Deutsche Bank Tells Investors Not To Worry About Its €46 Trillion In Derivatives

Tyler Durden's picture

Having first flagged Deutsche Bank enormous derivative book for the first time back in 2013, it wasn't until last week that JPMorgan admitted just what the biggest risk facing Deutsche Bank was. In a note by JPMorgan's Nikolaos Panigirtzoglou, the strategist warned that, "in our opinion it is not so much funding issues but rather derivatives exposures that more likely to trouble markets going forward if Deutsche Bank concerns continue. This is especially true if these concerns propagate into a confidence crisis inducing more rapid unwinding of derivative contracts."

For those new to the story, Deutsche has one of the world’s largest notional derivatives books — its portfolio of financial contracts based on the value of other assets. As we first noted in 2013, It peaked at over $75 trillion, about 20 times German GDP, but had shrunk to around $46 trillion by the end of last year. That’s around 12% of the total notional value of derivatives outstanding worldwide ($384 trillion), according to the Bank for International Settlements.  It was €46 trillion as of Q2 measured by notional outstanding.

JPMorgan bank analysts confirmed the size of DB's book, and note that BIS data provide an alternative but indirect way to gauge the size of derivatives exposures. According to BIS data the exposure of foreign banks to German counterparties via derivatives contracts stood at $312bn as of Q1 2016.

Source: BIS

While the topic of DB's derivative book size emerges any time the bank's stock slides, it tends to be swept under the rug whenever due to fake rumors or otherwise, the stock rebounds.

And in light of yesterday's latest news, in which Germany's Bild reported that Deutsche bank CEO John Cryan "failed to reach an agreement with the US Justice Department", it is possible that on Monday the stock will have an adverse reaction, which also means that attention will once again turn to what JPM believes is the biggest concern for investors for the world's most systematically risky bank.


So what is the embattled German lender, the same one which two weeks ago at the depth of its stock plunge blamed its woes on market "speculators", to do?

As the Chief Risk Officer Stuart Lewis told Welt am Sonntag in an interview published on Sunday, it was to take a preemptive stance on market concerns about Deutsche Bank's staggering derivative position.

Speaking to the German publication, Lewis said that Deutsche Bank continues to cut back the size of its derivatives book, "which is not as risky as investors may believe." Well, not just investors: it also includes that "other" bank with some $53.3 trillion in derivatives, JPMorgan.

"The risks in our derivatives book are massively overestimated," Lewis told the paper cited by Reuters. He said 46 trillion euros in derivatives exposure at Deutsche appeared large but reflected only the notional value of the contracts, while the bank's net exposure to derivatives was far lower, at around €41 billion.

"The 46 trillion euros figure sounds gigantic, but it is completely misleading. The real risk is far lower," Lewis said, adding that the level of risk on Deutsche Bank's books was in line with that seen at other investment banking peers. While he is largely correct about gross notional netting down to a vastly smaller number in a functioning, stable derivatives market in which there is no contagion and all counterparties continue to function during a Deutsche Bank "stress event", that assumption falls out of the window the moment a counterparty fails, and becomes even worse whould any of the underlying derivative collateral be found to have been rehypothecated more than once, something not just we, but the BIS itself warned about in 2013.

But back to Deutsche Bank, whose Chief Risk Officer tried to further belay concerns of a derivative fiasco when he said that "we are trying to make our business less complex and are paring back our derivatives book. Parts of it were transferred into a non-core unit some years ago." While that is true, most of its exposure remains in the core unit (where the deposits are to be found), and what's worse, one wonders why DB hasn't had more success with derisking its gross notional derivative holdings, which still remain a substantial outlier within the European banking system.

More to the point, it is worth recalling that only two short months ago, on July 31, the same Stuart Lewis, when interviewed by Frankfurter Allgemeine said exactly the same thing, in an article titled "We are not dangerous"... 

... and promising that concern for the bank in the aftermath of the IMF report labeling it the most systematically risky bank in the world, was unfounded.

