Overall Risk Position


Economic Capital

To determine our overall (nonregulatory) risk position, we generally consider diversification benefits across risk types except for business risk, which we aggregate by simple addition.

Overall risk position as measured by economic capital usage

 

 

 

2012 increase (decrease)
from 2011

in € m.

Dec 31, 2012

Dec 31, 2011

in € m.

in %

Credit risk

12,574

12,812

(238)

(2)

Market Risk

13,185

12,003

1,182

10

Trading market risk

4,690

4,724

(34)

(1)

Nontrading market risk

8,495

7,278

1,216

17

Operational risk

5,018

4,846

171

4

Diversification benefit across credit, market and operational risk

(4,435)

(4,264)

(171)

4

Sub-total credit, market and operational risk

26,342

25,397

945

4

Business risk

2,399

980

1,419

145

Total economic capital usage

28,741

26,377

2,364

9

As of December 31, 2012, our economic capital usage totaled € 28.7 billion, which is € 2.4 billion, or 9 %, above the € 26.4 billion economic capital usage as of December 31, 2011. The higher overall risk position mainly reflected introduction of the new strategic risk model for business risk and extension of nontrading market risk coverage to banking book credit spread risk.

The economic capital usage as of December 31, 2012 included € 5.3 billion in relation to Postbank, which is € 1.0 billion, or 23 % higher than the € 4.3 billion economic capital usage as of December 31, 2011. The increase was largely driven by the inclusion of credit spread risk exposure of Postbank’s banking book investment portfolio into the coverage of the nontrading economic capital framework, partially offset by reduced economic capital usage for business risk.

Our economic capital usage for credit risk totaled € 12.6 billion as of December 31, 2012. The decrease of € 238 million, or 2 %, mainly reflected overall exposure reduction compensated for by the effects from regular recalibrations of credit risk parameters and methodology updates.

The economic capital usage for market risk increased by € 1.2 billion, or 10 %, to € 13.2 billion as of December 31, 2012 and was driven by € 1.2 billion, or 17 %, higher nontrading market risk. The increase was primarily due to the extension of nontrading market risk coverage to banking book credit spread risk mentioned above as well as higher economical capital usage for our guaranteed funds portfolio, partially offset by methodology updates in relation to structural foreign exchange risk, higher diversification benefit with trading market risk and lower economic capital usage due to asset sales. Our trading market risk economic capital usage decreased by € 34 million, or 1 %. The materially unchanged economic capital usage for trading market risk reflected offsetting effects of methodology refinements and exposure reductions.

The economic capital usage for operational risk increased by € 171 million, or 4 %, to € 5.0 billion as of December 31, 2012. The increase is primarily due to higher industry loss experience, the integration of BHF-BANK into our AMA model in the first quarter 2012, as well as a model refinement in the second quarter 2012. The capital continues to include the safety margin applied in our AMA model, which was implemented in 2011 to cover unforeseen legal risks from the current financial crisis.

Our business risk economic capital usage, consisting of a strategic risk and a tax risk component, totaled € 2.4 billion as of December 31, 2012, which is € 1.4 billion or 145 % higher than the € 1.0 billion economic capital usage as of December 31, 2011. The increase was driven by a new, significantly improved model to calculate the economic capital for strategic risk, which was implemented in the fourth quarter 2012. The new model replaced our former scenario approach by a full simulation of the Group and business unit earnings and links in more closely with the Group’s strategic planning process.

The diversification effect of the economic capital usage across credit, market and operational risk increased by € 171 million, or 4 %, as of December 31, 2012, corresponding to the higher risk position considered for diversification.

Relative measure of each risk type as measured by economic capital usage of our business Divisions

in € m.

Dec 31, 2012

Dec 31, 2011

Corporate Banking & Securities

11,788

8,729

Global Transaction Banking

1,434

1,294

Asset & Wealth Management

2,016

1,647

Private & Business Clients

6,720

6,508

Non-Core Operations Unit

5,452

6,806

Consolidation & Adjustments

1,331

1,393

Total economic capital requirement

28,741

26,377

Internal Capital Adequacy Assessment Process

The lnternal Capital Adequacy Assessment Process (“ICAAP”) requires banks to identify and assess risks, maintain sufficient capital to face these risks and apply appropriate risk-management techniques to ensure adequate capitalization on an ongoing and forward looking basis, i.e., internal capital supply to exceed internal capital demand (figures are described in more detail in the section “Internal Capital Adequacy”).

