37 – Regulatory Capital


Capital Management

The Group’s Treasury function manages capital at Group level and locally in each region, except that Postbank manages its capital on a group level and locally on its own. The allocation of financial resources, in general, and capital, in particular, favors business portfolios with the highest positive impact on the Group’s profitability and shareholder value. As a result, Treasury periodically reallocates capital among business portfolios.

Treasury implements the Group’s capital strategy, which itself is developed by the Capital and Risk Committee and approved by the Management Board, including the issuance and repurchase of shares. The Group is committed to maintain its sound capitalization. Overall capital demand and supply are constantly monitored and adjusted, if necessary, to meet the need for capital from various perspectives. These include book equity based on IFRS accounting standards, regulatory capital and economic capital.

The allocation of capital, determination of the Group’s funding plan and other resource issues are framed by the Capital and Risk Committee.

Regional capital plans covering the capital needs of the Group’s branches and subsidiaries are prepared on a semi-annual basis and presented to the Group Investment Committee. Most of the Group’s subsidiaries are subject to legal and regulatory capital requirements. Local Asset and Liability Committees attend to those needs under the stewardship of regional Treasury teams. Furthermore, they safeguard compliance with requirements such as restrictions on dividends allowable for remittance to Deutsche Bank AG or on the ability of its subsidiaries to make loans or advances to the parent bank. In developing, implementing and testing the Group’s capital and liquidity, the Group takes such legal and regulatory requirements into account.

The Group’s core currencies are euro, U.S. dollar and pound sterling. Treasury manages the sensitivity of the Group’s capital ratios against swings in core currencies. The capital invested into the Group’s foreign subsidiaries and branches in non-core currencies is largely hedged against foreign exchange swings, except for the Chinese yuan that the Group currently does not hedge. Treasury determines which currencies are to be hedged, develops suitable hedging strategies and finally executes these hedges.

Treasury is represented on the investment committee of the largest Deutsche Bank pension fund which sets the investment guidelines. This representation ensures that pension assets are aligned with pension liabilities, thus protecting the bank’s capital base.

Treasury constantly monitors the market for liability management trades. Such trades represent an anticyclical opportunity to create Core Tier 1 capital by buying back Deutsche Bank’s issuances below par.

The Core Tier 1 capital ratio amounted to 9.5 % at year-end 2011. It is already above the 9 % level proposed by the European Banking Authority (EBA) and agreed by the European Council for the EU Wide Capital Exercise, ahead of the June 30, 2012 deadline. It also covers the shortfall of € 388 million in relation to European Economic Area sovereign exposure which was determined as at September 30, 2011 solely for the purposes of the EU-Wide Capital Exercise. The Group will strive to adhere to the 9 % threshold by June 30, 2012.

In the first quarter 2011, the Group changed the methodology used for allocating average active equity to the business segments and to Consolidation & Adjustments in proportion to their regulatory requirements. Under the new methodology economic capital as basis for allocation is substituted by risk weighted assets and certain regulatory capital deduction items. All other items of the capital allocation framework remain unchanged. The total amount allocated continues to be determined based on the higher of the Group’s overall economic risk exposure or regulatory capital demand. In 2011, the Group derives its internal demand for regulatory capital assuming a Tier 1 ratio of 10.0 %. If the Group’s average active equity exceeds the higher of the overall economic risk exposure or the regulatory capital demand, this surplus is assigned to Consolidation & Adjustments.

During the period from the 2010 Annual General Meeting (May 27, 2010) until the 2011 Annual General Meeting (May 26, 2011), 28.5 million shares were purchased, of which 0.5 million were purchased via sold put options which were executed by the counterparty at maturity date. 22.0 million of the shares purchased were used for equity compensation purposes and 6.5 million shares were used to increase the Group’s Treasury position for future equity compensation. 9.8 million shares were purchased from January 1, 2011 until May 26, 2011, none of which via sold put options. In addition, 10.0 million physically settled call options were purchased in first quarter 2011 to hedge existing equity compensation awards. These call options have a remaining maturity of more than 18 months and were purchased under the above mentioned authorization from the Annual General Meeting to buy back shares by using derivatives. In second quarter 2011, the Group restructured 15.3 million existing call options in order to allow physical settlement according to the above mentioned authorization. These call options have a remaining maturity below 18 months. As of the 2011 Annual General Meeting, the number of shares held in Treasury from buybacks totaled 7.6 million.

