Thursday, September 29, 2011

Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure

Source: ZeroHedge

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaringformat the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies, a mere 5 banks account for 95.9% of all derivative exposure. The top 5 banks:


  • JP Morgan Chase with $78.1 trillion in exposure
  • Citi with $56 trillion
  • Bank of America with $53 trillion
  • Goldman with $48 trillion
  • HSBC with $3.9 trillion


As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively.

And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

If any of the top four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.

Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

While virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla interest rate swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-basedcommercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure to the ridiculously volatile FX space should perhaps raise some further eyebrows...

This is a Suspicious News Brief. Read more at ZeroHedge.
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