16 – Fair Value of Financial Instruments not carried at Fair Value


The valuation techniques used to establish fair value for the Group’s financial instruments which are not carried at fair value in the balance sheet are consistent with those outlined in Note 15 “Financial Instruments carried at Fair Value”.

As described in Note 14 “Amendments to IAS 39 and IFRS 7, “Reclassification of Financial Assets””, the Group reclassified certain eligible assets from the trading and available for sale classifications to loans. The Group continues to apply the relevant valuation techniques set out in Note 15 “Financial Instruments carried at Fair Value”, to the reclassified assets.

Other financial instruments not carried at fair value are not managed on a fair value basis, for example, retail loans and deposits and credit facilities extended to corporate clients. For these instruments fair values are calculated for disclosure purposes only and do not impact the balance sheet or income statement. Additionally, since the instruments generally do not trade there is significant management judgment required to determine these fair values.

Short-term financial instruments: The carrying value represents a reasonable estimate of fair value for the following financial instruments which are predominantly short-term.

Assets

Liabilities

Cash and due from banks

Deposits

Interest-earning deposits with banks

Central bank funds purchased and securities sold under repurchase agreements

Central bank funds sold and securities purchased under resale agreements

Securities loaned

Securities borrowed

Other short-term borrowings

Other assets

Other liabilities

For longer-term financial instruments within these categories, fair value is determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and credit risks and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued, at the balance sheet date.

Loans: Fair value is determined using discounted cash flow models that incorporate parameter inputs for credit risk, interest rate risk, foreign exchange risk, loss given default estimates and amounts utilized given default, as appropriate. Credit risk, loss given default and utilization given default parameters are determined using information from the loan or credit default swap markets, where available and appropriate.

For retail lending portfolios with a large number of homogenous loans (e.g., German residential mortgages), the fair value is calculated on a portfolio basis by discounting the portfolio’s contractual cash flows using risk-free interest rates. This present value calculation is then adjusted for credit risk by discounting at the margins which could be earned on similar loans if issued at the balance sheet date. For other portfolios the present value calculation is adjusted for credit risk by calculating the expected loss over the estimated life of the loan based on various parameters including probability of default and loss given default and level of collateralization. The fair value of corporate lending portfolios is estimated by discounting a projected margin over expected maturities using parameters derived from the current market values of collateralized loan obligation (“CLO”) transactions collateralized with loan portfolios that are similar to the Group’s corporate lending portfolio.

Securities purchased under resale agreements, securities borrowed, securities sold under repurchase agreements and securities loaned: Fair value is derived from valuation techniques by discounting future cash flows using the appropriate credit risk-adjusted discount rate. The credit risk-adjusted discount rate includes consideration of the collateral received or pledged in the transaction. These products are typically short-term and highly collateralized, therefore the fair value is not significantly different to the carrying value.

Long-term debt and trust preferred securities: Fair value is determined from quoted market prices, where available. Where quoted market prices are not available, fair value is estimated using a valuation technique that discounts the remaining contractual cash at a rate at which an instrument with similar characteristics could be issued at the balance sheet date.

Estimated fair value of financial instruments not carried at fair value on the balance sheet1

 

Dec 31, 2012

Dec 31, 2011

in € m.

Carrying value

Fair value

Carrying value

Fair value

1

Amounts generally presented on a gross basis, in line with the Group’s accounting policy regarding offsetting of financial instruments as described in Note 01 “Significant Accounting Policies”

2

Only includes financial assets or financial liabilities.

Financial assets:

 

 

 

 

Cash and due from banks

27,885

27,885

15,928

15,928

Interest-earning deposits with banks

119,548

119,560

162,000

161,905

Central bank funds sold and securities purchased under resale agreements

36,570

36,570

25,773

25,767

Securities borrowed

23,947

23,947

31,337

31,337

Loans

397,279

400,603

412,514

408,295

Other assets2

106,878

106,851

134,699

134,660

Financial liabilities:

 

 

 

 

Deposits

577,202

577,936

601,730

602,585

Central bank funds purchased and securities sold under repurchase agreements

36,144

36,144

35,311

35,311

Securities loaned

3,109

3,109

8,089

8,089

Other short-term borrowings

69,060

69,059

65,356

65,348

Other liabilities2

145,679

145,679

154,647

154,647

Long-term debt

158,097

158,117

163,416

158,245

Trust preferred securities

12,091

12,014

12,344

9,986

Loans: The difference between fair value and carrying value does not reflect the economic benefits and costs that the Group expects to receive from these instruments. The difference arose predominantly due to an increase in expected default rates and reduction in liquidity as implied from market pricing since initial recognition. These reductions in fair value are offset by an increase in fair value due to interest rate movements on fixed rate instruments.

Long-term debt and trust preferred securities: The difference between fair value and carrying value is due to the effect of changes in the rates at which the Group could issue debt with similar maturity and subordination at the balance sheet date compared to when the instrument was issued.