Part of the Consolidated Financial Statements as of 31 December 2008; audited by KPMG AG Wirtschaftsprüfungsgesellschaft.

Beginning in 2008, Deutsche Bank calculated and published consolidated capital ratios pursuant to the Banking Act and the Solvency regulation (“Solvabilitätsverordnung”), which adopted the revised capital framework of the Basel Committee from 2004 (“Basel II”) into German law. Until the end of 2007, Deutsche Bank published consolidated capital ratios based on the Basel I framework.

A bank’s total regulatory capital, also referred to as “Own Funds”, is divided into three tiers: Tier 1, Tier 2 and Tier 3 capital, and the sum of Tier 1 and Tier 2 capital is also referred to as “Regulatory Banking Capital”.

  • Tier 1 capital consists primarily of share capital (excluding cumulative preference shares), additional paid-in capital, retained earnings and hybrid capital components such as noncumulative trust preferred securities, less goodwill and other intangible assets and other deduction items such as common shares in Treasury.
  • Tier 2 capital consists primarily of cumulative preference shares, cumulative trust preferred securities and long-term subordinated debt, as well as partially unrealized gains on listed securities and the amount by which value adjustments and provisions for exposures to central governments, institutions and corporates and retail exposures as measured under the bank’s internal rating based approach (“IRBA”) exceeds the expected loss of such exposures. Certain items must be deducted from Tier 1 and Tier 2 capital. Primarily these include capital components the Group has provided to other financial institutions or enterprises which are not consolidated, but where the Group holds more than 10 % of the capital, the amount by which the expected loss for exposures to central governments, institutions and corporates and retail exposures as measured under the bank’s IRBA model exceeds the value adjustments and provisions for such exposures, the expected losses for certain equity exposures, securitization positions to which the Solvency Regulation assigns a risk-classification multiplier of 1,250 % and which have not been taken into account when calculating the risk-weighted position for securitizations and the value of securities delivered to a counterparty plus any replacement cost to the extent the required payment by the counterparty has not been made within five business days after delivery and the transaction has been allocated to the bank’s
    trading book.
  • Tier 3 capital consists mainly of certain short-term subordinated liabilities and it may only cover market risk. Banks may also use Tier 1 and Tier 2 capital that is in excess of the minimum required to cover credit risk and operational risk in order to cover market risk.

The amount of subordinated debt that may be included as Tier 2 capital is limited to 50 % of Tier 1 capital. Total Tier 2 capital is limited to 100 % of Tier 1 capital. Tier 3 capital is limited to 250 % of the Tier 1 capital not required to cover counterparty risk. The minimum total capital ratio (Tier 1 + Tier 2 + Tier 3) is 8 % of the risk position. The minimum Tier 1 capital ratio is 4 % of the credit risk and operational risk positions and 2.29 % of the market risk position. The minimum Tier 1 capital ratio for the total risk position therefore depends on the weighted-average of the credit risk and operational risk and the market risk position.

The Tier 1 capital ratio is the principal measure of capital adequacy for internationally active banks. The ratio as defined under the Basel II framework compares a bank’s regulatory Tier 1 capital with its
credit risks, market risks and operational risks (which the Group refers to collectively as the “risk position”). In the calculation of the risk position the Group uses BaFin approved internal models for all three risk types. More than 90 % of the Group’s exposure relating to asset and off-balance sheet credit risks is measured using internal rating models under the so-called advanced internal rating based approach (“advanced IRBA”). The Group’s market risk component is a multiple of its value-at-risk figure, which is calculated for regulatory purposes based on the Group’s internal models. These models were approved by the BaFin for use in determining the Group’s market risk equivalent component of its risk position.

The introduction of Basel II had a negative impact on regulatory capital mainly due to the aforementioned deduction items from Tier 1 and Tier 2 capital. The Other Inherent Loss Allowance is no longer a separate regulatory capital component under Basel II as provisions are now taken into account in the calculation of the deduction items. Following the application of the advanced IRBA approach the Group’s credit risk position decreased, which outweighed the introduction of operational risk as a new risk class.

The following two tables present a summary of the Group’s regulatory capital and risk position. Amounts presented for 2008 are pursuant to the revised capital framework presented by the Basel Committee in 2004 (“Basel II”) as adopted into German law by the German Banking Act and the Solvency Regulation (“Solvabilitätsverordnung”). The amounts presented for 2007 are based on the Basel I framework and thus calculated on a non-comparative basis.

in € m.

Dec 31, 2008

Dec 31, 2007

(unless stated otherwise)

Basel II

Basel I

N/A – not applicable.

