In this article Warren Buffett is quoted as saying "there can be enormous gaps in things that you thought were fully protected by collateral, or netting arrangements and that sort of thing. So I regard very large derivatives positions as dangerous".
The article goes on to say JP Morgan Chase, Citigroup and Bank of America (presumably as reflected in their latest publicly released information) hold $50.7 trillion, $48.0 trillion and $42.2 trillion respectively. I take these figures to be gross numbers that are partially offset by other derivatives. Even so, they are huge numbers considering the current world nominal (inflation included) GDP is about $80 trillion.
Estimates for total outstanding derivatives vary widely. Latest Global OTC Derivatives contracts numbers suggest that in mid-2015 such contracts totaled about $550 trillion, and then had a market value of about $15 trillion. It seems likely no one really knows for sure.
That said, there can be little doubt total outstanding derivatives contracts is a multiple of world GDP. Moreover, based on the foregoing numbers the market value of outstanding derivatives is less than 3% of the total derivatives amount. Whether or not a correct calculation, this seems to imply that a very small drop in the value of total outstanding derivatives would wipe out their market value.
This article suggests "it's reasonable to assume that even the most sophisticated banks don't have a complete grasp of their derivatives portfolios". The reasons cited for this statement are (1) derivatives can be complicated (no kidding!), and (2) it's impossible to predict what will happen to the assets or events they're tied to (surely not in all cases!).
I have long believed, and continue to believe, the derivatives overhang - as I think about it - to be very worrisome. More than once I have likened that derivatives overhang to a gymnasium full of dominos where if one domino falls many other dominos may sequentially fall over.
The Hathaway Berkshire investment portfolio includes large positions in a few selected banks. The fact that Warren Buffett has elected to speak out about derivatives in the context of bank risk is interesting, and ought to be taken into account.
Finally, if you have not read my post titled "Trillion: Can You Put Trillion in Context" you ought to do consider doing that. It is hard to think sensibly about economic, business and financial markets news without knowing just how big a trillion is. You can find that post at here.
Read "Why Warren Buffett Wouldn't Invest in 90% of Big Banks" at Fox Business - Why Warren Buffett Wouldn't Invest in 90% of Big Banks.