It’s hardly a
shock…
Deutsche Bank boasted a notional
derivatives exposure of €41.9 trillion (US$46.53 trillion) in its 2015
annual report. This is about 10% of the total global derivatives market,
standing at roughly US$493 trillion. In comparison, the current market cap of
Deutsche Bank is worth €17.46 billion. In other words, Deutsche Bank is
leveraged 2,399 times. Imagine promising to buy a house for $2,399 with assets
of $1!.
While a fair chunk of these derivatives are hedged (i.e. there’s
a buyer and seller for each contract), what happens if one side can’t pay up
during the coming times of chaos? This is exactly what happened during the US
sub-prime crisis of 2008. For this reason, the IMF notes that Deutsche
Bank ‘appears to be the most important net contributor to systemic
risks.’
We had underestimated the importance of Deutsche Bank. Lehman
Brothers on May 31, 2008, (the last 10-Q it had filed before it went bust)
showed assets on its balance sheet of $639.4 billion and stockholders' equity
of $26.3 billion. By comparison, Deutsche Bank, as of June 30, 2016, has assets
of €1.8 trillion and stockholders' equity of €66.5 billion. Given the size of
Deutsche's balance sheet, it is three times as large as Lehman Brothers was.
Indeed, the bank is connected to everything. Will it be the
first domino to fall?
Source:
IMF, WealthMills.
Looking at the globally connected game of counterparty
derivative contracts, if Deutsche Bank fails, everyone else should follow. But IMF, European central Bank and politicians
are proactively trying to rescue 'Deutsche Bank' as it is the symbol of European
Economy to avoid any chance for financial crises.
No comments:
Post a Comment