Diverging monetary policies are creating ideal conditions forbanks to make money from trading currencies, as Credit Suisse GroupAG to Goldman Sachs Group Inc. say rising volatility is boostingearnings.

“If there's higher volatility, there's higher volume and higheropportunities for us to generate revenue,” Bernie Sinniah, theLondon-based global head of corporate foreign-exchange sales atCitigroup Inc., the second-biggest currency trader, said in a phoneinterview.

Volumes in the biggest financial market jumped to a record $5.7trillion a day in June, according to the latest data from CLS Bank,which operates the world's largest foreign-exchange settlementsystem. Deutsche Bank AG and Barclays Plc, which had the highestrevenue 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 itpumps into the U.S. economy should a recovery take hold, theEuropean Central Bank is considering additional stimulus, and theBank of Japan announced four months ago an unprecedentedbond-buying program. The JPMorgan Global FX Volatility Index jumpedlast month to the highest level since June 2012.

Stricter Rules

The rise in price swings should bolster banks' profits at a timewhen stricter regulations after the financial crisis threatenearnings from other divisions. The Basel Committee on BankingSupervision's latest rules, known as Basel III, will force theworld's 101 largest banks to set aside additional capital tocushion against potential losses from businesses such asfixed-income.

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

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

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

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

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

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

'Strong' Activity

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

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

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

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

Weaker Yen

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

JPMorgan's foreign-exchange volatility index surged to 11.96percent on June 24, from 8.07 percent at the end of last year. At9.7, the gauge is now up 20 percent for the year.

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

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

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

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

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

Bank of America Corp. Chief Financial Officer Bruce Thompsonsingled out currencies as one of the areas “where the markets weregood” on a July 17 conference call after the Charlotte, NorthCarolina-based lender reported a 63 percent jump in second-quarternet income.

“For the players who are strong in foreign exchange, they willremain 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 theinternational foreign exchange market for smallerattackers.”

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