1

A multiple of the Group’s value-at-risk, calculated with a probability level of 99 % and a ten-day holding period.

Credit risk

247,611

314,845

Market risk1

23,496

13,973

Operational risk

36,625

N/A

Total risk position

307,732

328,818

Tier 1 capital

31,094

28,320

Tier 2 capital

6,302

9,729

Available Tier 3 capital

Total regulatory capital

37,396

38,049

Tier 1 capital ratio

10.1 %

8.6 %

Total capital ratio

12.2 %

11.6 %

Average Active Book Equity

32,079

30,093

The Group’s total capital ratio was 12.2 % on December 31, 2008, significantly higher than the 8 % minimum required.

The Group’s Tier 1 capital was € 31.1 billion on December 31, 2008 and € 28.3 billion on December 31, 2007. The Tier 1 capital ratio was 10.1 % as of December 31, 2008 (exceeding the Group’s target ratio of 10 % ) and 8.6 % as of December 31, 2007 (within the Group’s then target range of 8-9 % ).

The Group’s Tier 2 capital was € 6.3 billion on December 31, 2008, and € 9.7 billion on December 31, 2007, amounting to 20 % and 34 % of Tier 1 capital, respectively.

The German Banking Act and Solvency Regulation rules require the Group to cover its market risk as of December 31, 2008, with € 1,880 million of total regulatory capital (Tier 1 + 2 + 3) compared to € 1,118 million as of December 31, 2007. The Group met this requirement entirely with Tier 1 and Tier 2 capital that is not required for the minimum coverage of credit and operational risk.

The following are the components of Tier 1 and Tier 2 capital for the Group of companies consolidated for regulatory purposes as of December 31, 2008, and December 31, 2007.

 

Dec 31, 2008

Dec 31, 20071

in € m.

Basel II

Basel I

N/A – Not applicable

1

Comparative figures for 2007 are unadjusted for the retrospective changes described in Note [1]. Including these total regulatory capital would have increased by € 849 million.

2

Net unrealized gains and losses on listed securities as to be determined for regulatory purposes were negative at the end of 2008 € (108) million and were fully deducted from Tier 1 capital.

3

Pursuant to German Banking Act section 10 (6) and section 10 (6a) in conjunction with German Banking Act section 10a.

Tier 1 capital:

 

 

Common shares

1,461

1,358

Additional paid-in capital

14,961

15,808

Retained earnings, common shares in treasury, equity classified as obligation to purchase common shares, foreign currency translation, minority interest

16,724

17,717

Noncumulative trust preferred securities

9,622

5,602

Items to be fully deducted from Tier 1 capital2 (inter alia goodwill and intangible assets)

(10,125)

(12,165)

Items to be partly deducted from Tier 1 capital3

(1,549)

N/A

Total Tier 1 capital

31,094

28,320

Tier 2 capital:

 

 

Unrealized gains on listed securities2 (45 % eligible)

1,472

Other inherent loss allowance

N/A

358

Cumulative preferred securities

300

841

Qualified subordinated liabilities

7,551

7,058

Items to be partly deducted from Tier 2 capital3

(1,549)

N/A

Total Tier 2 capital

6,302

9,729

Basel II requires the deduction of goodwill from Tier 1 capital. However, for a transitional period the German Banking Act allows the partial inclusion of certain goodwill components in Tier 1 capital pursuant to German Banking Act section 64h (3). While such goodwill components are not included in the regulatory capital and capital adequacy ratios shown above, the Group makes use of this transition rule in its capital adequacy reporting to the German regulatory authorities.

As of December 31, 2008, the transitional item amounted to € 971 million. In the Group’s reporting to the German regulatory authorities, the Tier 1 capital, total regulatory capital and the total risk position shown above were increased by this amount. Correspondingly, the Group’s reported Tier 1 and total capital ratios including this item were 10.4 % and 12.4 %, respectively, on December 31, 2008.

The group of companies consolidated for banking regulatory purposes includes all subsidiaries as defined in the German Banking Act that are classified as banks, financial services institutions, investment management firms, financial enterprises or ancillary services enterprises. It does not include insurance companies or companies outside the finance sector.

For financial conglomerates, however, insurance companies are included in the capital adequacy calculation. The Group has been designated as a financial conglomerate following the acquisition of Abbey Life Assurance Company Limited in October 2007. The Group’s solvency margin as a financial conglomerate remains dominated by its banking activities.

Failure to meet minimum capital requirements can result in orders and discretionary actions by the BaFin and other regulators that, if undertaken, could have a direct material effect on the Group’s businesses. The Group complied with the regulatory capital adequacy requirements in 2008.

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