Liquidity Risk

Liquidity risk is the risk arising from our potential inability to meet all payment obligations when they come due or only being able to meet these obligations at excessive costs.

Our liquidity risk management framework has been an important factor in maintaining adequate liquidity and in managing our funding profile during 2013.

Liquidity Risk Management Framework

The Management Board defines our liquidity risk strategy, and in particular our tolerance for liquidity risk based on recommendations made by the Capital and Risk Committee. At least once every year the Management Board will review and approve the limits which are applied to the Group to measure and control liquidity risk as well as our long-term funding and issuance plan.

Our Treasury function is responsible for the management of our liquidity and funding risk globally as defined in the liquidity risk strategy. Our liquidity risk management framework is designed to identify, measure and manage our liquidity risk position. Liquidity Risk Control is responsible for the internal reporting on liquidity and funding which is submitted to the Management Board at least weekly via a Liquidity Scorecard. In addition Liquidity Risk Control is responsible for the oversight and validation of the bank’s liquidity risk framework. Our liquidity risk management approach starts at the intraday level (operational liquidity) managing the daily payments queue, forecasting cash flows and factoring in our access to Central Banks. It then covers tactical liquidity risk management dealing with access to secured and unsecured funding sources. Finally, the strategic perspective comprises the maturity profile of all assets and liabilities (Funding Matrix) and our issuance strategy.

Our cash-flow based reporting system provides daily liquidity risk information to global and local management.

Stress testing and scenario analysis plays a central role in our liquidity risk management framework. This also incorporates an assessment of asset liquidity, i.e., the characteristics of our asset inventory, under various stress scenarios as well as contingent funding requirements from off-balance-sheet commitments. The monthly stress testing results are used to calibrate our short-term wholesale funding profile limits (both unsecured and secured) which are a key tool to support compliance with the Board’s overall liquidity risk tolerance.

Short-term Liquidity and Wholesale Funding

Our Group-wide reporting system tracks all contractual cash flows from wholesale funding sources on a daily basis over a 12-month horizon. We consider as wholesale funding for this purpose unsecured liabilities raised primarily by our Global Liquidity Management business as well as secured liabilities primarily raised by our Global Liquidity Management and Equities businesses. Such liabilities primarily come from corporates, banks and other financial institutions, governments and sovereigns. Wholesale funding profile limits, which are calibrated against our stress testing results and are approved by the Management Board according to internal governance, express our maximum tolerance for liquidity risk. The wholesale funding limits apply to the respective cumulative global cash outflows as well as the total volume of unsecured wholesale funding and are monitored on a daily basis. Our Liquidity Reserves are the primary mitigant against stresses in short-term wholesale funding markets. At an individual entity level we may set liquidity outflow limits across a broader range of cash flows where this is considered to be meaningful or appropriate.

Funding Markets and Capital Markets Issuance

Credit markets in 2013 were affected by continued political uncertainties in the Eurozone and the U.S., the ongoing low interest rate environment as well as the U.S. Federal Reserve’s plans to taper its quantitative easing program. Our 5 year CDS traded within a range of 81 – 136 bps, peaking in March. Since then, the spread has declined and as of year-end was trading close to its lows for the year. The spreads on our bonds exhibited similar volatility. For example, our 4 year EUR benchmark (5.125 % coupon, maturing in August 2017) traded in a range of 20 – 57 bps, also closing the year near its lows.

Our 2013 funding plan of up to € 18 billion, comprising debt issuance with an original maturity in excess of one year, was fully completed and we concluded 2013 having raised € 18.6 billion in term funding. This funding was broadly spread across the following funding sources: unsecured benchmark issuance (€ 4.5 billion), subordinated benchmark issuance (€ 1.1 billion), unsecured retail-targeted issuance (€ 5.6 billion) and unsecured and secured private placements (€ 7.5 billion). Of the € 18.6 billion total, the majority was in EUR (€ 10.2 billion). We also issued € 5.6 billion in U.S. dollar and smaller amounts in JPY and GBP. In addition to direct issuance, we use long-term cross currency swaps to manage our funding needs outside of EUR. Our investor base comprised retail customers (30 %), banks (23 %), asset managers and pension funds (20 %), insurance companies (4 %) and other, including institutional investors (23 %). The geographical distribution was split between Germany (25 %), Rest of Europe (45 %), US (19 %), Asia Pacific (9 %) and Other (2 %). Of our total capital markets issuance outstanding as of December 31, 2013, approximately 80 % was issued on an unsecured basis.