When asked if Deutsche Bank is indeed the most important net contributor to systemic risks,  he replied:

“No, not at all. Only one IMF report has recently muddled up the situation: We are not dangerous. We are very relevant. Deutsche Bank is interwoven with the entire financial sector. We are one of the largest universal banks in the world. But to make it clear: Our house is stable. The balance sheet is healthy.”

When further asked if he can make this claim in good conscience, he said:

“Absolutely. Look at how we have capitalized the bank since the Financial Crisis. We have taken €115 billion in risks off the balance sheet and have €220 billion of liquidity. Concern for us is unfounded.”

Two months later it turned out that concern for us was, in fact, "founded."

Amusingly, when Wolf Richter pointed out Lewis' comments, he noted that "wisely, Deutsche Bank’s elephantine exposure to derivatives didn’t even come up. It’s better to silence the topic to death than to cause a panic with it."

Now, just over two months later, the topic has come up, and this time Stuart Lewis is scrambling to preempt concerns about the dozens of trillions in derivatives, using the same exact rhetoric: please ignore the elephant in the room; Deutsche Bank is fine.

But the biggest irony from Lewis' August appeal to investors was the following: “The good news is: the taxpayer does not have to step in; according to the new regulations for banks, bondholders will get hit first.” If anything, events over the past two weeks confirmed that this will not happen.

* * *

Still, perhaps an even more important story ahead of Monday's open is not Deutsche Bank's latest attempt to ease investor concerns about its balance sheet and trillions in derivatives, but Friday's report that global banking regulators are sticking to their guns on capital standards in the face of intense European pressure to soften planned rule-changes.

As Bloomberg reported on Friday, the Basel Committee on Banking Supervision will wrap up work on the post-crisis capital framework, known as Basel III, on schedule by the end of the year, William Coen, the regulator’s secretary general, said on Friday. Key elements criticized by European Union policy makers will be retained, according to the text of Coen’s remarks in Washington.

One flashpoint is a proposed new capital floor that caps the benefit banks can gain by measuring asset risk using their own models compared with a formula set by regulators. Coen said “discussions are still under way” on the floor, though Valdis Dombrovskis, the EU’s financial-services chief, called last month for it to be scrapped.

What this means is that as it wraps up Basel III, the regulator is under instructions not to increase overall capital requirements significantly in the process. That promise, first made in January, left open the possibility that individual countries or banks could face a marked increase.

“This is not an exercise in increasing regulatory capital requirements,” Coen said. “However, this does not mean that the minimum capital requirement for all banks will remain the same; variability in risk-weighted assets can only be reduced if there is some impact on the outlier banks. So some banks which are genuinely outliers may face a significant increase in requirements as a result.”

Banks such as Deutsche Bank, which while not named can be inferred: among the most vocal opponents to a boost in overall capital levels is German Finance Minister Wolfgang Schaeuble who has insisted that the Basel Committee not only keep any overall increase in capital requirements to a minimum, but also ensure the rules have no “particularly negative consequences for specific regions,” such as Europe. Or rather, Germany.

In the current round of talks, Europe and Japan are keen to retain risk-sensitivity in the capital rules, including the use of models where appropriate.  The European Commission, the EU’s executive arm, doesn’t believe capital floors are an “essential part of the framework,” Dombrovskis said. Europe also opposes the Basel Committee’s proposal to bar some asset classes from modeling entirely, and objects to the calibration of risk-weights in the standardized approach to credit risk.

Why is Europe, and its biggest bank, "keen" on retaining the existing model-based framework which would not require substantial capital increases for risky banks, of which Deutsche Bank is at the very top? Simple: the largest German lender is already notably undercapitalized, and any further capital needs would only lead to further pressure on its stock, forcing it to seel even more equity when the inevitable capital raising moment arrives; it also means that the models used by DB's risk managers are likely to materially misrepresent the bank's true value at risk, not only when it comes to its loan book, and especially Level II and III assets, but more importantly, its derivative book, where while we appreciate Mr. Lewis' assertion that the bank's €46 trillion in gross notional derivatives collapse to just €41 billion, we would be far more interested in seeing the math and assumptions behind this calculation.