The 2011 Annual General Meeting granted the Group’s Management Board the authority to buy back up to 92.9 million shares before the end of November 2015. Thereof 46.5 million shares can be purchased by using derivatives. These authorizations replaced the authorizations of the 2010 Annual General Meeting. During the period from the 2011 Annual General Meeting until December 31, 2011, 27.4 million shares were purchased, thereof 10.9 million of the shares purchased were used for equity compensation purposes and 16.5 million shares were used to increase the Group’s Treasury position for future equity compensation. As of December 31, 2011, the number of shares held in Treasury from buybacks totaled 24.1 million.

To take advantage of Deutsche Bank’s low share price in the third quarter 2011, Treasury unwound the 10.0 million physically settled call options purchased in first quarter 2011 and entered into new 10.0 million physically settled call option with significant lower strike prices. These call options were purchased under the authorization from the 2011 Annual General Meeting. From the 10.0 million call options, 6.0 million have a remaining maturity of more than 18 months. In addition to these 10 million call options, the Group restructured additional call options to further hedge the Group’s obligation to deliver shares for equity compensation purposes.

Total outstanding hybrid Tier 1 capital (substantially all noncumulative trust preferred securities) as of December 31, 2011, amounted to € 12.7 billion compared to € 12.6 billion as of December 31, 2010. This increase was mainly due to the foreign exchange effects of the strengthened U.S. dollar to the U.S. dollar denominated hybrid Tier 1 capital. In 2011, the Group neither raised nor redeemed any hybrid Tier 1 capital.

In 2011, the Group did not issue any lower Tier 2 capital (qualified subordinated liabilities). Profit participation rights amounted to € 1.2 billion as of December 31, 2011, unchanged to December 31, 2010. Total lower Tier 2 capital as of December 31, 2011, amounted to € 9.4 billion compared to € 10.7 billion as of December 31, 2010. Cumulative preferred securities amounted to € 0.3 billion as of December 31, 2011, unchanged to December 31, 2010.

Capital Management at Postbank

Postbank manages its capital by continuously monitoring capital supply and demand. Capital management aims at regulatory as well as at economic capital adequacy, in line with the concept of risk bearing capacity. In general, the capital allocation requires an appropriate return on regulatory capital demand. The capital allocation is approved by Postbank’s Management Board based on a multiyear plan.

The regulatory and economic capital demand is permanently monitored to adjust the available capital if required. Capital demand forecasts are regularly determined and carried forward based on the planned development of the business volume and results as well as expected risk parameter changes. Capital ratios are managed in compliance with the Postbank’s Management Board approved statutory guidelines, by steering the existing and new transaction volume, by issuance of Tier 1 and Tier 2 capital instruments or by executing risk mitigating capital market transactions.

Capital Adequacy

Since 2008, Deutsche Bank has calculated and published consolidated capital ratios for the Deutsche Bank group of institutions pursuant to the Banking Act and the Solvency Regulation (“Solvabilitätsverordnung”), which implemented the revised capital framework of the Basel Committee from 2004 (“Basel 2”) into German law. Starting with December 31, 2011, the calculation of the Group’s capital ratios incorporates the amended capital requirements for trading book and securitization positions following the Capital Requirements Directive 3, also known as “Basel 2.5”, as implemented in the German Banking Act and the Solvency Regulation.

The Basel 2.5 framework introduced the model based risk measures stressed value-at-risk, incremental risk charge and comprehensive risk within market risk for banks applying an internal model approach:

 

  • Stressed Value-at-Risk: calculates a stressed value-at-risk measure based on a continuous 1 year period of significant market stress.
  • Incremental Risk Charge (“IRC”): captures default and migration risks in addition to the risks already captured in value-at-risk for credit-sensitive positions in the trading book.
  • Comprehensive Risk Measure (“CRM”): captures incremental risk for the credit correlation trading portfolio calculated using an internal model subject to qualitative minimum requirements as well as stress testing requirements. The CRM must be calculated weekly and is determined as the higher of the latest weekly CRM charge from the model, the twelve weeks average CRM charge, and the market risk standardized approach charge for the credit correlation portfolio, the so-called CRM Floor.
  • Market Risk Standardized Approach (“MRSA”): calculates regulatory capital for securitisations and nth-to-default credit derivatives.

In addition, Basel 2.5 regulations require as part of the market risk capital charge the calculation of the specific market risk of securitization trading positions, which are not eligible for the comprehensive risk measure, based on the market risk standardized approach.

Basel 2.5 also requires identifying re-securitization positions in the trading and banking book which receive an increased risk-weighting and result in higher capital charges for credit risk and market risk, respectively.