The average spread of our issuance over the relevant floating index (i.e., Libor) was 36 bps for the full year with an average tenor of 4.4 years. Our issuance activities were higher in the first half of the year with volumes decreasing in the second half of the year 2013. We issued the following volumes over each quarter: € 6.0 billion, € 6.5 billion, € 2.7 billion and € 3.4 billion, respectively.

In 2014, our base case funding plan is € 20 billion which we plan to cover by accessing the above sources, without being overly dependent on any one source. We also plan to raise a portion of this funding in U.S. dollar and may enter into cross currency swaps to manage any residual requirements. We have total capital markets maturities, excluding legally exercisable calls of approximately € 20 billion in 2014.

For information regarding the maturity profile of our wholesale funding and capital markets issuance please refer to the table below.

Funding Diversification

Diversification of our funding profile in terms of investor types, regions, products and instruments is an important element of our liquidity risk management framework. Our most stable funding sources are capital markets and equity, retail, and transaction banking clients. Other customer deposits and borrowing from wholesale clients are additional sources of funding. Unsecured wholesale funding represents unsecured wholesale liabilities sourced primarily by our Global Liquidity Management business. Given the relatively short-term nature of these liabilities, they are primarily used to fund cash and liquid trading assets.

To promote the additional diversification of our refinancing activities, we hold a Pfandbrief license allowing us to issue mortgage Pfandbriefe.

In 2013, we have reduced our overall funding volume in line with the broader balance sheet de-leveraging. Total external funding declined by € 117 billion (11 %) during the year of which the majority came in our CB&S business, in particular we reduced unsecured wholesale funding by € 20 billion (21 %) and secured funding and shorts by € 43 billion (22 %). We also saw smaller reductions from capital markets and equity (€ 17 billion, 8 %), transaction banking (€ 16 billion, 8 %) and retail clients (€ 9 billion, 3 %). The overall proportion of our most stable funding sources (comprising capital markets and equity, retail, and transaction banking) increased from 62 % to 66 %.

Unsecured wholesale funding comprises a range of unsecured products e.g. Certificates of Deposit (CDs), Commercial Paper (CP) as well as term, call and overnight deposits across tenors primarily up to one year. In addition, included within financing vehicles, is € 11 billion of asset-backed commercial paper (ABCP) issued through conduits.

The overall volume of unsecured wholesale funding and secured funding fluctuated between reporting dates based on our underlying business activities. Higher volumes, primarily in secured funding transactions, are largely driven by increased client related securities financing activities as well as intra quarter growth in liquid trading inventories.

To avoid any unwanted reliance on these short-term funding sources, and to promote a sound funding profile at the short end, which complies with the defined risk tolerance, we have implemented limit structures (across tenor) to these funding sources, which are derived from our stress testing analysis. In addition we are setting a limit on the total volume of unsecured wholesale funding to manage the reliance on this funding source as part of the overall funding diversification.

The following chart shows the composition of our external funding sources that contribute to the liquidity risk position, both in EUR billion and as a percentage of our total external funding sources.

Composition of External Funding Sources

Composition of External Funding Sources (bar chart)

The following table shows the contractual maturity of our short-term wholesale funding (comprising unsecured wholesale funding plus asset-backed commercial paper), as well as our capital markets issuance.

Maturity of wholesale funding and capital markets issuance

 

Dec 31, 2013

in € m.

Not more than 1 month

Over 1 month but not more than 3 months

Over 3 months but not more than 6 months

Over 6 months but not more than 1 year

Sub-total less than 1 year

Over 1 year but not more than 2 years

Over 2 years

Total

1

Liabilities with call features are shown at earliest legally exercisable call date. No assumption is made as to whether such calls would be exercised.

