Banks

Spare Some Worrying For Ratings-Triggered Collateral

Remember how a week ago people went around bothering themselves about Bank of America’s derivatives? Specifically how if they get downgraded, as seems plausible, they will have to come up with a zillion more dollars for derivative collateral? And how earlier this week they did the same for Morgan Stanley?

Anyway we talked about it a bit and I put up a table that I figured I’d update when it was complete and now it is so here it is. Also a JPMorgan downgrade, which looked hilariously unlikely 25 hours ago, looks more likely so I guess this is relevant even where it wasn’t before. So here is how much cash various banks will need to stump up – to post as collateral on OTC derivatives or to clearinhouses, or to pay on termination of trades – if they are downgraded two notches:



It is … am I right in thinking it is harder to get worked up about these numbers today than it was 25 hours ago? I feel like they are interesting – I’d highlight the second-to-last line as a rough-and-ready indicator of something between “how strong counterparties think these banks are” and “how tough these banks are as negotiators looking out for their own liquidity”; lower is better and I suspect the differences do tell you something. But the total number here, $23-ish billion split among five banks if they’re all downgraded two notches, doesn’t average out to that much more of a liquidity drain than the one that JPMorgan is so manfully taking as we speak.

Just for fun though let’s calculate the “cost” of posting all that cash, in terms of foregone earnings rather than just foregone liquidity. Here’s one way to do it: treat it as a DVA loss. You go from having uncollateralized exposure at whatever your credit spread is, to having collateralized exposure at a +0 credit spread, so you’ve lost your credit spread times the duration of your derivatives. Here are some imagined numbers:

These numbers don’t seem that intimidating when you’re busy wrestling a whale carcass to your boat, though you might gulp hard at that MS number. (They also include numbers for a three-notch downgrade in their Q. Enjoy that!) They are also a lot more predictable, insofar as everyone knows there is some likelihood of these downgrades coming, and everyone knows roughly what the costs will be. Unless, of course, someone discovers that their derivative valuation model was wrong and they actually have bigger liabilities – and thus bigger triggered collateral posting obligations – than they thought. But what are the odds of that?

96 comments
(hidden for your protection)
Show all comments

96 Responses to “Spare Some Worrying For Ratings-Triggered Collateral”

  1. guesticles says:

    HOW ARE YOU STILL WRITING

  2. guest says:

    Matt, either "1Q2012" and "4Q2012" under "percentage of uncollateralized derivatives subject to trigger" is out of order or I already failed at grasping the concept of percentages… apart from that no worries.

  3. Cumin Sense says:

    "But what are the odds of that?"

    The odds are very good, since no one seems to want to point out the obvious…

  4. guest says:

    zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz

  5. durp says:

    Matt, how am I supposed to easily pass off the work you've done for me as my own if you don't provide footnotes with links to the relevant pages where these figures come from (like you did for BOA and MS in your last post)?

  6. http://modafinilwithoutprescription.net/ – buy modafinil provigil – modafinil generic side effects

  7. http://modafinilwithoutprescription.net/ – buy modafinil cheap – modafinil ingredients

  8. fn9g9p Enjoyed every bit of your blog.Thanks Again.

  9. crork says:

    4gfh8V Great article post. Fantastic.

  10. Im obliged for the article post.Really thank you! Fantastic.

  11. Really appreciate you sharing this blog.Much thanks again.

  12. Major thanks for the post.Much thanks again. Much obliged.

  13. Thank you for your post.Really thank you!

  14. bird removal says:

    This is one awesome post.Thanks Again. Fantastic.

  15. Thank you for your post.Much thanks again. Really Cool.

  16. Enjoyed every bit of your blog.Really looking forward to read more. Much obliged.

  17. Thanks-a-mundo for the post. Cool.

  18. Really enjoyed this blog post. Much obliged.

  19. I value the blog post.Really looking forward to read more. Awesome.

  20. jokes says:

    Great blog post. Want more.

  21. die cutting says:

    Wow, great blog post.Thanks Again. Want more.

  22. diamants says:

    Really appreciate you sharing this article. Want more.

  23. buy celebrex – celebrex 100mg capsules

  24. provigil kaiser – provigil prescription cost – provigil and 5-htp

  25. bloom says:

    Really appreciate you sharing this blog post. Really Cool.

  26. Appreciate you sharing, great post.Really looking forward to read more. Much obliged.

  27. Very neat blog.Much thanks again. Really Great.

  28. check it out says:

    Im grateful for the blog post.Thanks Again. Want more.

  29. buy xenical for cheap buy xenical online xenical manufacturing problem

  30. Thanks a lot for the article post. Much obliged.

  31. Really enjoyed this post.Thanks Again. Cool.

  32. Thanks for the post.Thanks Again. Keep writing.

  33. Erotismo says:

    Thank you for your article post.Much thanks again. Awesome.

