Default Definition and Model Validation

A prerequisite for the development of rating methodologies and the determination of risk parameters is a proper definition, identification and recording of the default event of a customer. We apply a default definition in accordance with the requirements of Section 125 SolvV as confirmed by the BaFin as part of the IRBA approval process.

As an important element of our risk management framework we regularly validate our rating methodologies and credit risk parameters. Whereas the rating methodology validation focuses on the discriminatory power of the models, the risk parameter validation for PD, LGD and EAD analyzes the predictive power of those parameters when compared against historical default and loss experiences.

According to our standards, and in line with the SolvV-defined minimum requirements, the parameters PD, LGD and EAD are reviewed annually. The validation process for parameters as used by us excluding Postbank is coordinated and supervised by a validation working group composed of members from Finance, Risk Analytics & Living Wills and Credit Risk Management. Risk parameter validations consist of quantitative analyzes of internal historical data and are enriched by qualitative assessments in case data for validation is not statistically sufficient for deriving reliable validation results. A recalibration of specific parameter settings is triggered based on validation results if required. In addition to annual validations, ad hoc reviews are performed where appropriate as a reaction to quality deterioration at an early stage due to systematic changes of input factors (i.e., changes in payment behavior) or changes in the structure of the portfolio. The reviews conducted in 2013 for advanced IRBA rating systems triggered recalibrations as shown in the table below. 66 new risk parameters are applied due to newly approved rating systems or due to increased granularity in existing risk parameter settings (including Postbank). None of the recalibrations individually nor the impact of all recalibrations in the aggregate materially impacted our regulatory capital requirements.

Analogously at Postbank the results of the estimations of the input parameters PD, CCF and LGD are reviewed annually. Postbank’s model validation committee is responsible for supervising the annual validation process of all models. Via a cross committee membership Deutsche Bank senior managers join Postbank committees and vice versa, to ensure a joint governance.

Validation results for risk parameters used in our advanced IRBA

 

2013

 

PD

LGD

EAD

 

Count

EAD in %

Count

EAD in %

Count

EAD in %

Appropriate

136

80.8

150

87.3

50

52.2

Overly conservative

8

7.9

6

7.5

21

43.6

Progressive

10

11.3

6

5.1

8

4.2

Total

154

100.0

162

100.0

79

100.0

 

 

 

 

 

 

 

Thereof already recalibrated and introduced in 2013

 

 

 

 

 

 

 

Overly conservative

3

5.2

2

1.0

7

38.6

Progressive

6

6.9

4

5.1

4

3.5

Total

9

12.1

6

6.0

11

42.1

 

2012

 

PD

LGD

EAD

 

Count

EAD in %

Count

EAD in %

Count

EAD in %

Appropriate

104

91.4

100

89.8

40

79.5

Overly conservative

6

1.8

18

4.1

29

15.9

Progressive

16

6.8

11

6.1

5

4.6

Total

126

100.0

129

100.0

74

100.0

 

 

 

 

 

 

 

Thereof already recalibrated and introduced in 2012

 

 

 

 

 

 

 

Overly conservative

1

0.1

17

3.5

24

15.3

Progressive

1

0.1

7

2.0

5

4.6

Total

2

0.2

24

5.5

29

19.9

Above table summarizes the outcome of the model validations for risk parameters PD, LGD and EAD used in our advanced IRBA including Postbank. Individual risk parameter settings are classified as appropriate if no recalibration was triggered by the validation and thus the application of the current parameter setting is continued since still sufficiently conservative. A parameter classifies as overly conservative or progressive if the validation triggers a recalibration analysis leading to a potential downward or upward change of the current setting, respectively. The breakdown for PD, LGD and EAD is presented in counts as well as in the relative EAD attached to the respective parameter as of December 31, 2013 and December 31, 2012.

The validations during 2013 largely confirm our parameter settings. Negatively validated PD and LGD parameters with high materiality are caused by three rating systems. For one Postbank rating system contributing around 6 % of EAD (for both PD and LGD) the PD parameter proved to be too progressive and the LGD parameter is overly conservative. Whereas PDs were already increased, it was decided to keep the LGD setting until next validation. For another Postbank rating system contributing around 5 % of EAD (for both PD and LGD), PDs were overly conservative and LGD progressive, both parameters were already amended. For a third DB rating system contributing to around 3.5 % of EAD, the progressive PD parameters will be mitigated by re-rating of effected exposures which was already started in 2013. One EAD parameter used in DB contributing 35 % of the free limit was overly conservative and was reduced by 3 %-points still keeping a high level of conservatism. All other negatively validated parameters are applied to smaller portfolios.

Out of the 59 risk parameters, where a change was suggested during 2013 by the conducted validation, 26 were already introduced in 2013. Out of the remaining 33 parameter changes 18 are scheduled for implementation in the first quarter 2014. Further investigations showed that one parameter setting could be retained due to changed portfolio composition. The remaining 14 parameter settings are planned to be implemented during 2014. Some of these parameter changes require pending approval from BaFin prior to introduction. Out of the 85 risk parameters where a change was suggested during 2012 by the conducted validation, 55 were already introduced in 2012. The remaining 30 parameter changes were implemented in 2013.

In addition to the above, the comparison of regulatory expected loss (“EL”) estimates with actual losses recorded also provides some insight into the predictive power of our parameter estimations and, therefore, EL calculations.

The EL used in this comparison is the forecast credit loss from counterparty defaults of our exposures over a one year period and is computed as the product of PD, LGD and EAD for performing exposures as of December 31 of the preceding year. The actual loss measure is defined by us as new provisions on newly impaired exposures recorded in our financial statements through profit and loss during the respective reported years.

