OCC: Deriv fears are an overreaction
Wednesday 25 January 2012 - by Karina Whalley
John Walsh, acting head of the Office of the Comptroller of the Currency, warned of the misconception surrounding the controversial products and said derivatives are incorrectly viewed as being more risky than they really are.
This figure is used by the public to describe both the size and risk of the derivatives market but "of course that's far from the mark", he said.
"I'm not trying to suggest that this isn't a big market or that it doesn't involve sizeable risks, but the risks ascribed to derivatives is often many orders of magnitude greater than the reality," said Walsh who has been acting Comptroller since 2010.
The biggest risk from derivatives is not market risk but credit risk and at the end of the third quarter of 2011, insured US commercial banks had $504bn (€383.6bn) of net current credit exposures from derivatives contracts, just 0.2 per cent of the notional value, according to Walsh.
Although OCC data shows that banks have effectively managed credit risks over time, Walsh does acknowledge the importance of central clearing of derivative transactions to further reduce credit exposures.
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