  34. Wow, great article.Thanks Again. Want more.

  35. I am so grateful for your blog post.Thanks Again. Really Great.

  36. Appreciate you sharing, great blog article. Fantastic.

  37. Major thankies for the blog.Much thanks again. Great.

  38. Hey, thanks for the article.Really looking forward to read more. Awesome.

  39. Werewolves says:

    Thanks-a-mundo for the article post.Really looking forward to read more. Want more.

  40. I cannot thank you enough for the blog post. Awesome.

  41. Very informative article.Really looking forward to read more. Fantastic.

  42. Appreciate you sharing, great article.Thanks Again. Want more.

  43. Major thanks for the blog post.Thanks Again. Will read on…

  44. Looking forward to reading more. Great article post. Really Cool.

  45. Really informative post.Really thank you! Will read on…

  46. Looking forward to reading more. Great article post.Thanks Again. Want more.

  47. vde 0113 says:

    Im grateful for the article. Much obliged.

  48. Major thankies for the blog article.Really looking forward to read more. Fantastic.

  49. Muchos Gracias for your post.Much thanks again.

  50. This is one awesome blog post.Really thank you! Really Cool.

  51. Enjoyed every bit of your post.Really thank you! Want more.

  52. I think this is a real great blog post.Really thank you!

  53. Major thankies for the blog post. Fantastic.

  54. A big thank you for your blog article. Really Great.

  55. Sex Anzeigen says:

    Really appreciate you sharing this post.Thanks Again. Keep writing.

  56. Major thanks for the article post. Awesome.

  57. I think this is a real great article post.Much thanks again. Great.

  58. bathmate says:

    Im thankful for the blog post.Really thank you! Will read on…

  59. Hey, thanks for the blog. Awesome.

  60. Really enjoyed this blog.Thanks Again. Awesome.

  61. I appreciate you sharing this blog post. Awesome.

  62. Great, thanks for sharing this post.Thanks Again. Keep writing.

  63. Really enjoyed this blog article.Really thank you! Awesome.

  64. I appreciate you sharing this blog post. Much obliged.

  65. A round of applause for your article post.Thanks Again. Will read on…

  66. Wow, great blog post. Much obliged.

  67. I really enjoy the post.Thanks Again. Keep writing.

  68. six sheet says:

    Thanks-a-mundo for the article post.Really looking forward to read more. Great.

  69. Thanks for the blog. Will read on…

  70. Thanks so much for the blog.Really looking forward to read more. Really Cool.

  71. buy ambien overnight delivery http://generic-ambien.com/sleep-disorders.htm ambien 10 side effects

  72. overnight shipping of ambien http://generic-ambien.com/ ambien onset

  73. http://cheaplasix.net/#47455 – lasix kidneys – jockey club lasix

  74. […]please take a look at the internet sites we adhere to, including this 1, as it represents our picks from the web[…]

  75. Of course, I understand a little about this post but will try cope with it!!…

  76. Jarkesy says:

    Thank you ever so for you blog article.Much thanks again. Awesome.

  77. provigil caffeine buy provigilonline provigil purchase

  78. quickly does provigil work generic provigil online – cost of prescription provigil

  79. http://www.ambienprescription.net/ – ambien prescription canadaambien online no prescription mastercard

  80. I wanted to post you this tiny note in order to say thank you again for those amazing things you have featured on this website. It was shockingly open-handed with people like you to convey without restraint what most people could have offered for an ebook to generate some cash on their own, especially given that you might have tried it in case you considered necessary. The secrets as well worked to become good way to fully grasp that other people have the same desire just as my very own to figure out way more in respect of this condition. I am certain there are some more enjoyable sessions in the future for those who start reading your blog.

  81. rideshare says:

    I`m so grateful that you enlightened me and the most important thing that it happened in time. Just think, I have been using the internet for six years already but it`s the first time I`ve ever heard about it!…

  82. The Author is crazy..!

  83. ambien cr generic ambien groggy что такое ambien

  84. buy vaniqa – vaniqa kaufen vaniqa canada 2010

  85. sohbet says:

    Relative game comment sounds like pr straight from ir talking points to me written by an underpaid res associate rather than an honest opinion of what matters: will financing costs for banks rise and will corporates that have stronger ratings than the banks wake up and disintermediation

  86. 5 htp max says:

    sweet sweet stuff, I'm beginning to love this site a lot…

    Be sure to check out my own blog too on pure saffron extract

  87. Nice style you 've written this article…

  88. Jack Conner says:

    The odds are probably pretty good.