $800 billion. “The continued decline in NCCE is a very welcome development,” said Kathryn Dick, Deputy Comptroller for Credit and Market Risk.NCCE fell in each quarter of 2009, as rises in interest rates and sharp declines in credit spreads helped to reduce receivables from derivatives, Ms. Dick noted. “Despite the substantial reduction in credit exposures from derivatives, NCCE remains historically quite high, and so we continue to closely evaluate, as part of our examination priorities, banks’ measurement and management of counterparty credit exposures,” Ms. Dick said.
And there is a sign of concentrating risk in these numbers. The OCC said that the number of commercial banks holding derivatives decreased by 35 in the quarter to 1,030.
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