(The opinions expressed here are those of the author, a columnist for Reuters.)
By Jamie McGeever
LONDON, June 6 (Reuters) - Perhaps the most remarkable aspect of Deutsche Bank's dramatic fall from grace over recent years is that it's still Europe's largest player in world financial markets.
The question is whether Germany's biggest bank, with its share price cratering and a derivatives book nudging $50 trillion, can continue to shrink that footprint gradually, smoothly and with minimal market disruption.
The bank's new chief executive Christian Sewing has embarked on a plan to scale back its global investment bank to focus more on Europe and its home market.
The potential for upheaval is greater if it cuts and runs from markets where it is a major force, like FX, credit or structured financing. But it is difficult to envisage Deutsche completely abandoning markets it is so dominant in.
The test for financial markets is whether a bank with such a large and tangled web of exposure can downsize without having a disruptive effect on liquidity, trading and pricing.
Deutsche's gross derivatives exposure last year was over $48 trillion, although net exposure was $20 billion, and investment banking and trading revenue was $14.2 billion. All this was supported by a market cap of only $23 billion.
That's a lot of derivatives exposure for market participants to potentially absorb. As it is spread across multiple players, it makes these links highly opaque, increases uncertainty, and raises suspicion among market participants over who is most exposed.
"If other banks and fund managers are not currently aware of their Deutsche Bank exposure I would be extremely surprised," said Helen Thomas, an independent financial analyst and former banker. "Their risk is not counterparty exposure but market exposure, where Deutsche's decline sets in chain an unwind of positions across the board."
The International Monetary Fund said two years ago that Deutsche, thanks to its links with other lenders, posed a greater risk to global financial stability than any other bank.
Deutsche's share price sank to a record low close of 9.1570 euros on May 31, valuing the bank at just 19 billion euros ($22 bln). That means it is the 83rd biggest bank in the world by market capitalisation, according to Reuters data.
Yet it is still the sixth largest investment bank in the world, according to banking industry data provider Coalition. It is the joint second largest player in global credit markets with JP Morgan, the third biggest in G10 foreign exchange, and joint third in securitisation with Citi.
The German bank is scaling back investment banking activities in the United States and elsewhere, and has already exited some markets altogether. Hundreds more trading jobs in New York and London are being cut.
Other big banks and, increasingly, asset management firms are ready to move in.
Analysts say there is enough capacity in the system to fill these gaps, as has already happened when Deutsche cut back in areas like commodities. There has been no noticeable market disruption there.
Deutsche's decline has been startling. Its share price is down 40 percent this year and down 90 pct from its pre-crisis peak in 2007 when then CEO Josef Ackermann was almost as famous in Germany as Angela Merkel.
In 2009, Deutsche was the biggest FX bank in the world, handling 21 pct of the global currency market's $4 trillion average daily volume, according to Euromoney. Last year, it was in fifth place, seeing 5.7 pct of the $5 trillion-a-day market.
In 2011, Deutsche was the world's joint second biggest bank with Goldman Sachs, behind JP Morgan, according to Coalition. Revenue from investment banking and market trading was 18.5 bln euros, and in bond trading, Deutsche was the stand alone second biggest bank in the world. Its market cap was $36 bln.
But the contrast in Deutsche's fortunes compared with JP Morgan could not starker. When world stock markets hit their crisis nadir in early 2009, Deutsche's market cap was just over $13 bln and JP Morgan's was around 4.5 times larger at $60 bln.
Today, JP Morgan's market cap is $369 billion, around 17 times larger than Deutsche.
In that time Deutsche's market share has mostly shrunk, it has paid out billions of dollars in fines around the world for a range of trading and banking scandals, and is on its fourth CEO in six years.
Speculation that it will be taken over, merged with a domestic or euro zone rival, or even nationalised has been pretty much constant too. Investors don't see much light at the end of the tunnel.
Nearly $1 billion of Deutsche stock is currently out on loan - a key indicator of short interest and the highest of any global bank in dollar terms, according to data provider FIS Astec Analytics.
Reporting by Jamie McGeever. Editing by Jane Merriman