Derivatives Trading in U.S. Banking (CRS Report for Congress)
| Release Date |
Oct. 17, 2024 |
| Report Number |
IF12786 |
| Report Type |
In Focus |
| Authors |
Rena S. Miller; Graham C. Tufts |
| Source Agency |
Congressional Research Service |
Summary:
Bank derivative holdings are highly concentrated among
large banks, with large banks holding 97.9% of the notional
amounts of bank derivative holdings. This level of
concentration holds across all asset classes of derivatives. A
September 2024 Office of the Comptroller of the Currency
report noted that the four banks with the most derivative
activity hold 88% of all bank derivatives. Since the
financial crisis of 2008, regulators and academics have
grappled with whether, and to what extent, a concentration
of derivatives trading within large banks contributes to
systemic risk. The concern about “too big to fail” banks has
also translated into concern over “too interconnected to
fail” banks—wherein banks may also be systemically
important because of their prominence in financial
activities, such as derivatives trading. Separately, in 2023, a
series of regional bank failures (involving Silicon Valley
Bank, First Republic Bank, and Signature Bank) raised
questions over whether banks—especially medium-size
ones—sufficiently used derivatives to hedge the interest
rate risk that contributed to the 2023 bank failures. This
episode raised a different concern—that the failure to use
derivatives to hedge rate risk by the failed banks had
contributed to systemic risk.
