Update on Key Credit Market Exposures


The following is an update on the development of certain credit positions (including protection purchased from monoline insurers) of those CB&S businesses on which we have previously provided additional risk disclosures. These positions were those that significantly impacted the performance of CB&S during the recent financial crisis. In addition to these CB&S positions, we have also provided information about positions acquired from Postbank where relevant.

For information on our Commercial Real Estate and Leveraged Finance exposures, please see “Risk Report – Credit Exposure from Lending” and – “Credit Exposure from Nonderivative Trading Assets”.

Mortgage Related Exposure

The following table presents certain mortgage related exposures from the trading businesses described net of hedges and other protection purchased. Hedges consist of a number of different market instruments, including protection provided by monoline insurers, single name credit default swap contracts with market counterparties and index-based contracts.

Certain mortgage related exposure in our trading businesses

Dec 31, 2011

Dec 31, 2010

in € m.

Gross exposure

Hedges and other protection purchased

Net exposure

Gross exposure

Hedges and other protection purchased

Net exposure

1

Included within U.S. RMBS and CDO exposure is CDO subprime trading exposure of € 169 million gross (€ 29 million net of hedges) as at December 31, 2011 and € 420 million gross (€ 345 million net of hedges) as at December 31, 2010.

2

The reserves included within ‘U.S. subprime and Alt-A RMBS and CDO’ factor in a counterparty credit risk valuation adjustment related to U.S. RMBS, which is intended to better reflect the fair value of the instruments underlying this exposure. This adjustment resulted in a reduction in the net exposure of € 401 million for December 31, 2011 and € 320 million for December 31, 2010.

U.S. subprime and Alt-A RMBS and CDO1,2

2,421

2,567

(146)

3,848

3,228

620

European RMBS

162

162

169

169

The net exposure to U.S. RMBS and CDO is composed of € (457) million Alt-A, € 5 million Subprime, € 19 million Other, € 29 million CDO and € 258 million Trading-related net positions as of December 31, 2011 and € (267) million Alt-A, € 10 million Subprime, € 52 million Other, € 345 million CDO and € 480 million Trading-related net positions as of December 31, 2010. In determining subprime, we apply industry standard criteria including FICO (credit quality) scores and loan-to-value ratios. In limited circumstances, we also classify exposures as subprime if 50 % or more of the underlying collateral is home equity loans which are subprime. Alt-A loans are loans made to borrowers with generally good credit, but with non-conforming underwriting ratios or other characteristics that fail to meet the standards for prime loans. These include lower FICO scores, higher loan-to-value ratios and higher percentages of loans with limited or no documentation.

In the aforementioned table, net exposure represents our potential loss in the event of a 100 % default of securities and associated hedges, assuming zero recovery. It is not an indication of net delta adjusted trading risk (the net delta adjusted trading risk measure is used to ensure comparability between different exposures; for each position the delta represents the change of the position in the related security which would have the same sensitivity to a given change in the market).

The aforementioned table excludes assets reclassified from trading or available for sale to loans and receivables in accordance with the amendments to IAS 39 with a carrying value as of December 31, 2011 of € 1.6 billion (which includes European residential mortgage exposure of € 971 million, Other U.S. residential mortgage exposure of € 286 million, CDO subprime exposure – Trading of € 323 million) and as of December 31, 2010 of € 1.8 billion (which includes European residential mortgage exposure of € 1.0 billion, Other U.S. residential mortgage exposure of € 339 million, CDO subprime exposure – Trading of € 402 million).

The table also excludes both agency mortgage-backed securities and agency eligible loans, which we do not consider to be credit sensitive products, and interest-only and inverse interest-only positions which are negatively correlated to deteriorating markets due to the effect on the position of the reduced rate of mortgage prepayments. The slower prepayment rate extends the average life of these interest-only products which in turn leads to a higher value due to the longer expected interest stream.

The various gross components of the overall net exposure shown above represent different vintages, locations, credit ratings and other market-sensitive factors. Therefore, while the overall numbers above provide a view of the absolute levels of our exposure to an extreme market movement, actual future profits and losses will depend on actual market movements, basis movements between different components of our positions, and our ability to adjust hedges in these circumstances.

In addition to these CB&S positions, at December 31, 2011, Postbank had exposure to European commercial mortgage-backed securities of € 101 million as well as residential mortgage-backed securities of € 233 million (thereof € 231 million in Europe). At December 31, 2010, Postbank had exposure to European commercial mortgage-backed securities of € 192 million as well as residential mortgage-backed securities of € 428 million (which included € 398 million in Europe, € 27 million in U.S.).

Furthermore, Postbank has exposure to non-corporate CDOs of € 35 million where the underlying assets include both commercial mortgage-backed securities and residential mortgage-backed securities. These positions are mainly classified as loans and receivables and available for sale. At December 31, 2010, Postbank had exposure to non-corporate CDOs of € 69 million.

