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
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