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The Are Two Big Problems With Deutsche Bank Failing The Fed's Stress Test

Tyler Durden's picture




 

There are two big problems with Deutsche Bank failing the Fed's stress test as the WSJ just reported it would.

This is what the WSJ reported moments ago:

Large European banks including Deutsche Bank AG and Banco Santander SA are likely to fail the U.S. Federal Reserve’s stress test over shortcomings in how they measure and predict potential losses and risks, according to people familiar with the matter. Failing the stress tests would likely subject the U.S. units of Deutsche Bank and Banco Santander to restrictions on paying dividends to their European parent companies or other shareholders.

Why is this an issue?

Well, the first problem is that Deutsche Bank recently passed the ECB stress test with flying colors. Then again, since that was a "test" which not even in its worst-case scenario modeled for deflation (as a reminder, Europe just suffered its record worst deflation in history on par with the Great financial crisis), one can now roundly dismiss any and all current or future analytical, regulatory and executive tasks conducted by the ECB. We will ignore the fact that the world's biggest bond buying program is currently being undertaken by precisely said clueless central bank. We will also ignore the other fact, that the bank of the former FDIC-head Sheila Bair, Santander - a bank which is currently the biggest subprime auto loan lender - will also fail the stress test: to dwell too much on that particular irony would give us a headache.

The WSJ did provide a token explanation for this particular "oversight" by the ECB:

Deutsche Bank Trust Corp. is expected to be found adequately capitalized by the Fed but will likely receive a warning on qualitative shortcomings, according to people familiar with the matter.

 

Both Deutsche Bank and Santander passed European Central Bank stress tests in October. Those tests focused on whether the banks had enough capital to withstand a two-year recession but didn't assess such things as governance, risk management, and other more subjective factors like the Fed’s test.

Actually, the explanation that Deutsche Bank is lacking in its "risk management" department should be enough to give one a chill, especially when one considers the second big problem. Then again technically it not just a second problem: it is some 62.2 trillion problems, which is what the gross notional exposure of all derivatives on the Deutsche Bank balance sheet is pre-netting (and as Lehman showed us, netting only works in a perfect world in which there isn't one single counterparty failure: if there is, there is no netting and gross instantly becomes net, simple as that).

 

So a bank which has €54.7 trillion, or a little over $62 trillion at today's exchange rate, in derivatives - a number that is 20 times greater than the GDP of Germany -  just failed a central bank stress test due to lacking governance and risk management controls and, just maybe, has insufficient capital? What can possibly go wrong.

 

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Fri, 02/20/2015 - 18:42 | 5809963 Five8Charlie
Five8Charlie's picture

Make the test easier, that'll fix things.

Fri, 02/20/2015 - 18:55 | 5810019 Lumberjack
Lumberjack's picture

Common Core?

Fri, 02/20/2015 - 21:03 | 5810483 Miss Expectations
Miss Expectations's picture

Here's the Common Core Standard Course of Study for Mathematics from North Carolina...Here's 1st Grade Math:

 

  1. 1.OA.4  Understand subtraction as an unknown-addend problem. For example, subtract 10 – 8 by finding the number that makes 10 when added to 8.

Add and subtract within 20.

  1. 1.OA.5  Relate counting to addition and subtraction (e.g.,

    by counting on 2 to add 2).

  2. 1.OA.6  Add and subtract within 20, demonstrating
    fluency for addition and subtraction within 10.
    Use strategies such as counting on; making ten (e.g., 8+6=8+2+4=10+4=14); decomposing a number leading to a ten (e.g.,13–4=13–3–1=
    10 – 1 = 9); using the relationship between addition and subtraction (e.g., knowing that 8 + 4 = 12, one knows 12 – 8 = 4); and creating equivalent but easier or known sums (e.g., adding 6 + 7 by creating theknownequivalent6+6+1=12+1=13).

Work with addition and subtraction equations.

  1. 1.OA.7  Understand the meaning of the equal sign, and determine if equations involving addition and subtraction are true or false. For example, which of the following equations are true and which are false?6=6, 7=8–1, 5+2=2+5, 4+1=5+2.