While we believe that this approach provides some insight, the comparison has limitations as the two measures are not directly comparable. In particular, the parameter LGD underlying the EL calculation represents the loss expectation until finalization of the workout period while the actual loss as defined above represents the accounting information recorded for one particular financial year. Furthermore, EL is a measure of expected credit losses for a snapshot of our credit exposure at a certain balance sheet date while the actual loss is recorded for a fluctuating credit portfolio over the course of a financial year, i.e., including losses in relation to new loans entered into during the year.

According to the methodology described above, the following table provides a comparison of EL estimates for loans, commitments and contingent liabilities as of year-end 2012 through 2008, with actual losses recorded for the financial years 2013 till 2009, by regulatory exposure class for advanced IRBA exposures. Postbank is firstly reflected in the comparison of EL estimates as of year end 2010 with actual losses recorded for the financial year 2011.

Comparison of expected loss estimates for loans, commitments and contingent liabilities with actual losses recorded by regulatory exposure class for advanced IRBA exposures

 

Dec 31,
2012

2013

Dec 31,
2011

2012

Dec 31,
2010

2011

Dec 31,
2009

2010

Dec 31,
2008

2009

in € m.

Expected loss

Actual loss

Expected loss

Actual loss1

Expected loss2

Actual loss2

Expected loss

Actual loss

Expected loss

Actual loss

1

The December 31, 2012 actual loss amounts have been restated due to alignment of Postbank’s calculation model to the Group’s approach.

2

The 2010 Expected Loss and 2011 Actual Loss figures have been restated to limit disclosure to Postbank’s advanced IRBA exposure only.

Central governments

3

18

1

0

2

0

2

0

2

0

Institutions

10

1

7

14

22

2

16

1

21

16

Corporates

351

717

445

393

449

363

471

358

591

1,665

Retail exposures secured by real estate property

284

223

294

224

222

359

118

101

120

140

Qualifying revolving retail exposures

23

7

23

12

2

30

2

5

2

7

Other retail exposures

404

370

418

385

390

301

301

282

311

315

Total expected loss and actual loss in the advanced IRBA

1,075

1,336

1,188

1,028

1,088

1,055

910

747

1,047

2,143

The actual loss in 2013 exceeded the expected loss by € 261 million or 24 %. This was primarily due to higher than expected level of provisions in our corporate portfolio driven by a large single client credit event in a usually low risk portfolio of GTB as well as one large charge within NCOU. Additionally, actual loss for central governments was higher than expected driven by one single client. Better than expected performance in all retail exposure classes as well as in institutions partly offset the overall excess of actual compared to expected loss.

The actual loss in 2012 was 13 % lower than the expected loss across all exposure classes apart from Institutions, where actual loss was driven by one single client.

The decrease in expected loss as of December 31, 2012 in comparison to December 31, 2011 is mainly resulting from exposure reductions and to less extent by partially lower LGD parameters.

The consolidation of Postbank lead to an increase in the expected loss starting December 31, 2010 and in the actual losses starting 2011.

In 2010 the actual loss was 18 % below the expected loss as the actual loss and was positively influenced by lower provisions taken for assets reclassified in accordance with IAS 39.

The decrease of the expected loss for 2010 compared with the expected loss for 2009 reflected the slightly improved economic environment after the financial crisis.

In 2009 actual losses exceeded the expected loss by 104 % driven mainly by material charges taken against a small number of exposures, primarily concentrated in Leveraged Finance, as well as the further deteriorating credit conditions not reflected in the expected losses for our corporate exposures at the beginning of the year.

The following table provides a year-to-year comparison of the actual loss by regulatory exposure class. Postbank is firstly included in the reporting period 2011.

Year-to-year comparison of the actual loss by IRBA exposure class

in € m.

2013

20121

2011

2010

2009

1

The December 31, 2012 actual loss amounts have been restated due to alignment of Postbank’s calculation model to the Group’s approach.

Central governments

18

0

0

0

0

Institutions

1

14

2

1

16

Corporates

717

393

363

358

1,665

Retail exposures secured by real estate property

223

224

359

101

140

Qualifying revolving retail exposures

7

12

30

5

7

Other retail exposures

370

385

301

282

315

Total actual loss by IRBA in the advanced IRBA

1,336

1,028

1,055

747

2,143

In the current year, the actual loss increased by € 308 million or 30 % compared to prior year numbers primarily driven by our corporate portfolio and to a minor extent exposures to central governments. The increase in our corporate portfolio was caused by a single client credit event in GTB along with higher actual losses for shipping companies recorded in CB&S as well as one large charge in NCOU related to the European Commercial Real Estate sector, while higher actual losses in central governments result from a charge to one single client. These increases were partly offset by slight reductions in our retail portfolios as well as in institutions.

The slight reduction of € 27 million or 3 % actual loss in 2012 compared to 2011 is driven by retail exposures secured by real estate property resulting from the alignment of Postbank’s calculation model to the Group’s approach.

New provisions established in 2011 were € 308 million higher compared with 2010 primarily due to the first time inclusion of Postbank in full year reporting.

New provisions established in 2010 were lower by € 1.4 billion compared with 2009, reflecting predominately significantly reduced provisions required for assets reclassified in accordance with IAS 39. Measures taken on portfolio and country level led to a reduction in the actual loss for our retail exposures in Spain and India, partially offset by increases in the consumer finance business in Poland. The observed decrease in actual loss were partially offset by provisions taken relating to the commercial banking activities acquired from ABN AMRO and Postbank.


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