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MANvsMACHINE's picture

At least it's not over 50 trillion. Then I'd be worried.

Looney's picture


Stewart Lewis: The teeth are about to fall off of my picture, but my syphilis is under control.

Looney   ;-)

BullyDog's picture

Trust me I'm a limo driver....    This cliff I'm hurtling towards will build a bridge before my rear axle goes over.

Whoa Dammit's picture

"A few trillion worthless ones and zeros never hurt anyone." Famous last words of a previously highly paid risk analyst.

knukles's picture

In Times of Great Stress, Nothing Nets, Bitchez

Deathrips's picture

Just the tip baby wont hurt.



Stackers's picture

It's only $41 billion in notional risk ....... unless one of the other Too Big To Fail banks fails and all it's hedged counterparty risk have to be actually marked to market and then it suddenly becomes $4 trillion in notional risk .... cough AIG cough

jcaz's picture

LOL- yeah, Stuart- the problem is that at $46T,  you don't have counterparties- you're the straw that stirs the drink.....

JRobby's picture

It is hard to speak words much less complete sentences when you are on a respirator. So D Bank is "telling" the market?

Notional is all so fun to imagine about. There is a reason this is an unregulated market. There are time bombs in many of these that are a lot more complex than your "garden variety if-then oerator"

eforce's picture

Wasn't Titanic TBTF?

Loftie's picture
Loftie (not verified) eforce Oct 9, 2016 9:10 PM

The SAUDIS withdrew their $ following Congress's stupid Sept 11 Bill and then BANG!

French Bloke's picture

Too big to Float?


Er, yes it was...

divingengineer's picture

It's brilliant, Douche Bank has made itself a doomsday device. They will take the whole world down with them when they fall.

BaBaBouy's picture

"46 trillion euros in derivatives exposure at Deutsche appeared large but reflected only the notional value of the contracts, while the bank's net exposure to derivatives was far lower, at around €41 billion."

That means they are leveraged @ about 1100 to 1 ???

Is GOLD shorted out 1 ozs to 1100 ???

johngaltfla's picture


"Don't Worry..."

Those are almost the exact same words some assholes who ran Bear Stearns and Lehman used. And Wachovia. And WaMu....and Countrywide, etc...

Al Huxley's picture

Well yeah, that's the problem.  The netting only works out when all your counterparties are deemed to be good for their obligations.  If one fails then suddenly all 46 trillion are back on the table.

fajensen's picture

Or - Like Lloyds in the 1980's - there are no counterparties because all the people who bought "your risk" hedged it right back by selling "their risk" to "you".

It has been known for decades that the Ackermänner running Deutsche Bank has no idea about who the sucker is so now they are sitting at the Poker table holding all of the cards while the other players have "just gone over to the bar with the pot, you know, to get us some fresh drinks".  

38BWD22's picture



HSBC is a very dirty bank too.  Very risky, avoid allowing them to have custody of anything, especially your gold.

JRobby's picture

HSBC! (Laugh Track Deafening) Run away from that shit storm faster than you have ever run.

zvzzt's picture

I noticed on the chart above. What's their story? Was rather surprized to see them that high. 

fajensen's picture

They are pretty good at getting coke and blood stains off your money, though.

CorporateCongress's picture

Half of the number is listed on exchange. I'd be worried about the half that isn't.

thesonandheir's picture

So they think that by hedging risk against risk they cancel each other out and it's only net 40-odd billion?

Jesus wept they are fucked.

CorporateCongress's picture

For a part these derivs are against other banks. These can't be messed with too much as the counterparty would complain about it. It's all those derivs against (failing) corporations that can be marked to MYTH.

BennyBoy's picture


Don't worry about their 46 trillion in notional derivatives.

