Wednesday, October 14, 2015

Two Systemic Risk Situations to Keep an Eye On

We have covered many times here on the blog that the global financial system is highly interconnected and that means a problem anywhere can lead to a problem everywhere. Lately we have two situations (at least) that bear keeping an eye on. One is the problems at Glencore which the Bank of England warned about recently. The other was the news that Deutsche Bank would have to take more than a $6 Billion loss in its 3rd quarter. Because both of these entities are huge dealers in derivatives, the risk of further problems being triggered with derivative contracts obviously is still out there.

We would assume that whatever risks are there are known and measures to contain them are available, but there is never really any way we can know this for sure. 

Anything that triggers a massive global derivatives problem could certainly turn into the type of major crisis Jim Rickards and others have been predicting. I have no way of knowing if this could happen here or not, but it would irresponsible to readers not to mention the risks are out there. Below are quotes from the two articles linked above.


The Guardian - Bank of England Warns on Glencore

"The Bank of England has told major banks to check the impact of falling commodity prices on their lending positions.
Threadneedle Street has been asking for information from the major players in light of the rout in the shares in Glencore, the commodity trading and mining firm.
Glencore’s shares plunged by 29% a week ago on Monday to 68.62p. Although they have subsequently recovered to 120p, the shares are trading far below their 2011 flotation price of 530p. The fall in Glencore stock came amid concerns about its debt position and fears that the Chinese economy was on the cusp of a hard landing that would further reduce already softening global demand for commodities.
The demand for information by the Bank of England has emerged at a time when banking analysts have been questioning the exposure of banks to the the fallout in the commodity sector. In a research note entitled The $100bn Gorilla in the Room, Bank of America analysts said: “The banking industry may have significantly more exposure to Glencore than is generally appreciated in the market.”
"When Deutsche Bank stunned markets this week with a profit warning, part of the rationale the bank gave was to write down the value of an acquisition of a bank it bought 16 years ago.
Deutsche Bank DB, +3.35% DBK, +3.46%  said it will report a 6.2 billion euro ($6.99 billion) third-quarter net loss that included a write off of the remaining premium paid in 1999 to purchase Bankers Trust, which at the time was a $10.1 billion deal.
John Cryan, Deutsche Bank’s Co-CEO, told employees in a message that current assessments of Bankers Trust and Deutsche Postbank, acquired in 2010, “no longer support the carrying values on our balance sheet.”
An unusual mid-year assessment of its balance sheet and the admittedly stale goodwill and intangibles balance in its investment bank prompted the dramatic write off. The bank said in a statement the move was driven by “anticipated higher capital requirements on the value of Corporate Banking & Securities and Private & Business Clients along with current expectations of higher disposal costs for Postbank.”

Along with this we have the massive fraud exposed at VW that will certainly hit them hard and also an increasing number of layoffs being announced around the world. On top of all this we have increasing tension in the Middle East around the Russian move into Syria. When we see all these kinds of things happening, it is obviously important to stay alert and informed as any or all these situations could escalate into a bigger problem.

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