This is the small news that stayed under the radar this week, but we have to get back to it : The bank with the most exposure to derivatives is not JP Morgan, as we thought, but Deutschebank. As indicated in its 2012 annual report, the bank is exposed to, hang on to your seat : 55,605,039,000,000 euros or, if you prefer, 55,605 Billion euros, or 55.6 Trillion euros... wow!
By way of comparison, Germany’s GDP in 2012 was 2,644 Billion euros, which means that the country’s first bank’s exposure to derivatives is twenty times higher than all the wealth created by the European economic powerhouse in a year. Converted into dollars, the exposure amounts to $72.8 Trillion, a little more than JP Morgan. Europe holds the record, due to the most solid country’s best bank... congratulations!
But, according to the German bank’s accountants, we should not worry, because all of those engagements are compensated for and, at the end, net exposure is only 20.3 Billion euros. This is what large bank managers always say when the subject is brought up : positions are balanced; when a bank takes a position on a derivative, it also buys some protection (the inverse position) to hedge itself.
But... who does it buy this protection from? Well, from another bank, of course. The reality is that all the large banks are selling one another derivatives, which means that if one of them goes bankrupt, the rest of them will plunge with it! The protection bought from a defaulted bank vanishes and other banks just watch their net exposure explode and then go bankrupt as well. This is what almost happened in 2008 with the failure of AIG, which was counterparty to several financial institutions, which was bailed out at the last minute by theUS government. So the calculation of net exposure is purely theoretical. Deposits at Deutschebank are only 1/100th of those 55.6 Trillion euros in derivatives. Cyprus pales in comparison.
All the large banks are trying to keep their balance atop a mountain of derivatives, and we know that derivatives become very risky in times of crises. But hey, here is one positive point in this whole thing : Deutschebank’s headquarters are located in Frankfurt, just like the ECB’s, so Mario Draghi will only have to walk a few blocks should a problem arise!
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.