Deutsche Bank, FRTB and the Asia Risk Awards

The week on Risk.net, September 30–October 6, 2016

DEUTSCHE BANK CDSs jumped because of waterfall change

FRTB data pooling crawls into action

ASIA RISK AWARDS winners named in Singapore

 

COMMENTARY: Deutsche Bank – everything old is new again

Deutsche Bank's troubles highlight how much the financial industry has changed in the past 10 years – and how much it has remained the same. "This isn't Lehman, this isn't 2011 with Greece" one wealth manager remarked.

It certainly isn't. In 2008, even in 2011, the idea that a single regulatory fine could even credibly threaten to bring down one of the largest banks in the world would have seemed ridiculous. But the past five years have seen many regulators – in the US, the UK and elsewhere – impose increasingly large fines, especially for conduct failures. Deutsche's threatened $14 billion fine for mis-selling mortgage-backed securities is still unusually large, even by today's standards, but the fact that a $5 billion fine would be seen as good news underlines how much the scale of regulatory penalties has shifted. (Deutsche has fallen foul of this shift before.)

Another new feature is the use by Deutsche and other banks of contingent convertible bonds, known as CoCos or alternative tier 1 instruments (AT1).  Controversial since their inception, these instruments could now face their first real test – at least, so some market observers believe, though others point out that the trigger is set so low that Deutsche Bank's regulators would have stepped in to force a capital increase long before the bonds kicked in.

The crisis is also raising new questions about the usefulness of credit default swaps (CDS) as a measure of a bank's default risk. CDSs on Deutsche Bank's senior unsecured debt have widened sharply, but this has more to do with a change in their underlying's priority in the repayment waterfall at the start of this year – and the bank is now arguing that as a result there is no link between the CDS spread and Deutsche's default risk at all.

But there's another way in which this week's events are all too similar to those of 2008. An IMF report earlier in the year named Deutsche Bank as the single most important net contributor to systemic risk in the world's financial system. It's true that this time, at least, we have more advance insight into the centrality of highly connected banks – Lehman's keystone position came as a surprise to financial stability bodies around the world. But if the goal of post-2008 reform was to build a financial system that could never be threatened by problems at a single bank – where no-one was too big, or too connected, to fail – then the turbulence surrounding Deutsche Bank's impending fine shows that, so far, it has failed to do so.

 

STAT OF THE WEEK

In April, ForexClear, LCH's forex clearing house, had an outstanding notional value of $160 billion cleared and 13,800 outstanding trades at month-end. By the end of August, those numbers had risen by 25% and 46%, respectively. The CCP cleared a record $100 billion notional volume in the week ending September 23.

 

QUOTE OF THE WEEK

"Ninety-five per cent of our cashflow is 100% automated. That 95% of cashflow never sees human eyes; never talks to anybody. They interact with the products, take loans and make payments without ever stopping to see a person" – Spencer Robinson, head of data strategy at loan automation company Kabbage


ALSO THIS WEEK

Final EU non-cleared margin rules softened for pension funds
No margin concentration limits for pension funds, but intragroup rules threaten US equivalence

Lawmakers rush to double Euribor panel membership
Benchmark designated "critical" to stem departures and enable transaction-based methodology

Embattled utilities increase focus on ERM
ERM remains just a compliance function at many utilities, say consultants

Data providers wrestle with systematic internaliser status
Covering 80% of venues is considered enough to approximate total market size under Mifid II

Non-cleared margin transfer rules vex asset managers
Market split on whether MTA applies at the client or account level

Swaps market mutation could replace managed change
Banks are finding it harder to control the future of the swaps market – that's no bad thing

Taking the FRTB plunge
Banks entering chilly FRTB waters for the first time are facing fresh challenges

Pension funds cautioned on equity-bond correlation
Buy-siders need to plug changes into VAR, say risk managers

Europe arrogant to reject capital increase, says lawmaker
Parliamentarian hits back at European Commissioner's criticism of Basel model floors

A conflict resolution strategy for capital allocation?
A recently proposed method for capital allocation has the potential to resolve internal disputes

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