Ocala Funding LLC

We own 71.4 % of the commercial paper issued by Ocala Funding LLC (Ocala), a commercial paper vehicle sponsored by Taylor Bean & Whitaker Mortgage Corp. (TBW), which ceased mortgage lending operations and filed for bankruptcy protection in August 2009. We classify the commercial paper as a trading asset and measure it at fair value through profit or loss. As of December 31, 2011, the total notional value of the commercial paper issued by Ocala which was held by the Group was € 928 million, with a fair value of € 132 million. Fair value losses of € 56 million and € 360 million were recorded in 2011 and 2010 respectively, resulting from ongoing information we have obtained on the TBW estate.

Exposure to Monoline Insurers

The deterioration of the U.S. subprime mortgage and related markets has generated large exposures to financial guarantors, such as monoline insurers, that have insured or guaranteed the value of pools of collateral referenced by CDOs and other market-traded securities. Actual claims against monoline insurers will only become due if actual defaults occur in the underlying assets (or collateral). There is ongoing uncertainty as to whether some monoline insurers will be able to meet all their liabilities to banks and other buyers of protection. Under certain conditions (e.g., liquidation) we can accelerate claims regardless of actual losses on the underlying assets.

The following tables summarize the fair value of our counterparty exposures to monoline insurers with respect to U.S. residential mortgage-related activity and other activities, respectively, in each case on the basis of the fair value of the assets compared with the notional value guaranteed or underwritten by monoline insurers. The other exposures described in the second table arise from a range of client and trading activity, including collateralized loan obligations, commercial mortgage-backed securities, trust preferred securities, student loans and public sector or municipal debt. The tables show the associated credit valuation adjustments (“CVA”) that we have recorded against the exposures. For monolines with actively traded CDS, the CVA is calculated using a full CDS-based valuation model. For monolines without actively traded CDS, a model-based approach is used with various input factors, including relevant market driven default probabilities, the likelihood of an event (either a restructuring or an insolvency), an assessment of any potential settlement in the event of a restructuring, and recovery rates in the event of either restructuring or insolvency. The monoline CVA methodology is reviewed on a quarterly basis by management; since the second quarter of 2011 market based spreads have been used more extensively in the CVA assessment.

The ratings in the tables below are the lowest of Standard & Poor’s, Moody’s or our own internal credit ratings as of December 31, 2011 and December 31, 2010.

Monoline exposure related to U.S. residential mortgages

Dec 31, 2011

Dec 31, 2010

in € m.

Notional amount

Fair value prior to CVA

CVA

Fair value after CVA

Notional amount

Fair value prior to CVA

CVA

Fair value after CVA

AA Monolines:

 

 

 

 

 

 

 

 

Other subprime

124

65

(20)

45

139

60

(6)

54

Alt-A

3,662

1,608

(353)

1,255

4,069

1,539

(308)

1,231

Total AA Monolines

3,786

1,673

(373)

1,300

4,208

1,599

(314)

1,285

Other Monoline exposure

Dec 31, 2011

Dec 31, 2010

in € m.

Notional amount

Fair value prior to CVA

CVA

Fair value after CVA

Notional amount

Fair value prior to CVA

CVA

Fair value after CVA

AA Monolines:

 

 

 

 

 

 

 

 

TPS-CLO

2,721

786

(201)

585

2,988

837

(84)

753

CMBS

1,113

26

(3)

23

1,084

12

(1)

11

Corporate single name/Corporate CDO

602

(1)

(1)

Student loans

303

56

(13)

43

295

19

(2)

17

Other

922

305

(111)

194

925

226

(23)

203

Total AA Monolines

5,059

1,173

(328)

845

5,894

1,093

(110)

983

Non Investment Grade Monolines:

 

 

 

 

 

 

 

 

TPS-CLO

547

199

(89)

110

917

215

(49)

166

CMBS

3,539

211

(42)

169

6,024

547

(273)

274

Corporate single name/Corporate CDO

2,062

2

2

2,180

12

(6)

6

Student loans

1,325

587

(189)

398

1,308

597

(340)

257

Other

1,076

213

(89)

124

1,807

226

(94)

132

Total Non Investment Grade Monolines

8,549

1,212

(409)

803

12,236

1,597

(762)

835

Total

13,608

2,385

(737)

1,648

18,130

2,690

(872)

1,818

The tables exclude counterparty exposure to monoline insurers that relates to wrapped bonds. A wrapped bond is one that is insured or guaranteed by a third party. As of December 31, 2011 and December 31, 2010, the exposure on wrapped bonds related to U.S. residential mortgages was € 52 million and € 67 million, respectively, and the exposure on wrapped bonds other than those related to U.S. residential mortgages was € 46 million and € 58 million, respectively. In each case, the exposure represents an estimate of the potential mark-downs of wrapped assets in the event of monoline defaults.

A proportion of the mark-to-market monoline exposure has been mitigated with CDS protection arranged with other market counterparties and other economic hedge activity.

As of December 31, 2011 and December 31, 2010 the total credit valuation adjustment held against monoline insurers was € 1,109 million and € 1,186 million respectively.

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Deutsche Bank Annual Report 2011

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