Macro Swan Watch: Deutsche Bank, Again

Deutsche Bank (DB) stock is approaching single digits again.   Watch this space. 

In 2016,  DB traded with a single digit handle for a few seconds before, we suspect, the monetary authorities stepped in.

When a “too big to fail” (TBTF) bank stock falls to into single digits, the risk of panic increases, the bank may begin to experience funding pressure, short selling proliferates, and systemic risk skyrockets.

Unlike Lehman,  however, DB has a deep deposit base and is less dependent on wholesale market financing.

We are not certain why the stock is plummeting, but we do suspect markets are getting a bit concerned about Deutsche’s humungo derivatives book, and the global size of the derivatives markets, in general.

Derivatives, especially credit default swaps (CDS),  are a legacy of the financial crisis which was ignored and never really dealt with.

Derivatives have never really gone away in the ensuing decade. The total value of the books at five of the biggest US banks has dropped about one-quarter since tougher capital rules kicked in, from 2013. Even so, there were $157tn of derivatives out there at the end of last year, according to data prepared for the FT by Aite Group, a Boston-based research firm. That’s about 12 per cent more than the amount these banks had, entering the crisis.

…The banks say these huge numbers — $157tn is more than twice global GDP — do not tell the whole story. And they are right: headline figures say nothing about the counterparties, the collateral, the offsetting positions, or whether the trades are centrally cleared. (Bear’s actual credit exposure — or its “net replacement cost of derivatives contracts in a gain position”, in the jargon — was much smaller, at $12.5bn.)  – FT, March 16

Though, we believe it is a small probability,  if the markets do run on DB’s derivatives book, even God won’t be able to save it.

Low probability, high impact event.  A major macro swan.  Keep it on your radar.