As part of her re-election campaign Angela Merkel, Germany’s chancellor re-affirmed the promise that her government would not bail out Deutsche Bank (DB) in the case of failure.

This spurred the decline of shares of DB which have drifted 20% since the comment on September 15, trading at less than half of their value at the beginning of the year. The European bank has struggled with profitability in a slow growth, negative rate environment and uncertainties relating to a $14B MBS-related SEC fines.

After analysing the options positioning around DB, we see a 10 fold increase in puts outstanding since the downturn in the beginning of the year, reflecting an increase of ~400,000 put contracts. The jagged edges of the area graph illustrate expiry of options each month, which only underlines the strong bear case – the market has continued to more fresh put options as they expire.

db-options

DB has struggled with it’s decision to use contingent convertible (CoCo) bonds as a funding source, which only adds to the complication created by the opacity of their derivatives book. Although Tuesday saw a stabilisation of the share price, the first 2 trading days of this week, saw the addition of another 80k put positions, possibly foreshadowing further stress ahead.

As a comparison below I have created the same graph for a HSBC and Credit Suisse, who have both had significant challenges this year. While DB was named the systematically riskiest bank by the IMF , it was closely followed by HSBC and CS.

hsbccs

Both banks have surprisingly rebounded from recent lows as Brexit and various internal shifts seem to be producing results.

So maybe against Merkel’s wishes a bailout is inevitable if the trend continues.