Deutsche Bank derivative dumbness

In financial markets, there's always a new reason to worry.

Over the weekend, Deutsche Bank announced a new "strategic transformation" after a decade of woeful underperformance. The headline-grabbing figure was 18,000 -- the number of jobs it expects to cut as part of the restructuring. You can read the FT story here, there and just about everywhere.

But of course, it's a large bank. So that means it poses systemic risks. Which means bad news for everyone, or something. So cue a pack of market bears over the weekend speculating over the bank's long-term health, and what it might mean for the broader market.

And that means, of course, citing Deutsche Bank's notional derivative exposure, which as of Dec 31 2018, according to the bank's annual report, stood at a terrifying €43.5tn.

A few examples. This article by Wall Street on Parade from April was doing the rounds Sunday. Then there's this tweet featuring some sort of evil eye graphic:

While here's another comparing Deutsche Bank's exposure, a stock, to erm, Europe's GDP, a flow:

Readers may spot the uniting factor is a certain bearish website which rhymes with "NeroDredge". A site, that has, quite remarkably been calling the top in equity markets since it launched a decade ago.

The issue with banging on about Deutsche Bank's notional derivative exposure, as ex-IMF economist Mark Dow pointed out yesterday, is that the German business's net exposure is infinitesimal compared to the notional number. The total in Deutsche's report represents positions both long and short positons including hedging transactions.

Indeed, according to the International Swaps and Derivatives Association, the gross credit exposure of over-the-counter derivatives, which " is a more accurate measure of counterparty credit risk", was just $2.3tn for the entire market at the end of 2018, a decline of 0.4 per cent from 2017.

So unless you think Deutsche's risk management is so bad that it would expose €61.3bn of capital to €43.5tn of unhedged derivative positions, perhaps it's time to start looking elsewhere for a market event that will pull the plug on the longest equity bull market in history.

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