  2. 1.OA.8  Determine the unknown whole number in an addition or subtraction equation relating to three whole numbers. For example, determine the unknown number that makes the equation true in each of the equations 8 + ? = 11, 5 =o– 3,

    6 + 6 =o.

NUMBER AND OPERATIONS IN BASE TEN

Extend the counting sequence.

1.NBT.1 Count to 120, starting at any number less than 120. In this range, read and write numerals and represent a number of objects with a written numeral.

Understand place value. 

If you don't have a nail gun handy, don't look here for more proof about how AWFUL Common Core is:

http://maccss.ncdpi.wikispaces.net/file/view/NCSCOS%20K-12%20Standards_F...

Fri, 02/20/2015 - 18:57 | 5810024 Harbanger
Harbanger's picture

Will the Fed have to bailout Deutsche Bank again?

Fri, 02/20/2015 - 19:13 | 5810106 max2205
max2205's picture

People on the street call them Citi2 

Fri, 02/20/2015 - 22:49 | 5810832 Againstthelie
Againstthelie's picture

Is that the revenge for Merkel not sabotageing Minsk 2?

Fri, 02/20/2015 - 19:45 | 5810216 slaughterer
slaughterer's picture

I got out of DB in 2002.  I worked in risk management.  I saw what they were doing.  I knew it would lead to disaster.

Fri, 02/20/2015 - 20:05 | 5810267 zeropain
zeropain's picture

so my question is how much will they be forced to liquidate and what will those holding comprise of?  

Fri, 02/20/2015 - 18:43 | 5809964 Nafets93
Nafets93's picture

Typoo in the title

Fri, 02/20/2015 - 18:43 | 5809966 all-priced-in
all-priced-in's picture

Pull my finger!

 

 

 

Fri, 02/20/2015 - 18:44 | 5809967 Ruffmuff
Ruffmuff's picture

Stress test. IS that on CSI miami?

I hope I don't have to study for my stress test, too damn stressful.

Fri, 02/20/2015 - 18:47 | 5809980 Bastiat
Bastiat's picture

What's their Moody's long term debt rating?  A3

Fri, 02/20/2015 - 19:01 | 5810033 ThroxxOfVron
ThroxxOfVron's picture

( opening wallet )

Does Goldman Sachs recommend to buy or accumulate?

Fri, 02/20/2015 - 18:46 | 5809981 czarangelus
czarangelus's picture

Douche Bank.

Fri, 02/20/2015 - 18:52 | 5810008 mattgallis
mattgallis's picture

Nominally speaking, this is a bitch.

Net speaking, BGFD!

Fri, 02/20/2015 - 18:55 | 5810021 Racer
Racer's picture

Oh and of course they reported this two hours after market close on a FRIDAY

FFS

 

Fri, 02/20/2015 - 19:03 | 5810064 zenon
zenon's picture

That's what they get for going against the US. Both  Germany and Spain were the toughest adherents against Greece's push for fiscal relaxation which lo-and-behold coincides with US wishes. This, er, small potential capital issue should help ensure that both of these countires cooperate with the new Greece-for-growth agenda.

Fri, 02/20/2015 - 19:10 | 5810100 permarig
permarig's picture

So Deutsche will be sacrificed or split in half if Europe/Germany decides to side with Eurasia?

 

Fri, 02/20/2015 - 19:18 | 5810128 Ban KKiller
Ban KKiller's picture

Santander default rate on subprime loans is what? Betting north of twenty percent delinquency. Heck, they loan to "addresses" on the rez. They will never recover collateral on the rez. 

Defaults are not allowed, we just extend shiney new improved terms! Ta da, all better.    

Fri, 02/20/2015 - 19:25 | 5810158 Spungo
Spungo's picture

We should pass No Bank Left Behind and say every bank passes just by existing.

Fri, 02/20/2015 - 19:52 | 5810235 Dre4dwolf
Dre4dwolf's picture

They already do that.

When there are like . . . only 10 banks in the entire planet that matter, if 8/10 of them fail a stress test , it doesn't really matter . . . as you don't have any other choices.