The group of companies consolidated for banking regulatory purposes (“group of institutions”) includes all subsidiaries as defined in the German Banking Act that are classified as banks, financial services institutions, investment management companies, financial enterprises, payment institutions 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 an additional capital adequacy (also “solvency margin”) calculation. Since October 2007, the Group is a financial conglomerate. The Group’s solvency margin as a financial conglomerate remains dominated by its banking activities.

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 common share capital, additional paid-in capital, retained earnings and certain hybrid capital components such as noncumulative trust preferred securities, also referred to as Additional Tier 1 capital. Common shares in treasury, goodwill and other intangible assets are deducted from Tier 1 capital. Other regulatory adjustments entail the exclusion of capital from entities outside the group of institutions and the reversal of capital effects under the fair value option on financial liabilities due to own credit risk. Tier 1 capital without hybrid capital components is referred to as Core Tier 1 capital.
  • Tier 2 capital consists primarily of cumulative trust preferred securities, certain profit participation rights and long-term subordinated debt, as well as 45 % of unrealized gains on certain listed securities.
  • Certain items must be deducted from Tier 1 and Tier 2 capital. Primarily these include deductible investments in unconsolidated banking, financial and insurance entities where the Group holds more than 10 % of the capital (in case of insurance entities 20 % either of the capital or of voting rights unless included in the solvency margin calculation of the financial conglomerate), the amount by which the expected loss for exposures to central governments, institutions and corporate and retail exposures as measured under the bank’s internal ratings based approach (“IRBA”) model exceeds the value adjustments and provisions for such exposures, the expected losses for certain equity exposures, securitization positions not included in the risk-weighted assets 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 provided the transaction has been allocated to the bank’s trading book. Starting with December 31, 2011, the deduction for securitization positions calculated according to Basel 2 is replaced by a calculation according to Basel 2.5.
  • Tier 3 capital consists mainly of certain short-term subordinated debt.

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.

The Core Tier 1 and the Tier 1 capital ratio are the principal measures of capital adequacy for internationally active banks. The ratios compare a bank’s regulatory Core Tier 1 and Tier 1 capital with its credit risks, market risks and operational risks pursuant to Basel 2.5 (which the Group refers to collectively as the “risk-weighted assets” or “RWA”). In the calculation of the risk-weighted assets 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 (excluding Postbank) is measured using internal rating models under the so-called advanced IRBA. For December 31, 2010, the vast majority of the Group’s market risk component was a multiple of its value-at-risk figure, which was calculated for regulatory purposes based on the Group’s internal models.Starting with December 31, 2011, the market risk component includes a multiple of the stressed value-at-risk and the value-at-risk, as well as the incremental risk charge and the comprehensive risk measure on the Group’s correlation trading portfolio. All of which are all calculated on the basis of the Group’s BaFin approved internal models. The market risk component now also includes securitizations in the trading book outside the correlation trading portfolio measured with the standardized approach according to Basel 2.5. Further standard calculation approaches are used for remaining market risk positions, especially for the trading market risk of Deutsche Postbank. For operational risk calculations, the Group uses the so-called Advanced Measurement Approach (“AMA”) pursuant to the German Banking Act.

The following two tables present a summary of the Group’s risk-weighted assets, and the regulatory capital excluding transitional items pursuant to section 64h (3) of the German Banking Act.



in € m.
(unless stated otherwise)

Dec 31, 2011
Basel 2.5

Dec 31, 2010
Basel 2

Credit risk

262,460

285,218

Market risk

68,091

23,660

Operational risk

50,695

37,326

Total risk-weighted assets

381,246

346,204

Core Tier 1 capital

36,313

29,972

Additional Tier 1 capital

12,734

12,593

Tier 1 capital

49,047

42,565

Tier 2 capital

6,179

6,123

Tier 3 capital

Total regulatory capital

55,226

48,688

Core Tier 1 capital ratio

9.5 %

8.7 %

Tier 1 capital ratio

12.9 %

12.3 %

Total capital ratio

14.5 %

14.1 %

The Group’s total capital ratio was 14.5 % on December 31, 2011, compared to 14.1 % as of December 31, 2010, both significantly higher than the 8 % minimum ratio required.

The Group’s Core Tier 1 capital amounted to € 36.3 billion on December 31, 2011 and € 30.0 billion on December 31, 2010 with a Core Tier 1 capital ratio of 9.5 % respectively 8.7 % as per December 31, 2010. The Group’s Tier 1 capital was € 49.0 billion on December 31, 2011 and € 42.6 billion on December 31, 2010. The Tier 1 capital ratio was 12.9 % as of December 31, 2011 and 12.3 % as of December 31, 2010.

