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U.S. Banks And Derivatives Risk 

January 13, 2016

Seeking Alpha

Every quarter the Office of the Comptroller of the Currency (the OCC) releases a report on U.S. bank derivatives activities. Derivatives trading (i.e. regarding financial instruments not held for hedging purpose) is an especially risky part of universal banks' activities. Yet the accounting of derivative contracts is relatively opaque in the bank quarterly financial reports, as the information is scattered over several sections and these items are partly taken off-balance sheet and therefore remain hidden from the casual observer or the investor uninterested in seeping through piles of abstruse documents.

This lack of transparency remains despite the fact that credit derivatives like collateralized debt obligations (CDO), credit default swaps (CDS), and asset-backed securities, played a big role in the financial crisis of 2007-2008 and resulted in huge losses for many banks. Derivatives trading is risky, and it is still hard to estimate the amount of risk taken by individual banks. Consequently, the OCC quarterly reports are a gold mine for U.S. investors who want to know more about this. In this article I will compare the credit risk some banks incur through derivatives and how this risk has varied with time, based on OCC reports going as far back as 1996. I focus on JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, four of the largest U.S. banks. All these groups have very different risk profiles. read more

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