Risk Report

Introduction

Disclosures in line with IFRS 7 and IAS 1

The following Risk Report provides qualitative and quantitative disclosures about credit, market and other risks in line with the requirements of International Financial Reporting Standard 7 (IFRS 7) Financial Instruments: Disclosures, and capital disclosures required by International Accounting Standard 1 (IAS 1) Presentation of Financial Statements. Information which forms part of and is incorporated by reference into the financial statements of this report is marked by a bracket in the margins throughout this Risk Report.

Disclosures according to Pillar 3 of the Basel 2.5 Capital Framework

The following Risk Report incorporates the Pillar 3 disclosures required by the international capital adequacy standards as recommended by the Basel Committee on Banking Supervision known as Basel 2 and Basel 2.5. The European Union enacted the Capital Requirements Directives 2 and 3, which amended the Basel capital framework in Europe as initially adopted by the Banking Directive and Capital Adequacy Directive. Germany implemented the Capital Requirements Directives into national law and established the disclosure requirements related to Pillar 3 in Section 26a of the German Banking Act (“Kreditwesengesetz” or “KWG”) and in Part 5 of the German Solvency Regulation (“Solvabilitätsverordnung”, “Solvency Regulation” or “SolvV”). For consistency purposes we use the term “Basel 2.5” when referring to these regulations as implemented into German law as they were in effect until December 31, 2013, throughout this risk report. Per regulation it is not required to have Pillar 3 disclosures audited. As such certain Pillar 3 disclosures are labeled unaudited.

We have applied the Basel 2.5 capital framework for the majority of our risk exposures on the basis of internal models for measuring credit risk, market risk and operational risk, as approved by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, referred to as “BaFin”). All Pillar 3 relevant disclosures are compiled based upon a set of internally defined principles and related processes as stipulated in our applicable risk disclosure policy.

The following table provides the location of the Pillar 3 disclosure topics in this Risk Report.

Pillar 3 disclosures in our Financial Report

Pillar 3 disclosure topic

Where to find in our Financial Report

Introduction and Scope of Application of Pillar 3

“Introduction“

Capital Adequacy

“Regulatory Capital”

Risk and Capital Management of the Group

“Risk Management Executive Summary”, “Risk Management Principles”, “Risk Assessment and Reporting”, “Risk Inventory”, “Capital Management”, “Balance Sheet Management” and “Overall Risk Position”

Counterparty Credit Risk: Strategy and Processes
Counterparty Credit Risk: Regulatory Assessment

“Credit Risk”, “Asset Quality”, “Counterparty Credit Risk: Regulatory Assessment” and Note 1 “Significant Accounting Policies and Critical Accounting Estimates”

Securitization

“Securitization” and Note 1 “Significant Accounting Policies and Critical Accounting Estimates”

Trading Market Risk
Nontrading Market Risk

“Trading Market Risk”, “Nontrading Market Risk”, “Accounting and Valuation of Equity Investments” and Note 1 “Significant Accounting Policies and Critical Accounting Estimates – Determination of Fair Value”

Operational Risk

“Operational Risk”

Liquidity Risk

“Liquidity Risk”

Outlook to Basel 3 and CRR/CRD 4

In the European Union, the new Basel 3 capital framework was implemented by the “Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms” (Capital Requirements Regulation, or “CRR”) and the “Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms” (Capital Requirements Directive 4, or “CRD 4”) published on June 27, 2013. The CRD 4 was implemented into German law as amendments to the German Banking Act (KWG) and the German Solvency Regulation (SolvV) and further accompanying regulations. Jointly, these regulations represent the new regulatory framework applicable in Germany to, among other things, capital, leverage and liquidity as well as Pillar 3 disclosures. The new regulatory framework became effective on January 1, 2014, subject to certain transitional rules. As this report covers financial years ending on December 31, 2013, the disclosures in the following sections refer to the regulations (particularly provisions of the German Banking Act and the German Solvency Regulation) as they were in effect prior to January 1, 2014, unless otherwise stated.

Some of the new regulatory requirements are subject to transitional rules. The new minimum capital ratios are being phased in until 2015. Most regulatory adjustments (i.e. capital deductions and regulatory filters) are being phased in until 2018. Capital instruments that no longer qualify under the new rules are being phased out through 2021. New capital buffer requirements are being phased in until 2019. Although they are subject to supervisory reporting starting from 2014, binding minimum requirements for short-term liquidity will be introduced in 2015 and a standard for longer term liquidity is expected to become effective in 2018. The introduction of a binding leverage ratio is expected from 2018 following disclosure of the ratio starting in 2015. The CRR/CRD 4 framework also changed some of the nomenclature relating to capital adequacy and regulatory capital, such as the use of the term Common Equity Tier 1 in place of the term Core Tier 1.

For purposes of clarity in our disclosures, we use the nomenclature from the CRR/CRD 4 framework in the following sections and tables on capital adequacy, regulatory capital and leverage. Nevertheless, the amounts disclosed for the reporting period in this report are based on the Basel 2.5 framework as implemented into German law and as still in effect for these periods, unless stated otherwise.

As there are still some interpretation uncertainties with regard to the CRR/CRD 4 rules and some of the related binding Technical Standards are not yet finally available, we will continue to refine our assumptions and models as our and the industry’s understanding and interpretation of the rules evolve. In this light, our pro forma CRR/CRD 4 measures may differ from our earlier expectations, and as our competitors’ assumptions and estimates regarding such implementation may also vary, our pro forma CRR/CRD 4 non-GAAP financial measures may not be comparable with similarly labeled measures used by our competitors.