Deposits from banks

14,446

5,704

5,536

1,350

27,035

9

148

27,192

Deposits from other wholesale customers

5,589

4,419

861

259

11,127

129

128

11,384

CDs and CP

4,819

19,135

7,188

3,646

34,789

31

14

34,834

ABCP

5,221

4,833

541

0

10,596

0

0

10,596

Senior unsecured plain vanilla

2,364

1,632

3,203

3,561

10,760

10,014

32,851

53,625

Senior unsecured structured notes

470

1,566

1,257

3,585

6,877

4,312

19,746

30,935

Covered bonds/ABS

149

1,208

113

1,660

3,130

1,677

20,457

25,263

Subordinated liabilities

255

4,527

1,137

670

6,588

2,511

10,948

20,048

Other

70

21

6

0

97

0

76

173

Total1

33,382

43,046

19,841

14,730

110,999

18,683

84,368

214,050

Thereof secured

5,370

6,042

654

1,660

13,726

1,677

20,457

35,859

Thereof unsecured

28,012

37,004

19,187

13,070

97,274

17,006

63,911

178,190

The total volume of wholesale liabilities and capital markets issuance maturing within one year amounting to € 111 billion as of December 31, 2013, should be viewed in the context of our total Liquidity Reserves of € 196 billion. The reduction in the volume maturing within one year is primarily driven by our balance sheet de-leveraging initiatives.

 

Dec 31, 2012

in € m.

Not more than 1 month

Over 1 month but not more than 3 months

Over 3 months but not more than 6 months

Over 6 months but not more than 1 year

Sub-total less than 1 year

Over 1 year but not more than 2 years

Over 2 years

Total

1

Liabilities with call features are shown at earliest legally exercisable call date. No assumption is made as to whether such calls would be exercised.

2

For year-end 2012 we have additionally considered an amount of € 3.7 billion relating to a single entity in ABCP; amounts have been adjusted accordingly.

Deposits from banks

24,627

5,820

2,542

870

33,859

25

214

34,098

Deposits from other wholesale customers

20,776

1,996

779

465

24,015

185

294

24,495

CDs and CP

9,978

14,880

5,329

3,625

33,812

283

183

34,277

ABCP2

6,127

5,614

575

0

12,316

0

0

12,316

Senior unsecured plain vanilla

1,972

4,921

5,101

4,489

16,483

6,929

37,419

60,832

Senior unsecured structured notes

969

1,271

1,331

2,640

6,210

4,611

21,184

32,005

Covered bonds/ABS

1,501

1,120

0

11

2,631

3,555

25,316

31,502

Subordinated liabilities

2,180

4,704

1,750

1,262

9,898

1,069

11,940

22,906

Other

7

33

12

6

58

18

227

303

Total1,2

68,137

40,358

17,419

13,368

139,283

16,675

96,777

252,735

Thereof secured

7,628

6,734

575

11

14,947

3,555

25,316

43,818

Thereof unsecured

60,509

33,625

16,844

13,357

124,335

13,120

71,461

208,917

The following table shows the currency breakdown of our short-term wholesale funding as well as of our capital markets issuance.

Wholesale funding and capital markets issuance (currency breakdown)

 

Dec 31, 2013

Dec 31, 2012

in € m.

in EUR

in USD

in GBP

in other CCYs

Total

in EUR

in USD

in GBP

in other CCYs

Total

Deposits from banks

2,630

19,453

1,516

3,592

27,192

3,924

18,121

6,336

5,717

34,098

Deposits from other whole-sale customers

2,177

6,413

667

2,127

11,384

3,139

15,709

778

4,868

24,495

CDs and CP

6,291

22,467

4,394

1,682

34,834

5,715

20,341

4,524

3,698

34,277

ABCP

1,245

8,132

1,219

0

10,596

848

9,975

1,493

0

12,316

Senior unsecured plain vanilla

39,500

8,676

1,794

3,656

53,625

43,220

12,918

24

4,670

60,832

Senior unsecured structured notes

13,381

12,072

164

5,319

30,935

12,594

12,245

223

6,943

32,005

Covered bonds/ABS

25,263

0

0

0

25,263

31,484

11

7

0

31,502

Subordinated liabilities

11,264

8,028

176

579

20,048

14,673

7,289

221

724

22,906

Other

72

2

2

97

173

72

173

0

59

303

Total

101,823

85,243

9,932

17,052

214,050

115,670

96,780

13,606

26,679

252,735

Thereof secured

26,508

8,132

1,219

0

35,859

32,333

9,985

1,500

0

43,818

Thereof unsecured

75,314

77,111

8,713

17,052

178,190

83,337

86,795

12,105

26,679

208,917

Funding Matrix

We map all funding-relevant assets and all liabilities into time buckets corresponding to their economic maturities to compile a maturity profile (funding matrix). The funding matrix is compiled on an aggregated currency basis, as well as for selected individual currencies and legal entities. Given that trading assets are typically more liquid than their contractual maturities suggest, we determine individual liquidity profiles reflecting their relative liquidity value. We take assets and liabilities from the retail bank (mortgage loans and retail deposits) that show a behavior of being renewed or prolonged regardless of capital market conditions and assign them to time buckets reflecting the expected prolongation. Wholesale banking products are included with their contractual maturities.

