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At $72.8 Trillion, Presenting The Bank With The Biggest Derivative Exposure In The World

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http://www.zerohedge.com/news/2013-04-29/728-trillion-presenting-bank-biggest-derivative-exposure-world-hint-not-jpmorgan

Moments ago the market jeered the announcement of DB's 10% equity dilution, promptly followed by cheering its early earnings announcement which was a "beat" on the topline, despite some weakness in sales and trading and an increase in bad debt provisions (which at €354MM on total loans of €399.9 BN net of a tiny €4.863 BN in loan loss allowance will have to go higher. Much higher). Ironically both events are complete noise in the grand scheme of things. Because something far more interesting can be found on page 87 of the company's 2012 financial report.

The thing in question is the company's self-reported total gross notional derivative exposure.

And while the vast majority of readers may be left with the impression that JPMorgan's mindboggling $69.5 trillion in gross notional derivative exposure as of Q4 2012 may be the largest in the world, they would be surprised to learn that that is not the case. In fact, the bank with the single largest derivative exposure is not located in the US at all, but in the heart of Europe, and its name, as some may have guessed by now, is Deutsche Bank. The amount in question? €55,605,039,000,000. Which, converted into USD at the current EURUSD exchange rate amounts to $72,842,601,090,000.... Or roughly $2 trillion more than JPMorgan's.

German%20GDP%20vs%20DB%20Derivatives_1.jpg

A great number which effectively cancels itself out to zero doesn't it if the derivatives have been organised correctly?

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http://www.zerohedge.com/news/2013-04-29/728-trillion-presenting-bank-biggest-derivative-exposure-world-hint-not-jpmorgan

A great number which effectively cancels itself out to zero doesn't it if the derivatives have been organised correctly?

Or not at all if it's your counterparty that goes pop still owing. All your products suddenly aren't worth the paper they are written on.

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A great number which effectively cancels itself out to zero doesn't it if the derivatives have been organised correctly?

The entire balance sheet should sort of cancel to zero. However, that 78tr number is for notionals, not actuals, which is a huge distinction. Take the example of an interest rate swaps, which is probably a very large chunk of it. The notional for one of these is the number the interest is calculated on not any kind of sum that either side to the deal can possibly win or lose outside of hyperinflation scenarious (in which case it wouldn't matter).

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If banks have the same mix of derivatives then it follows the one with the largest gross will also have the largest exposure in relative terms ( not definitely but likely)

That said, the figure reported is still scary IMO

Edited by Sir Harold m

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Germany.

The biggest sinner in the EZ.

No wonder they won't permit any of their counterparties to default on them.

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This should cover it.

575px-100_Billionen_Mark_1924-02-15.jpg

Ha! Peanuts. Pocket money.

Oh, wait... Germany (and the UK, until the 1970's) uses 'billion' to mean 1,000,000,000,000, not a mere 1,000,000,000. like the USA.

That's a BIG note. I bet the owner felt rich.

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if the derivatives have been organised correctly?

Yes again, I have to point out that this zero sum thing is a load of crap.

It's unlikely to be circular. Eventually there will be someone at either end of the chain.

People like to think these things are circular and resolve themselves because it make them feel more secure.

In reality, from experience we know it's not the case. We know this, because the US government had to give a certain investment bank hundreds of billions of dollars to cover derivatives liabilities they had taken on and not covered.

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From zerohedge

The amount in question? €55,605,039,000,000. Which, converted into USD at the current EURUSD exchange rate amounts to $72,842,601,090,000....

.....

.....

The good news for Deutsche Bank's accountants and shareholders, and for Germany's spinmasters, is that through the magic of netting, this number collapses into €776.7 billion in positive market value exposure (assets), and €756.4 billion in negative market value exposure (liabilities), both of which are the single largest asset and liability line item in the firm's €2 trillion balance sheet mind you, and subsequently collapses even further into a "tidy little package" number of just €20.3.

Of course, this works in theory, however in practice the theory falls apart the second there is discontinuity in the collateral chain as we have shown repeatedly in thh past, and not only does the €20.3 billion number promptly cease to represent anything real, but the netted derivative exposure even promptlier become the gross number, somewhere north of $70 trillion.

Accurate to a decimal point?

It does make you wonder how accurate such figures are - considering all the fraud and off balance sheet stuff etc etc etc there's been in the financial markets over the years.

The big numbers (the trillions) just need to be a couple of percent out and all those "small" numbers (the billions) turn into trillions.

The "tidy little package" number of euro 20.3 billion just seems a bit farcical.

Edited by billybong

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Accurate to a decimal point?

It does make you wonder how accurate such figures are - considering all the fraud and off balance sheet stuff etc etc etc there's been in the financial markets over the years.

The big numbers (the trillions) just need to be a couple of percent out and all those "small" numbers (the billions) turn into trillions.

The "tidy little package" number of euro 20.3 billion just seems a bit farcical.

As long as they add up on the balance sheet there isn't a problem.... Well until reality asks what the numbers actually are.

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The entire balance sheet should sort of cancel to zero. However, that 78tr number is for notionals, not actuals, which is a huge distinction. Take the example of an interest rate swaps, which is probably a very large chunk of it. The notional for one of these is the number the interest is calculated on not any kind of sum that either side to the deal can possibly win or lose outside of hyperinflation scenarious (in which case it wouldn't matter).

+1 agree... should be notional gross amounts...

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However, that 78tr number is for notionals, not actuals

Exactly.

We could have a bet right now on interest rates. Make the notional £78tr and cap it at £10 either side.

Does that double the global derivatives exposure, or just add £10 to it?

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If derivatives are in fact no real threat to the banks- why did Bank of America do this?:

Bank of America Corporation, hit by a credit downgrade last month by Moody’s has moved trillions of dollars of derivatives, mostly credit default swaps, from its Merrill Lynch unit (which is not guaranteed by the FDIC) to it’s banking subsidiary, which does carry deposit guarantees from the FDIC.

Clearly not only is BoA worried that it's derivative exposure is a real threat- they have taken action to make sure that if that threat materialises they will have placed that exposure firmly in the realms of 'too big to fail' by ensuring that if they do down then the depositors in it's banking subsidiary will go down with them- triggering the required taxpayer bailout.

"The concern is that there is always an enormous temptation to dump the losers on the insured institution," said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. "We should have fairly tight restrictions on that."
This means that their investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counter-parties.
What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in credit default insurance contracts sold by Bank of America and JP Morgan. Even worse, the total exposure is unknown because Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.

http://open.salon.com/blog/toritto/2011/10/19/the_coming_major_bank_insolvency

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Or not at all if it's your counterparty that goes pop still owing. All your products suddenly aren't worth the paper they are written on.

That is why derivative positions are generally colleralised and far more than they were pre-crisis. There might be some frictional losses if a counterparty goes down but nothing cataclysmic.

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That is why derivative positions are generally colleralised and far more than they were pre-crisis. There might be some frictional losses if a counterparty goes down but nothing cataclysmic.

Assuming you remember to collect the collateral of course... You'd be surprised how many big derivatives counterparties outside of the core of serious banks don't do this properly. Even some of the really big players can be quite lax about it.

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That is why derivative positions are generally colleralised and far more than they were pre-crisis. There might be some frictional losses if a counterparty goes down but nothing cataclysmic.

Isn't a lot of that collateral re-hypothecated or otherwise encumbered (such as being a mark to model fantasy)- how much of it is actually something you could count on?

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  • 242 Brexit, House prices and Summer 2020

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