A table with the total notional of the derivatives that American banks ordered from more to less is appearing on social networks. Those who share use it to say that, adding the total to an absurd amount (a thousand trillion dollars), the economy is about to burst. This is not true, it just shows ignorance of how the global financial system actually works.
Let's start because the number of derivatives that each bank has is not a secret, but well known by the authorities. Furthermore, the way of valuing it (adding the notional) does not say much, as it is just one of the factors used to calculate the payments associated with the financial derivative.
The notional of the derivatives that each bank owns is no secret
Since the 2008 financial crisis, banks have had to report their positions to “trade repositories” or transaction repositories. Here you can consult a list of those accepted by ESMA, the European financial authority.
Specifically, this table round by nets Social I'm sure it comes from the public reports given by the entities themselves, which can be found with a simple Google search, that is, it's a Very easy information to get, none of the twitter accounts where you could see got confidential information.
The notional of derivatives is nothing more than the reference quantity over which the value of the derivative is calculated. Let's think about life insurance, the amount insured is what will be delivered to the beneficiaries in the event of the death of the insured person, but if the insurer has a thousand clients insured for one million euros, it does not mean that it owes a thousand million euros to the beneficiaries, but you will win or lose depending on how well you calculated your payouts. Something similar happens with derivatives. It is a reference value, but it does not mean that they are a debt.
Earlier we said that knowing the notional of the operation is not enough information to know the risk of the same. Going back to the life insurance example, the one million euro claim doesn't tell us much about the risk of an insurance policy. Insuring a 20-year-old woman who practices sports in moderation is much less risky than insuring a 70-year-old man who has been a smoker since he was 15. Even if the compensation is the same. The same thing happens with financial derivatives, there are many other factors to consider.
Furthermore, a common practice is that Derivatives are contracted “hedged”, that is, covered. What this means? That if a “trader” at a bank contracts a derivative, it is with the intention of hedging a position he already has (perhaps in other investments such as interest rate or mortgage derivative) or to hedge that position in the future. That is, if you have a derivative that makes you pay flows of a thousand euros per month, try to get others that make you receive equivalent flows (for example, eight installments of one hundred and one of two hundred) and get a commission with the difference.
There are limits to the derivatives that a bank can have and mechanisms to reduce its risk
This table shows something that is quite expected, the bigger a bank is, the more derivatives it has. This is normal, as a bank's contracting capacity is, by common sense and more importantly, regulatory limited by the capital it has. The larger the financial services company, that is, the more capital shareholders have in it, the more contracting capacity (derivatives, mortgages, personal loans, etc.) they will have.
But this is not the only mechanism that limits the hiring capacity of each trader. Banks have risk departments specialized in controlling that open positions do not get out of hand. If a trader trades too much or their trades are too risky, they will be stopped from trading by the investment firm's risk department. We won't go into how correspondent banking departments calculate risks, but we monitor various types of risks and they are regulated as they should (they are quite sophisticated methods).
In addition, for If these internal mechanisms are insufficient, there are other mechanisms to reduce the risk of the position that a financial agent may have. The first is the central counterparty clearinghouses. They existed before the fall of Lehman Brothers, but since then more efforts have been made by legislators (in Europe, the US and Japan) so that a higher percentage of transactions go through this type of service. In short, the clearinghouses guarantee that if one of the counterparties is unable to meet its obligations, they will. To do this, they require collateral from both counterparties and have large resources waiting to be used if the counterparty's collateral is insufficient.
The other mechanism is for operations that do not go through cameras, this is collateralized. This means that financial services companies cover this operation with their counterparties, assigning guarantees that can be enforced if one of the two is in default. In other words, in case one of the chains failed, it had to provide guarantees covering all or a good part of its position. It's a bit like when a bank asks us for a house as collateral to foreclose on the mortgage or a pawnshop asks us for a gold ring to lend us money. So let's not think about dominoes, there are “buffers” between one piece and another, which means that if one falls, the others don't.
We can discuss whether these mechanisms (internal and external) are sufficient and adequate, whether the risk is well covered or not. But we can't add the notional of the derivatives and say "it's a very large quantity, it's a bubble", just as we wouldn't think that all car insurance companies are about to go bankrupt because there are so many cars parked on the street.
So the next time you see someone argue that the global financial system is a bunch of dominoes waiting to fall using the sum of all derivatives in the financial system as an argument, laugh in their face. It doesn't matter what degrees or certifications you claim to have, it just shows your ignorance.
ask the readers What other factors do they try to scare us with on social media?