The funding matrix identifies the excess or shortfall of assets over liabilities in each time bucket, facilitating management of open liquidity exposures. The funding matrix analysis together with the strategic liquidity planning process, which forecasts the funding supply and demand across business units, provides the key input parameter for our annual capital market issuance plan. Upon approval by the Management Board the capital market issuance plan establishes issuing targets for securities by tenor, volume and instrument. During the year the Management Board introduced a specific risk tolerance for our U.S. dollar funding matrix which limits the maximum short position in any time bucket (>1 year to >10 year) to € 10 billion. This supplements the risk tolerance for our aggregate currency funding matrix which requires us to maintain a positive funding position in any time bucket (>1 year to > 10 year). Both funding matrices were in line with the respective risk tolerance as of year ends 2013 and 2012.

Transfer Pricing

We operate a transfer pricing framework that applies to all businesses and promotes pricing of (i) assets in accordance with their underlying liquidity risk, (ii) liabilities in accordance with their funding maturity and (iii) contingent liquidity exposures in accordance with the cost of providing for commensurate liquidity reserves to fund unexpected cash requirements.

Within this transfer pricing framework we allocate funding and liquidity risk costs and benefits to the firm’s business units and set financial incentives in line with the firm’s liquidity risk guidelines. Transfer prices are subject to liquidity (term) premiums depending on market conditions. Liquidity premiums are set by Treasury and picked up by a segregated liquidity account. The Treasury liquidity account is the aggregator of long-term liquidity costs. The management and cost allocation of the liquidity account is the key variable for transfer pricing funding costs within Deutsche Bank.

Liquidity Reserves

Liquidity reserves comprise available cash and cash equivalents, highly liquid securities (includes government, agency and government guaranteed) as well as other unencumbered central bank eligible assets.

The volume of our liquidity reserves is a function of our expected stress result, both at an aggregate level as well as at an individual currency level. To the extent we receive incremental short-term wholesale liabilities which attract a high stress roll-off, we will largely keep the proceeds of such liabilities in cash or highly liquid securities as a stress mitigant. Accordingly, the total volume of our liquidity reserves will fluctuate according to the level of short-term wholesale liabilities held, although this has no material impact on our overall liquidity position under stress. Our liquidity reserves include only assets that are freely transferable within the Group, or can be applied against local entity stress outflows. We hold the vast majority of our liquidity reserves centrally held at our parent level or at our foreign branches with further reserves held at key locations in which we are active. While we hold our reserves across major currencies, their size and composition are subject to regular senior management review. In addition to the reported liquidity reserves below, there was an amount of € 19 billion of liquidity reserves, in excess of local stress outflows, that remains in entities which are subject to transfer restrictions due to local connected lending requirements or similar regulatory restrictions. We therefore do not include such amounts into our freely transferable liquidity reserves.

Composition of our freely transferable liquidity reserves by parent company (including branches) and subsidiaries

 

Dec 31, 2013

Dec 31, 2012

in € bn.

Carrying Value

Liquidity Value

Carrying Value

Liquidity Value

Available cash and cash equivalents (held primarily at central banks)

78

77

128

128

Parent (incl. foreign branches)

68

67

112

112

Subsidiaries

10

10

16

16

Highly liquid securities (includes government, government guaranteed and agency securities)

95

89

91

82

Parent (incl. foreign branches)

71

67

56

52

Subsidiaries

24

22

35

30

Other unencumbered central bank eligible securities

23

17

13

10

Parent (incl. foreign branches)

17

13

12

9

Subsidiaries

6

4

1

1

Total liquidity reserves

196

183

232

220

Parent (incl. foreign branches)

156

147

180

173

Subsidiaries

41

36

52

47

As of December 31, 2013, our freely transferable liquidity reserves amounted to € 196 billion compared with € 232 billion as of December 31, 2012. The primary driver of the decrease of € 36 billion in 2013 was a reduction of € 20 billion in our unsecured wholesale funding during the year, together with reductions in other liability sources. Our average liquidity reserves during the year were € 216 billion compared with € 211 billion during 2012 (2012 figures exclude Postbank). In the table above the carrying value represents the market value of our liquidity reserves while the liquidity value reflects our assumption of the value that could be obtained, primarily through secured funding, taking into account the experience observed in secured funding markets at times of stress.