We, at a group level, maintain compliance with the lCAAP as required under Pillar 2 of Basel 2 and its local implementation in Germany, the Minimum Requirements for Risk Management (MaRisk), through a group-wide risk management and governance framework, methodologies, processes and infrastructure.

In line with MaRisk and Basel requirements, the key instruments to ensure our adequate capitalization on an ongoing and forward looking basis are:

  • A strategic planning process which aligns risk strategy and appetite with commercial objectives;
  • A continuous monitoring process against approved risk and capital targets set;
  • Frequent risk and capital reporting to management; and
  • An economic capital and stress testing framework which also includes specific stress tests to underpin our Recovery monitoring processes.

More information on risk management organized by major risk category can be found in section “Risk Management Principles – Risk Governance”.

Internal Capital Adequacy

As the primary measure of our Internal Capital Adequacy Assessment Process, we assess our internal capital adequacy based on our “gone concern approach” as the ratio of our total capital supply divided by our total capital demand as shown in the table below. During 2011 we revised our capital supply definition for deferred tax assets, fair value adjustments and noncontrolling interests in accordance with regulatory guidance. In the fourth quarter of 2012 shareholders’ equity replaced adjusted active book equity as the starting point for capital supply calculation to make it more transparent. The prior year comparison information has been adjusted accordingly.

Internal Capital Adequacy

in € m.
(unless stated otherwise)

Dec 31, 2012

Dec 31, 2011

1

Includes unrealized net gains (losses) on cash flow hedges, net of tax and deduction of fair value gains on own credit-effect relating to own liabilities designated under the fair value option.

2

Includes fair value adjustments for assets reclassified in accordance with IAS 39 and for banking book assets where no matched funding is available.

3

Includes noncontrolling interest up to the economic capital requirement for each subsidiary.

4

Tier 2 capital instruments excluding items to be partly deducted from Tier 2 capital pursuant to Section 10 (6) and (6a) KWG, unrealized gains on listed securities (45 % eligible) and certain haircut-amounts that only apply under regulatory capital assessment.

Capital Supply

 

 

Shareholders’ Equity

54,003

53,390

Unrealized net gains/losses1

220

125

Deferred Tax Assets

(7,718)

(8,737)

Fair Value adjustments for financial assets reclassified to loans2

(1,992)

(3,323)

Noncontrolling Interests3

694

Hybrid Tier 1 capital instruments

12,526

12,734

Tier 2 capital instruments4

11,646

12,044

Capital Supply

68,685

66,927

 

 

 

Capital Demand

 

 

Economic Capital Requirement

28,741

26,377

Intangibles

14,219

15,802

Capital Demand

42,960

42,179

 

 

 

Internal Capital Adequacy Ratio

160 %

159 %

A ratio of more than 100 % signifies that the total capital supply is sufficient to cover the capital demand determined by the risk positions. This ratio was 160 % as of December 31, 2012, compared to 159 % as of December 31, 2011. The increase in capital supply, driven by higher shareholders’ equity and reduced deduction items, outweighed the increase in the observed capital demand and determined the development in favor of the ratio. The shareholders’ equity increase by € 613 million mainly reflected unrealized gains on financial assets available for sale and net income of the year, partially offset by foreign currency translation effects. The decrease in the noncontrolling interest by € 694 million was due to effects from the conclusion of the aforementioned domination and profit and loss transfer agreement with Postbank. The increase in capital demand was driven by higher economic capital requirement, explained in the section “Overall Risk Position”, which was partially offset by the impairments of goodwill and other intangible assets in the fourth quarter 2012.

The above capital adequacy measures apply for the consolidated group as a whole (including Postbank) and form an integral part of our Risk and Capital Management framework, further described in the other sections of this report.