Stress Testing and Scenario Analysis

We use stress testing and scenario analysis to evaluate the impact of sudden and severe stress events on our liquidity position. The scenarios we apply have been based on historic events, such as the 1987 stock market crash, the 1990 U.S. liquidity crunch and the September 2001 terrorist attacks, liquidity crisis case studies and hypothetical events, as well as the lessons learned from the latest financial markets crisis.

They include a prolonged term money-market and secured funding freeze, collateral repudiation, reduced fungibility of currencies, stranded syndications as well as other systemic knock-on effects. The scenario types cover institution-specific events (i.e., rating downgrade), market related events (i.e., systemic market risk) as well as a combination of both, which links a systemic market shock with a multi-notch rating downgrade. We apply stress scenarios to selected significant currencies and entities. As a result of the recent downgrades of Deutsche Bank’s credit ratings, we have adjusted the most severe idiosyncratic scenario (previously “A-2/P-2”). This scenario is now called “severe downgrade scenario” and describes a downgrade of Deutsche Bank to a long-term rating level of BBB/Baa2 and short-term rating of A-3/P-3 across all major rating agencies.

Under each of these scenarios we assume a high degree of rollovers of maturing loans to non-wholesale customers (in order to support franchise value) whereas the rollover of liabilities will be partially or fully impaired resulting in a funding gap. In this context, wholesale funding from the most risk sensitive sources (including unsecured funding from commercial banks, money market mutual funds, as well as asset backed commercial paper) is assumed to contractually roll off in the acute phase of stress. In addition, we analyze the potential funding requirements from contingent risks which could materialize under stress. Those include drawings of credit facilities, increased collateral requirements under derivative agreements as well as outflows from deposits with a contractual rating trigger. We then model the steps we would take to counterbalance the resulting net shortfall in funding. Countermeasures would include our Liquidity Reserves, as well as potential further asset liquidity from other unencumbered securities. Stress testing is conducted at a global and individual legal entity level and across significant non-eurozone currencies, in particular USD as the major non-EUR funding currency. We review material stress-test assumptions on a regular basis and have increased the severity of a number of these assumptions through the course of 2014.

Stress testing is fully integrated in our liquidity risk management framework. For this purpose we use the contractual wholesale cash flows per currency and product over an eight-week horizon (which we consider the most critical time span in a liquidity crisis) and apply the relevant stress case to all potential risk drivers from on-balance sheet and off-balance sheet products. Beyond the eight week time horizon we analyze on a monthly basis the impact of a more prolonged stress period extending out to twelve months. The liquidity stress testing provides the basis for the bank’s contingency funding plan which is approved by the Management Board.

Our stress testing analysis assesses our ability to generate sufficient liquidity under extreme conditions and is a key input when defining our target liquidity risk position. The stress testing analysis is performed daily. The following table shows, that under each of our defined and regularly reviewed scenarios we would maintain a positive net liquidity position, as the counterbalancing liquidity we could generate via different sources more than offsets our cumulative funding gap over an eight-week horizon after occurrence of the triggering event.

Global All Currency Monthly Stress Testing Results

 

Dec 31, 2014

Dec 31, 20131

in € bn.

Funding Gap2

Gap Closure3

Net Liquidity Position

Funding Gap2

Gap Closure3

Net Liquidity Position

1

2013 figures are based on the prevailing methodology at the time and are not restated to reflect any changes to stress testing assumptions that have been implemented during the year.

2

Funding gap caused by impaired rollover of liabilities and other projected outflows.

3

Based on liquidity generation through Liquidity Reserves (after haircuts) and other countermeasures.

4

Combined impact of systemic market risk and severe downgrade.

Systemic market risk

49

183

134

31

179

148

Emerging markets

9

185

176

10

195

185

1 notch downgrade (DB specific)

42

166

124

37

178

141

Severe downgrade (DB specific)

163

202

38

170

208

37

Combined4

190

214

24

181

204

23

Global USD Monthly Stress Testing Results

 

Dec 31, 2014

Dec 31, 20131

in € bn.

Funding Gap2

Gap Closure3

Net Liquidity Position

Funding Gap2

Gap Closure3

Net Liquidity Position

1

2013 figures are based on the prevailing methodology at the time and are not restated to reflect any changes to stress testing assumptions that have been implemented during the year.

2

Funding gap caused by impaired rollover of liabilities and other projected outflows.

3

Based on liquidity generation through Liquidity Reserves (after haircuts) and other countermeasures.

4

Combined impact of systemic market risk and severe downgrade.

Combined4

92

149

56

89

132

43

The following table presents the amount of additional collateral required in the event of a one- or two-notch downgrade by rating agencies for all currencies.

Additional Contractual Obligations

 

Dec 31, 2014

Dec 31, 2013

in € m.

One-notch downgrade

Two-notch downgrade

One-notch downgrade

Two-notch downgrade

Contractual derivatives funding or margin requirements

6,806

7,893

5,459

9,071

Other contractual funding or margin requirements

529

689

0

502

With the increasing importance of liquidity management in the financial industry, we maintain an active dialogue with central banks, supervisors, rating agencies and market participants on liquidity risk-related topics. We participate in a number of working groups regarding liquidity and support efforts to create industry-wide standards to evaluate and manage liquidity risk at financial institutions. In addition to our internal liquidity management systems, the liquidity exposure of German banks is regulated by the German Banking Act, the CRR, the Single Supervisory Mechanism and accompanying regulations.