ECB asks Deutsche Bank to estimate the cost of winding down its investment bank; Spain’s sovereign debt upgrade; Canadian bond yields rising most amongst the G20

The European Central Bank (ECB) has asked Deutsche Bank to estimate the costs of winding down its trading operations. Apparently Deutsche Bank is the first bank that has been asked to run this exercise, but others may follow.

How complex is Deutsche Bank?

Well, for starters it has a portfolio of €48.5 trillion ($60 trillion) notional derivatives as of December 31, 2017. The net derivative position is about €21 billion.

Deutsche Bank has Tier 1 capital of €57.6 billion and a Tier 1 capital ratio of over 13% as of December 31, 2017. But its market capitalization is only €20 billion.

Back to derivatives, in Warren Buffett’s words “derivatives are weapons of mass destruction that morph, mutate, and multiply until some event makes their toxicity clear”. Well, that is one way to describe it.

When Lehman Brothers went into Chapter 11 administration (i.e. bankruptcy in simple words) in 2008 it had $35 trillion of notional derivatives. Deutsche has $60 trillion. Deutsche Bank is at least as complex if not more complex than Lehman Brothers was in 2008.

Meanwhile, Moody’s has raised Spain’s sovereign rating one notch to Baa1. It follows upgrades by Fitch in January and S & P in March. Spain has seen five years of growth and like we covered here, banks in Spain have tackled bad loans far better than compared to Greece, Italy, Ireland and Portugal since the financial crisis.

And it isn’t the US leading increasing bond yields amongst G20 countries, it is Canada. Canadian 10-year bond yields at 2.28% are up 0.76% over the past year. Canadian 2-year bond yields at 1.86% are up 1.13% over the past year. Rising Canadian bond yields haven’t been given as much attention as the US, but they should, after all they are leading the world now in increases.

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