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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

Jun 8

Written by: Donald van Deventer
6/8/2011 10:48 PM 

Today’s blog focuses on the funding shortfall that took place at Depfa Bank PLC New York Branch during the period from February 8, 2008 to March 16, 2009. During this period, Depfa was a subsidiary of Hypo Real Estate AG, which was nationalized by the German government rescue fund SoFFin on October 13, 2009. Today’s blog confirms that Depfa, through its New York Branch, was one of the largest borrowers from the Federal Reserve during the credit crisis, a fact that hasn’t received as much attention as it should. At its peak, Depfa was borrowing $47.8 billion from the Federal Reserve, almost double the funding shortfall at Lehman Brothers on September 15, 2008, the day after its bankruptcy filing. Depfa’s average borrowings from the Fed were $24 billion, second only to AIG among firms studied in this blog series so far.  Depfa’s average borrowings exceeded those of Morgan Stanley, Merrill Lynch, Bank of America in consolidation with Merrill Lynch and Countrywide, and Citigroup.

This is the tenth Kamakura case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, Morgan Stanley, Citigroup and Dexia SA.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at Depfa during the credit crisis. Although most observers implicitly assume that the primary beneficiaries of Fed support in the credit crisis were U.S. organizations, there were some major European beneficiaries of Federal Reserve lending programs, and Depfa ranked higher than Dexia SA among that group on the basis of average loans outstanding.

The data used for Depfa in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve. 

A detailed chronology of the credit crisis through February 28, 2008 is given in this recent blog post:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog,, May 13, 2011.

The key dates in the chronology relevant to Depfa are summarized below. 

July 23, 2007
Hypo Real Estate AG announces the acquisition of Dublin-based Depfa Bank PLC (source: Hypo Real Estate press release)
October 2, 2007
Hypo Real Estate AG completes 100% acquisition of Depfa Bank PLC (Source: Supplement to Base Prospectus, Depfa Bank, April 21, 2008)
September 30, 2008
European governments bail out Dexia SA in €6.4bn rescue deal (Source:
October 6, 2008
Germany announces Euro 50 billion bail-out of Hypo Real Estate AG (Source: USAToday)
October 6, 2008
Germany announces unlimited guarantee of Euro 568 billion in private bank deposits
November 12, 2008
Hypo Real Estate AG announces Euro 3.1 billion pre-tax losses largely due to real estate exposure at Depfa Bank plc (Source: USAToday)
March 20, 2009
German parliament passes Hypo Real Estate Nationalization bill (Source:
June 2, 2009
Hypo Real Estate AG shareholders vote on rescue by government that would take German government ownership of Hypo Real Estate to 90%. (Source:
October 13, 2009
100% acquisition of Hypo Real Estate by German government rescue fund SoFFin completed (Source: Reuters)
September 12, 2010
German government adds another Euro 50 billion in aid to Hypo Real Estate AG bringing total support to Euro 142 billion (Source: Business Standard)

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to Depfa during the period February 8, 2008 to March 16, 2009. Depfa’s borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing $1.5 billion on September 30, 2008, with borrowings continuously outstanding from October 6, 2008 (the date that the German government bailout was announced) through March 16, 2009.
Average from
2/8/2008 to 3/16/2009
$9.7 billion
Average when Drawn
$24.0 billion
Maximum Drawn
$47.8 billion on February 12, 2009
Number of Days with
Outstanding Borrowings
163 days

The graph below shows the Hypo Real Estate AG (parent of Depfa Bank plc) 1 month (yellow line) and 1 year default probabilities (blue line) for the Jarrow-Chava version 5.0 default probability models from Kamakura Risk Information Services from February 8, 2008 until just prior to the German government investment in Hypo Real Estate AG announced on October 6, 2008.

Cumulative default risk peaked just prior to the German government investment in Hypo Real Estate, parent of Depfa Bank plc, on October 6, 2008 with a 5 year cumulative default risk of 4.11%.

Depfa’s first borrowing from the Federal Reserve was $1.5 billion on September 30, 2008. Depfa Credit Local New York Branch borrowed from the Federal Reserve for 163 days. The peak borrowing was $47.8 billion on February 12, 2009, 4 months and 6 days after the German government announced its first injection of capital into Hypo Real Estate.

In the chart below, we compare Depfa’s funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  Depfa’s average drawn borrowing of $24.0 billion ranks second among the firms analyzed so far, about than 50% greater than Morgan Stanley and Merrill Lynch as beneficiaries of support from U.S. taxpayers via the Federal Reserve.

If one ranks the same firms by largest outstanding borrowing on a single day, Depfa ranks fifth, with a peak borrowing of $47.8 billion, almost quadruple that of Bank of America when Countrywide and Merrill Lynch-related borrowings are excluded. Dexia SA, the consolidated Bank of America and Depfa were nearly equal in peak borrowings:

Depfa did not borrow until the Commercial Paper Funding Facility, nor did its parent Hypo Real Estate AG.

Implications of Funding Shortfall Data

Depfa’s peak funding need of $47.8 billion on February 12, 2009 was almost double the $28 billion funding shortfall at Lehman Brothers on September 15, 2008, the day after Lehman Brothers filed for bankruptcy. As noted in our May 31, 2008 blog on Lehman, it is clear that the U.S. government dramatically revised its decision making on which firms were too big to fail in the aftermath of the Lehman Brothers bankruptcy. What is surprising is the Fed’s willingness to provide double the aid that Lehman Brothers required to a non-U.S. institution after a supposed rescue by the German government.  In reality, obviously, the United States was an active participant in the German government rescue announced October 6, 2008 rescue of Depfa Bank plc and its parent Hypo Real Estate AG. As in the Dexia SA rescue, the internet is silent on the “thank you” to the United States from the shareholders of Hypo Real Estate AG (who would otherwise have been completely wiped out) and the German government.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
June 9, 2011

© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.