Diverging monetary policies are creating ideal conditions for banks to make money from trading currencies, as Credit Suisse Group AG to Goldman Sachs Group Inc. say rising volatility is boosting earnings.

“If there's higher volatility, there's higher volume and higher opportunities for us to generate revenue,” Bernie Sinniah, the London-based global head of corporate foreign-exchange sales at Citigroup Inc., the second-biggest currency trader, said in a phone interview.

Volumes in the biggest financial market jumped to a record $5.7 trillion a day in June, according to the latest data from CLS Bank, which operates the world's largest foreign-exchange settlement system. Deutsche Bank AG and Barclays Plc, which had the highest revenue from currency trading in 2012, published results today, while HSBC Holdings Plc reports in the next week.

While the Federal Reserve said it plans to reduce the money it pumps into the U.S. economy should a recovery take hold, the European Central Bank is considering additional stimulus, and the Bank of Japan announced four months ago an unprecedented bond-buying program. The JPMorgan Global FX Volatility Index jumped last month to the highest level since June 2012.

Stricter Rules

The rise in price swings should bolster banks' profits at a time when stricter regulations after the financial crisis threaten earnings from other divisions. The Basel Committee on Banking Supervision's latest rules, known as Basel III, will force the world's 101 largest banks to set aside additional capital to cushion against potential losses from businesses such as fixed-income.

“Foreign exchange, which isn't a heavy consumer of risk-weighted assets or balance sheet, will become more important,” George Athanasopulous, the co-head of global foreign exchange at Zurich-based UBS AG, which reported second-quarter earnings today, said in an interview. “Stringent capital requirements will reduce the footprint of businesses which rely heavily on risk-weighted assets and balance sheet.”

Frankfurt-based Deutsche Bank, the biggest foreign-exchange trader, earned the most from this business in 2012 at about $2.7 billion, while Barclays in London received $1.8 billion, according to JPMorgan Chase & Co. estimates on June 28.

Both banks reported earnings today. London-based HSBC, which posts results on Aug. 5, was the third-biggest recipient of foreign-exchange revenue last year, JPMorgan estimates.

Deutsche Bank, continental Europe's biggest lender, said second-quarter revenue from foreign-exchange trading rose on increased price swings and greater client activity. Overall profit fell 49 percent to 334 million euros ($443 million), from 656 million euros in the same period a year earlier.

UBS, the fourth-largest currency trader, said that increased volatility caused a decline in second-quarter earnings from its foreign-exchange business. Revenue from currencies, rates, and credit fell 42 percent to 362 million Swiss francs ($389 million), from 619 million francs in the first three months of this year, UBS said. The investment bank posted a pretax profit of 775 million francs, compared with a 92 million-franc loss a year earlier.

Goldman Sachs, located in New York, said this month that its currency-trading operation had “significantly higher” revenue in the second quarter than in the year-earlier period. Like most of its peers, the investment bank doesn't break out foreign-exchange earnings.

'Strong' Activity

“Activity levels in our currency business remained strong, as clients reacted to increased volatility, particularly in Asia,” Chief Financial Officer Harvey Schwartz said on a conference call with analysts.

Most banks lump earnings from their fixed-income, currencies, and commodities divisions together.

Foreign-exchange trading for Group of 10 and emerging-market nations accounted for 15 percent of fixed-income revenue, or about $14 billion, for the 10 largest banks in 2012, according to an estimate from analytics firm Coalition. That's down from 22 percent in 2011, when most rates and credit operations lost money, Coalition said.

U.K. currency-trading volumes rose to a record $2.55 trillion a day in April, 26 percent higher than in October, the Bank of England said yesterday, citing a twice-yearly survey.

Weaker Yen

The increase was aided by a “substantial” jump in trading of the dollar against the yen, which more than doubled, the central bank said. Japan's currency has weakened 11.5 percent against the greenback this year.

JPMorgan's foreign-exchange volatility index surged to 11.96 percent on June 24, from 8.07 percent at the end of last year. At 9.7, the gauge is now up 20 percent for the year.

Fed Chairman Ben S. Bernanke stoked the surge in volatility when he raised the prospect of the U.S. central bank reducing its $85 billion of monthly bond purchases later this year.

In the euro region, ECB President Mario Draghi said he plans to keep the benchmark interest rate at a record-low 0.5 percent for an “extended” period, and that he's considering additional measures to boost the economy of the 17-nation bloc.

The Bank of Japan refrained from adding to its unprecedented monetary stimulus earlier this month and raised its assessment of the nation's economy, referring to a recovery for the first time since before a record 2011 earthquake.

Credit Suisse, Switzerland's second-biggest lender, said July 25 that increased currency volatility helped boost second-quarter earnings. “Revenues from foreign exchange improved as higher market volatility led to increased client activity,” the Zurich-based bank said in a statement.

HSBC, one of the few banks to disclose income from foreign exchange, reported revenue of $871 million from the business in the first quarter, compared with $746 million in the three months ended Dec. 31. Currency trading was the biggest contributor to revenue at HSBC's global markets unit, the bank said on May 7.

Bank of America Corp. Chief Financial Officer Bruce Thompson singled out currencies as one of the areas “where the markets were good” on a July 17 conference call after the Charlotte, North Carolina-based lender reported a 63 percent jump in second-quarter net income.

“For the players who are strong in foreign exchange, they will remain strong for a long time given the high barriers to entry,” Chirantan Barua, an analyst in London at Sanford C Bernstein Ltd., said in a phone interview. “It's very hard to gain share in the international foreign exchange market for smaller attackers.”

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FX Volatility Boosts Bank Revenues

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