The Group’s Tier 2 capital was € 6.2 billion on December 31, 2011, and € 6.1 billion on December 31, 2010, amounting to 13 % and 14 % of Tier 1 capital, respectively.

The German Banking Act and Solvency Regulation rules required the Group to cover its market risk as of December 31, 2011, with € 5,447 million of total regulatory capital (Tier 1 + 2 + 3) compared to € 1,893 million as of December 31, 2010, the increase reflecting the amended capital requirements for trading book positions according to Basel 2.5. The Group met this requirement entirely with Tier 1 and Tier 2 capital that was not required for the minimum coverage of credit and operational risk.

The following table presents the components of Core Tier 1, Tier 1 and Tier 2 capital for the group of companies consolidated for regulatory purposes as of December 31, 2011, and December 31, 2010, excluding transitional items pursuant to section 64h (3) German Banking Act.

in € m.

Dec 31, 2011
Basel 2.5

Dec 31, 2010
Basel 2

1

Included € 20 million silent participations as of December 31, 2011 and 2010.

Tier 1 capital:

 

 

Core Tier 1 capital

 

 

Common shares

2,380

2,380

Additional paid-in capital

23,695

23,515

Retained earnings, common shares in treasury, foreign currency translation, noncontrolling interests

29,400

24,797

Items to be fully deducted from Tier 1 capital pursuant to Section 10 (2a) KWG (inter alia goodwill and intangible assets)

(14,459)

(14,489)

Items to be partly deducted from Tier 1 capital pursuant to Section 10 (6) and (6a) KWG

 

 

Deductible investments in banking, financial and insurance entities

(1,332)

(954)

Securitization positions not included in risk-weighted assets

(2,863)

(4,850)

Excess of expected losses over risk provisions

(508)

(427)

Items to be partly deducted from Tier 1 capital pursuant to Section 10 (6) and (6a) KWG

(4,703)

(6,231)

Core Tier 1 capital

36,313

29,972

Additional Tier 1 capital

 

 

Noncumulative trust preferred securities1

12,734

12,593

Additional Tier 1 capital

12,734

12,593

Total Tier 1 capital pursuant to Section 10 (2a) KWG

49,047

42,565

Tier 2 capital:

 

 

Unrealized gains on listed securities (45 % eligible)

70

224

Profit participation rights

1,150

1,151

Cumulative preferred securities

294

299

Qualified subordinated liabilities

9,368

10,680

Items to be partly deducted from Tier 2 capital pursuant to Section 10 (6) and (6a) KWG

(4,703)

(6,231)

Total Tier 2 capital pursuant to Section 10 (2b) KWG

6,179

6,123

The following table reconciles shareholders’ equity according to IFRS to Tier 1 capital pursuant to Basel 2.5 respectively Basel 2, excluding transitional items pursuant to section 64h (3) German Banking Act.

in € m.

Dec 31, 2011
Basel 2.5

Dec 31, 2010
Basel 2

1

Included € 20 million silent participations as of December 31, 2011 and as of December 31, 2010.

Total shareholders’ equity

53,390

48,819

Reversal of net (gains) losses not recognized in the income statement excluding foreign currency translation

847

298

Less accrued future dividend

(697)

(697)

Active book equity

53,540

48,420

Goodwill and intangible assets

(15,802)

(15,594)

Noncontrolling interest

1,270

1,549

Other (consolidation and regulatory adjustments)

2,008

1,828

Noncumulative trust preferred securities1

12,734

12,593

Items to be partly deducted from Tier 1 capital

(4,703)

(6,231)

Tier 1 capital

49,047

42,565

Basel 2.5 requires, in the same way as already Basel 2, the deduction of goodwill from Tier 1 capital. However, for a transitional period the partial inclusion of certain goodwill components in Tier 1 capital is allowed 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, 2011, the transitional item amounted to € 319 million compared to € 390 million as of December 31, 2010. In the Group’s reporting to the German regulatory authorities, the Tier 1 capital, total regulatory capital and the total risk-weighted assets shown above were increased by this amount. Correspondingly, the Group’s Tier 1 and total capital ratios reported to the German regulatory authorities including this item were 12.9 % and 14.6 %, respectively, on December 31, 2011 compared to 12.4 % and 14.2 %, respectively, on December 31, 2010.

Failure to meet minimum capital requirements can result in orders to suspend or reduce dividend payments or other profit distributions on regulatory capital and discretionary actions by the BaFin that, if undertaken, could have a direct material effect on the Group’s businesses. The Group complied with the regulatory capital adequacy requirements in 2011.

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Deutsche Bank Annual Report 2011

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