tailieunhanh - OCC BANK DERIVATIVES REPORT FOURTH QUARTER 2003

This study extends the existing empirical evidence, which suggests that the degree of bank competition may have a significant effect on both the level of bank rates and on the pass-through of market rates to bank interest rates. Understanding this pass-through mechanism is crucial for central banks. However, most studies that analyse the relationship between competition and banks’ pricing behaviour apply a concentration index such as the Herfindahl-Hirschman index (HHI) as a measure of competition. We question the suitability of such indices as measures to capture competition. Where the traditional interpretation is that concentration erodes competition, concentration and competition may. | O Comptroller of the Currency Administrator of National Banks Washington DC 20219 OCC BANK DERIVATIVES REPORT FOURTH QUARTER 2003 GENERAL The OCC quarterly report on bank derivatives activities and trading revenues is based on call report information provided by . insured commercial banks. The notional amount of derivatives in insured commercial bank portfolios increased by trillion in the fourth quarter to trillion. Generally changes in notional volumes are reasonable reflections of business activity but do not provide useful measures of risk. During the fourth quarter the notional amount of interest rate contracts increased by trillion to trillion. Foreign exchange contracts increased by 271 billion to trillion. This figure excludes spot foreign exchange contracts which decreased by 379 billion to 273 billion. Equity commodity and other contracts decreased by billion to 1 trillion. Credit derivatives increased by 132 billion to 1 trillion. The number of commercial banks holding derivatives increased by 1 to 573. See Tables 1 2 and 3 Graphs 1 and 3. Eighty-seven percent of the notional amount of derivative positions was comprised of interest rate contracts with foreign exchange accounting for an additional 10 percent. Equity commodity and credit derivatives accounted for only 3 percent of the total notional amount. See Table 3 and Graph 3. Holdings of derivatives continue to be concentrated in the largest banks. Seven commercial banks account for 96 percent of the total notional amount of derivatives in the commercial banking system with more than 99 percent held by the top 25 banks. See Tables 3 5 and Graph 4. Over-the-counter OTC and exchange-traded contracts comprised 90 percent and 10 percent respectively of the notional holdings as of the fourth quarter of 2003. See Table 3. OTC contracts tend to be more popular with banks and bank customers because they can be tailored to meet firm-specific risk management needs. However OTC .