
#1
Oct1311, 05:00 AM

P: 66

The Office of the US Currency Comptroller has an interesting chart 4 titled '5 Banks Dominate in Derivatives, Insured U.S. Commercial Banks, Second Quarter 2011'.
http://www.occ.gov/topics/capitalma...ives/dq211.pdf I'm speechless! 



#2
Oct1311, 02:02 PM

P: 813

"The notional amount of derivatives held by insured U.S. commercial banks increased $5.3 trillion, or 2.2%, from the first quarter of 2011 to $249 trillion. Notional derivatives are 11.6% higher than a year ago." I'll read the article in full when I get home. What concerns me most about this statement is how these assets will show up in the balance sheets of banks and whether any part of these fictitious assets will show up in the calculation of their capital for the purposes of their capital adequacy requirements. If leverage is allowed based capital comprised of derivative assets (I’m not sure if it is), then this means that banks can expand the money supply based largely on assets that have no relation to any physical capital. Well, some money is required for liquidity for trading these derivitive assets, I don’t believe it should directly impact the money supply in the real economy. Derivative contracts should not get any precedence in the event of a bankruptcy. That is when there isn’t enough real money/capital to cover the loans/bets, lending based on real assets should take precedence. 



#3
Oct1311, 04:16 PM

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Graph 5A gives the top five in terms of involvement with derivatives:
Bank of America Citibank GoldmanSachs Bank JPMorgan Chase Bank HSBC Bank Graph 4 shows their involvement is overwhelmingly more than all the other banks put together. The heading on Graph 5A is "Percentage of Total Credit Exposure to Risk Based Capital Top 5 Insured U.S. Commercial Banks by Derivative Holdings" It shows how each of the bank's credit exposure to stuff like derivs. has changed from year to year. HSBC shows a gradual decline. the others not. Thanks for finding this. And thank you both for commenting! 



#4
Oct1411, 09:51 AM

P: 328

Derivatives in action
you have to take numbers like $249 trillion (over 4x global GDP) with a grain of salt
the calculations generally do not net out offsetting exposures, which is much of what banks do when they underwrite derivatives For example, they might offer one client an currency swap where bank receives Euros and pays dollars and then offer another client the opposite swap  paying Euros and receiving dollars. The bank makes a small spread on the notional value and the risks are offset, but the full notional values of both swaps show up in these derivative numbers. 



#5
Oct1411, 01:09 PM

P: 813





#6
Oct1411, 02:15 PM

P: 1,123

my bold "Notionals Changes in notional volumes are generally reasonable reflections of business activity, and therefore can provide insight into potential revenue and operational issues. However, the notional amount of derivatives contracts does not provide a useful measure of either market or credit risks. The notional amount of derivatives contracts held by insured U.S. commercial banks in the second quarter increased by $5.3 trillion (2.2%) to $249 trillion from first quarter 2011. The notional amount of derivatives is 11.6% higher than a year ago. The five banks with the most derivatives activity hold 96% of all derivatives, while the largest 25 banks account for nearly 100% of all contracts." I take very little comfort in knowing the top 5 banks hold 96% of the contracts and that activity is up 11.6%  that (IMO) infers they might be scrambling to balance their portfolios. 



#7
Oct1411, 04:48 PM

P: 328





#8
Oct1411, 06:05 PM

P: 813





#9
Oct1411, 08:06 PM

P: 1,123





#10
Oct1411, 11:32 PM

P: 813

Aside from the discussion about derivatives there is an interesting discussion in the document about risk management using VaR (Value at risk). I am unclear what assumptions are made about the statistics and sample space, in trying to inductively determine the risks.
I do know the statistics of financial events are tail heavy but the central limit theorem tells us that even tail heavy statistics should average out eventually to Gaussian statistics provided the statistics are ergodic stationary and bounded. However, there is no limit to the number of measurements required to get a degree of confidence in the estimate of the statistics. Var's measure the maximum risk one is likely to see for a given confidence interval. This is from the article: This is likely not the case in an irrational market and as a consequence sampling should be done over a long enough period of time to account for short term market irrationality. Well, over a long period of time the volatility of a firms stock could change significantly one would hope that there are metrics of a firms performance (such as price to earnings and leverage) whose statistics better corrolate too loss risk over longer intervals of time. Additionally, in the grand scheme of things 95% confidence bounds on daily risk may not be relevant because in two days our confidence of an not seeing an event that falls outside of these bounds drops to 90.25 % and after about 14 days we can't even be 50% confident. In other words 95% confidence says, in one day we are probably safe but in about two weeks it's a crap shoot. Of course, I'm presuming successive days as independent events if but if there is a lot of low frequency noise (auto regressive) the confidence won't fall off so quickly. Finally pay attention to the parts I bolded. Banks are risk weighting their capital based on purely inductive statistics but do back test their models and add a multiplier to try to give a safety factor for errors. They use a 99% confidence level and a 10 day holding period for their capital requirements. I would like to dive into the statistics of this further but perhaps in another thread. But before I do, does anyone beside me think it's odd that financial firms are reporting their Var's with less robust confidence levels and time frames then is required to meet capital requirement regulations. 



#11
Oct1411, 11:43 PM

P: 1,123





#12
Oct1411, 11:52 PM

P: 66





#13
Oct1411, 11:54 PM

P: 1,123





#14
Oct1511, 12:05 AM

P: 66





#15
Oct1511, 12:14 AM

P: 1,123





#16
Oct1511, 11:57 AM

P: 813

http://www.physicsforums.com/showpos...2&postcount=23 So the notional amount of derivatives held by U.S. commercial banks is five times the total wealth of the united states. Now with regards to my previous comment about swaps. Even though swaps aren't like options so if you hold two opposite positions some of the risk should cancel, there is a possibility that one of the parties can't pay so there is some counter party risk and consequently the bank should be required (if they aren't already) to represent some of this as a liability on their balance sheets and accurately weight the risk when doing capital adequacy calculations. 



#17
Oct1711, 02:38 AM

P: 66

http://moneymorning.com/2011/10/12/d...ettoexplode/ 



#18
Oct1711, 05:03 PM

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