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.
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.