We provide details on our pro forma fully loaded CRR/CRD 4 capital ratios in the respective paragraph in the section “Risk Report – Regulatory Capital” and provide details on our adjusted pro forma CRR/CRD 4 leverage ratio calculation in the section “Risk Report – Balance Sheet Management”.

Disclosures according to principles and recommendations of the Enhanced Disclosure Task Force (EDTF)

In 2012 the Enhanced Disclosure Task Force (“EDTF”) was established as a private sector initiative under the auspice of the Financial Stability Board, with the primary objective to develop fundamental principles for enhanced risk disclosures and to recommend improvements to existing risk disclosures. As a member of the EDTF we implemented the disclosure recommendations in this Risk Report.

Scope of Consolidation

The following sections providing quantitative information refer to our financial statements in accordance with International Financial Reporting Standards (“IFRS”). Consequently, the reporting is generally based on IFRS principles of valuation and consolidation. However, in particular for Pillar 3 purposes, regulatory principles of consolidation are relevant which differ from those applied for our financial statements and are described in more detail below. Where the regulatory relevant scope is used this is explicitly stated.

Scope of the Regulatory Consolidation

Deutsche Bank Aktiengesellschaft (“Deutsche Bank AG”), headquartered in Frankfurt am Main, Germany, is the parent institution of the Deutsche Bank group of institutions (the “regulatory group”), which is subject to the supervisory provisions of the KWG and the SolvV. Under Section 10a KWG, a regulatory group of institutions consisted of a credit institution (also referred to as a “bank”) or financial services institution, as the parent company, and all other banks, financial services institutions, investment management companies, financial enterprises, payment institutions and ancillary services enterprises which were subsidiaries in the meaning of Section 1 (7) KWG. Such entities were fully consolidated for our regulatory reporting. Additionally certain companies which were not subsidiaries could be included on a pro-rata basis. Insurance companies and companies outside the finance sector were not consolidated in the regulatory group of institutions.

For financial conglomerates, however, also the German Act on the Supervision of Financial Conglomerates (Finanzkonglomerate-Aufsichtsgesetz) applies according to which insurance companies are included in an additional capital adequacy calculation (also referred to as “solvency margin”). We have been designated by the BaFin as a financial conglomerate in October 2007.

The regulatory principles of consolidation are not identical to those applied for our financial statements. Nonetheless, the majority of subsidiaries according to the KWG are also fully consolidated in accordance with IFRS in our consolidated financial statements.

The main differences between regulatory and accounting consolidation are:

  • Entities which are controlled by us but do not belong to the banking industry do not form part of the regulatory group of institutions, but are included in the consolidated financial statements according to IFRS.
  • Most of our Special Purpose Entities (“SPEs”) consolidated under IFRS did not meet the specific consolidation requirements pursuant to Section 10a KWG and were consequently not consolidated within the regulatory group. However, the risks resulting from our exposures to such entities are reflected in the regulatory capital requirements.
  • Some entities included in the regulatory group are not consolidated for accounting purposes but are treated differently, in particular using the equity method of accounting. There are two entities within our regulatory group which are jointly controlled by their owners and consolidated on a pro-rata basis. Further four entities are voluntarily consolidated on a pro-rata basis. Four entities are treated according to the equity method of accounting, one entity is treated as assets available for sale in our financial statements and one entity is considered as other asset.

As of year-end 2013, our regulatory group comprised 844 subsidiaries, of which seven were consolidated on a pro-rata basis. The regulatory group comprised 127 credit institutions, one payment institution, 67 financial services institutions, 449 financial enterprises, 12 investment management companies and 188 ancillary services enterprises.

As of year-end 2012, our regulatory group comprised 913 subsidiaries, of which three were consolidated on a pro-rata basis. Our regulatory group comprised 137 credit institutions, three payment institutions, 80 financial services institutions, 514 financial enterprises, 14 investment management companies and 165 ancillary services enterprises.

120 entities were exempted from regulatory consolidation pursuant to Section 31 (3) KWG as per year end 2013 (year end 2012: 131 entities). Section 31 (3) KWG allowed the exclusion of small entities in the regulatory scope of application from consolidated regulatory reporting if either their total assets were below € 10 million or below 1 % of our Group’s total assets. None of these entities needed to be consolidated in our financial statements in accordance with IFRS. The book values of our participations in their equity were deducted from our regulatory capital, in total € 20 million as per year end 2013 (year end 2012: € 31 million).

The same deduction treatment was applied to a further 260 regulatory unconsolidated entities and three immaterial insurance entities as per year end 2013 (year end 2012: 267 entities), not included in the solvency margin, which we deducted from our regulatory capital pursuant to the then prevailing Section 10 (6) KWG. Section 10 (6) No. 1, 2, 3 and 5 KWG required the deduction of participating interests in unconsolidated banking, financial and insurance entities from regulatory capital when more than 10 % of the capital was held (in case of insurance entities, 20 % of either the capital or voting rights unless included in the solvency margin calculation of the financial conglomerate). Since we are classified as a financial conglomerate, material investments in insurance entities amounting to at least 20 % of capital or voting rights were not deducted from our regulatory capital as they were included in our solvency calculation at the financial conglomerate level.

From January 1, 2014, our regulatory consolidation will be governed by the CRR/CRD 4 framework (as implemented into German law where applicable) and the German Act on the Supervision of Financial Conglomerates.


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