Who Needs Derivatives?

June 9, 2012 • 8:00AM

The question, "What would Glass-Steagall do to derivatives holdings?" is heard so often the debates on restoring the Glass-Steagall Act, that one could wonder who is really asking it.

A report on global derivatives concentrations, by Fitch Ratings Service, gives a clue.

It seems that 10 banks in London do 47% of world derivatives. Sixteen banks based in the United States do another 25% of world derivatives ($290 trillion in nominal value), and those 16 have 99.5% of the derivatives exposure of U.S. banks. Six of them — JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo — have 75% of that exposure.

In other words, the great majority of banks in the 7,500 banks based in the United States do little or no derivatives trading, lending, or borrowing, although "banks must hedge" is a watchword of Dodd-Frank and the Volcker Rule. The strong impact Glass-Steagall would have in clearing out the financial derivatives markets, would have very little effect on the operations of that vast majority of commercial banks.