Its other hidden financial engineering that'll get 'em.

flash338's picture

DB, like every other bank, wants something for nothing. They all think they have built the equivalent of a financial "Perpetual Motion Machine". Risky bets are piled on top of yet more risky bets with derivatives passing on the risks to others. Profits for free until their machine breaks down and we all pay a price much greater than they have already extracted. 

Raffie's picture

Did DB say that with a straight face?

JRobby's picture

Imagine if you had died 2 years and 39 weeks ago instead of posting to Zero Hedge?

myne's picture

What gets me is how shit their profits are off all that. 

That's got to be the worst ROI in history. It's a rounding error. 

46,000,000,000,000 returning around 1,000,000,000 annually. 

Nothing can survive the long term with such a shitty return. 

putaipan's picture

jim willie has some fascinating insights into deutchebanks unwinding about half way thru the 1st part-

factgasm's picture

A trillion here, a trillion there and soon you're talking big money.

Captain Chlamydia's picture

Nothing to worry, they say. 

Ergo, start worrying. 

CorporateCongress's picture

Indeed the louder they argue it's fine the more worried you should be. If they truly were rock solid they wouldn't need to explain anything

HardlyZero's picture

Sunday finance/hedgie funnies...these funnies should be popular going forward every Sunday...until it gets serious.


As the Chief Risk Officer Stuart Lewis told Welt am Sonntag in an interview published on Sunday, it was to take a preemptive stance on market concerns about Deutsche Bank's staggering derivative position.

Speaking to the German publication, Lewis said that Deutsche Bank continues to cut back the size of its derivatives book, "which is not as risky as investors may believe." Well, not just investors: it also includes that "other" bank with some $53.3 trillion in derivatives, JPMorgan.

"The risks in our derivatives book are massively overestimated," Lewis told the paper cited by Reuters. He said 46 trillion euros in derivatives exposure at Deutsche appeared large but reflected only the notional value of the contracts, while the bank's net exposure to derivatives was far lower, at around €41 billion.

bugs_'s picture

Trust us it is only 46 trillion the 72 trillion figures you've heard are exaggerations!

dark fiber's picture

Yeah never mind those SPVs on our books.  They are totally innocent.

Son of Loki's picture

"Dear Valued Dammen und Herren,

You can't withdraw more then XY amount.

No, you cannot have your gold bars/coins.

And, NO!, we will not open our books for inspeckion.

Trust us.

Your DB Bankers"

Government needs you to pay taxes's picture

And that, dammen und herren, is how the great bankster die-off began, first in the major global financial centers, then at the regional level, then at the local level.  You see, as soon as the people knew the banksters would in fact take every last dime of their deposits, they fetched whatever they had in the garage  that might disembowel, decapitate, flay, filet, debride, or lynch, and they became VERY industrious.  It was a vast spontaneous cooperation between the ferals and the formerly middle class.  Outside Goldman Balsack HQ, it was a bloodbath . . . literally.  A few corpses of security guards who attempted to protect their managing directors lay crumped/trampled/forgotten in the street, the slight smell of human excrement wafting from the back of their pants. 

RaceToTheBottom's picture

If people outside the bank cannot rate the derivatives, the people in the bank don't know about the risks....

jdow's picture

One thing is for certain, someone is lying, or downplaying risk.  This sounds almost exactly like the rhetoric going on at the time of the Lehman collapse.  I clearly remember it.

Vageling's picture

Sure... Do an al-Sahaf! Worked great for comical Ali. No US tanks folks. Move a long. Bitch came back empty handed from the US and they go al-Sahaf? 

Cluster_Frak's picture

I knew a managing director at Bearn Sterns once. Shortly after 2 Bearn Sterns subprime funds failed in 2007, I asked him what is his take on it. He said "i do not worry".

The Fonz...before shark jump's picture

Wow DB is a house of cards drenched in gasoline inside a burning house situated in the middle of a raging forest fire...

Yukon Cornholius's picture

Yes, but they have a kitchen fire extinguisher that has just been recharged, so, you know, they've got this.

robnume's picture

In other words: Pay no attention to that man behind the curtain. There. Fixed it for ya.