Banking is a highly monopolized industry (because of central banks). . .  not a lot of banks out there . . . and most of them are owned by the same 12ish families or so . . . so pretty much a room full of people control the entire planets assets.

 

This is why the global monetary systems are doomed to fail, because there is strength in diversity . . . and when you lack diversity, you lack strength.

Fri, 02/20/2015 - 19:49 | 5810227 walküre
walküre's picture

I sell protection on your bets that you can absolutely 100% and with all certainty so help me God collect on in the currency of my choice.

Fri, 02/20/2015 - 19:59 | 5810258 are we there yet
are we there yet's picture

Nail guns are also stressful for bankers.

Fri, 02/20/2015 - 20:07 | 5810268 SmedleyButlersGhost
SmedleyButlersGhost's picture

A bank " tested" by some goofs controlled by bank goofs - wow - meaningful. It's like Goldman Sachs saying ...... Well anything

Guns, foodstuffs and opting out

Fri, 02/20/2015 - 20:25 | 5810331 whoopsing
whoopsing's picture

Twenty percent on a good day if the pile goes tits up

 

Fri, 02/20/2015 - 21:35 | 5810612 Lmo Mutton
Lmo Mutton's picture

These derivatives only pay out on the second Tuesday of the 5th week in the 14th month. No risk. Extend and pretend actually works.

Sat, 02/21/2015 - 00:43 | 5811202 Villageidiot777
Villageidiot777's picture

So everything is ok until the music stops playing?

Sat, 02/21/2015 - 10:12 | 5811690 ajkreider
ajkreider's picture

Not encouraging that Tyler doesn't understand notional derivatives value. Plenty to be scared about without making stuff up.

Sun, 02/22/2015 - 12:58 | 5815161 Hope Copy
Hope Copy's picture

Please.. the Tylers are just the messengers.  They watch us to see the general reaction and I suspect that thay do report back, so make sensible suggestions for them and then watch.  If you are following them for guidance, it should be for an after the fact affirmation, not to make a judgment call, because they see the trends and report them after the major players have.  I do make suggestions and in this forum the comments can be as important as the information that is given.

Sat, 02/21/2015 - 12:58 | 5811850 jber
jber's picture

And also don't forget that the Eurex is the main market for the hedge of European governement bonds.

This are the turn-over for January 2015 => Euro-Bund Futures 14,379,514 Euro-Bobl Futures 8,044,765 Euro-Schatz Futures 4,016,297

Sat, 02/21/2015 - 13:44 | 5812227 cornflakesdisease
cornflakesdisease's picture

Given that Deutsche Bank is via proxy an entity of the FED and actually owns 6% of the FED System, I don't think any one needs to worry about any collapse of it anytime soon.

 

Sorry, posh kids always win.

Sun, 02/22/2015 - 12:52 | 5815147 Hope Copy
Hope Copy's picture

So 'Rothschild'.  Family unity.

Sat, 02/21/2015 - 16:40 | 5812841 ZeroBoBo
ZeroBoBo's picture

"Chill guys, I got this"
- Janet

Sun, 02/22/2015 - 12:44 | 5815127 Hope Copy
Hope Copy's picture

I'll bet that the FED can't pass it's own 'stress test'.  In a world that is getting deceneralized form the hegmony of the US dollar the German Ceneral bank will synchronize with the FED by controlling the Euro, thus its fate is much the same as the FED or the FEDs major minion J. P. Morgan.  Under the broad rule of Dodd-Frank, expanded to the assests under the dirivatives, the speclator will fail, not the bank (the courts will see to that).

Sun, 02/22/2015 - 12:50 | 5815128 Hope Copy
Hope Copy's picture

I'll bet that the FED can't pass it's own 'stress test'.  In a world that is getting decentralized from the hegemony of the US dollar the German Central bank will synchronize with the FED by controlling the Euro, thus its fate is much the same as the FED or the FEDs major minion J. P. Morgan.  Under the broad rule of Dodd-Frank, expanded to the assets under the derivatives, the speculator will fail, not the bank (the courts will see to that).

 

 

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