With my emphasis, quoting from the article published in December 2008 by the Chartered Accountants Ireland (linked here) titled "Financial Derivitives (sic), Villian (sic) or Scapegoat" written by Grellan O'Kelly (who worked at the time in the Policy Section of the Financial Institutions and Funds Authorisation Department of the Financial Regulator):
"...when looking at the outstanding derivative positions (notional values) of our main banks as reported in their annual reports, the amounts are extremely small when compared to the total global amounts. A recent BIS survey2 on global OTC positions shows that global notional amounts come to a staggering $516 trillion. The most recent disclosures from our two main retail banks show that their gross notional exposures amount to €640 billion, only 0.17% of the total. ...noting that access to accurate data on derivative products is not always publicly available."
The article contains the usual caveat that "Any views expressed in this article are made in a personal capacity and are not intended to represent the views of the Financial Regulator." Nonetheless, it would be good to get some comment from the FR on this. After all, €640bn might be a small level of exposure to derivatives from the point of view of global banks, but for BofI and AIB to have such an exposure... is roughly 170% of the total 2009 asset base of all Irish banks combined.
For now, I cannot confirm whether this was a typo or not.
The problem is that unwinding even the straight forward swaps can be extremely costly. Buffet's unwinding of lost contracts against reinsurance claims cost Berkshire some $400mln back in 2008. In the case of interest rates swaps written against property, De Montfort University research in June 2010 has estimated that for a book of £143bn of interest rate swaps in the UK (57% of the total existing UK £250bn book of loans is estimated to be hedged by derivatives - here), the cost of unwinding these positions runs into ca £10bn.
So applying the UK estimate to our potential exposure, the cost of unwinding those €640bn in derivatives can be to the tune of €45bn.
Of course, this is just an estimate, but it gives some perspective to the numbers.
But let's ad some relative comparatives (hat tip to Conor for both):
- Ireland accounted for 0.17% of global estimates of OTC derivatives but only 0.03% of Global GDP (based on CIA fact book and CSO data)
- €640bn is 4.12 times our 2008 Gross Value Added (ca €155bn)
I am totally at a loss as to this figure - given its size - so any comment on its validity will be appreciated.