Overall Risk Position

Economic Capital

To determine our overall (nonregulatory) risk position, we generally consider diversification benefits across risk types.

Overall risk position as measured by economic capital usage

 

 

 

2014 increase (decrease)
from 2013

in € m.
(unless stated otherwise)

Dec 31, 2014

Dec 31, 2013

in € m.

in %

1

Diversification benefit across credit, market, operational and strategic risk (largest part of business risk)

2

Excluding strategic risk (not included in the diversification calculation for 2013)

Credit risk

12,885

12,013

872

7

Market Risk

14,852

12,738

2,114

17

Trading market risk

4,955

4,197

757

18

Nontrading market risk

9,898

8,541

1,357

16

Operational risk

7,598

5,253

2,345

45

Business risk

3,084

1,682

1,403

83

Diversification benefit1

(6,554)

(4,515)2

(2,039)

45

Total economic capital usage

31,866

27,171

4,695

17

As of December 31, 2014, our economic capital usage amounted to € 31.9 billion, which was € 4.7 billion, or 17 %, above the € 27.2 billion economic capital usage as of December 31, 2013. The higher overall risk position is driven by an increase in risk taking across all risk types and risk methodology enhancements.

The economic capital usage for credit risk increased to € 12.9 billion as of December 31, 2014, € 872 million or 7 % higher compared to year-end 2013. This increase is driven by higher exposures in CB&S and GTB, partly offset by lower exposures in NCOU.

The economic capital usage for trading market risk increased to € 5.0 billion as of December 31, 2014, compared with € 4.2 billion at year-end 2013. This was mainly driven by increased exposures in the fair value banking book. The nontrading market risk economic capital usage increased by € 1.4 billion or 16 %, mainly driven by higher structural foreign exchange risk exposure, methodology enhancements for pension risk and increased guaranteed funds risk, partly offset by de-risking activities in NCOU.

The economic capital usage for operational risk increased to € 7.6 billion as of December 31, 2014, compared with € 5.3 billion at year-end 2013. The increase was mainly driven by an early recognition of the impact of model enhancements to our Advanced Measurement Approach (AMA) model that were implemented in the second quarter 2014, which led to additional economic capital of € 1.1 billion. An additional driver was the increased operational risk loss profile of Deutsche Bank as well as of the industry as a whole. The related operational risk losses that have materialized and given rise to the increased economic capital usage are largely due to the outflows related to litigation, investigations and enforcement actions.

Our business risk economic capital methodology captures strategic risk, which also implicitly includes elements of non standard risks including refinancing and reputational risk, and a tax risk component. The business risk economic capital usage totaled € 3.1 billion as of December 31, 2014, which is € 1.4 billion or 83 % higher than the € 1.7 billion economic capital usage as of December 31, 2013. The increase mainly reflected a higher economic capital usage for the strategic risk component driven by adjustments to the strategic plan for 2015 compared to the business plan for 2014.

The inter-risk diversification effect of the economic capital usage across credit, market, operational and strategic risk increased by € 2.0 billion, or 45 %, as of December 31, 2014, mainly reflecting the increase in economic capital usage before diversification and a methodology update in the first quarter 2014, which relates, among other things, to the incorporation of strategic risk into the diversification calculation.

Internal Capital Adequacy Assessment Process

The lnternal Capital Adequacy Assessment Process (“ICAAP”) requires banks to identify and assess risks, maintain sufficient capital to face these risks and apply appropriate risk-management techniques to maintain adequate capitalization on an ongoing and forward looking basis, i.e., internal capital supply to exceed internal capital demand (figures are described in more detail in the section “Internal Capital Adequacy” below).

We, at a Group level, maintain compliance with the lCAAP as required under Pillar 2 of Basel 2 and its local implementation in Germany, the Minimum Requirements for Risk Management (MaRisk), through a Group-wide risk management and governance framework, methodologies, processes and infrastructure.

In line with MaRisk and Basel requirements, the key instruments to help us maintain our adequate capitalization on an ongoing and forward looking basis are:

  • A strategic planning process which aligns risk strategy and appetite with commercial objectives;
  • A continuous monitoring process against approved risk and capital targets set;
  • Frequent risk and capital reporting to management; and
  • An economic capital and stress testing framework which also includes specific stress tests to underpin our recovery monitoring processes.

More information on risk management organized by major risk category can be found in section “Risk Management Principles – Risk Governance”.

Internal Capital Adequacy

As the primary measure of our Internal Capital Adequacy Assessment Process (ICAAP) we assess our internal capital adequacy based on our “gone concern approach” as the ratio of our total capital supply divided by our total capital demand as shown in the table below. In 2014 we included defined benefit pension fund assets in our capital supply definition to reflect the CRR/CRD 4 capital framework. The prior year information has been revised accordingly.

Internal Capital Adequacy

in € m.
(unless stated otherwise)

Dec 31, 2014

Dec 31, 2013

1

Includes deduction of fair value gains on own credit-effect relating to own liabilities designated under the fair value option as well as the debt valuation adjustments.

2

Reported as net assets (assets minus liabilities) of a defined pension fund, i.e. applicable for overfunded pension plans.

3

Includes fair value adjustments for assets reclassified in accordance with IAS 39 and for banking book assets where no matched funding is available. A positive adjustment is not considered.

4

Includes noncontrolling interest up to the economic capital requirement for each subsidiary.

Capital supply

 

 

Shareholders' equity

68,351

54,719

Fair value gains on own debt and debt valuation adjustments, subject to own credit risk1

(544)

(537)

Defined benefit pension fund assets2

(961)

(639)

Deferred tax assets

(6,865)

(7,071)

Fair Value adjustments for financial assets reclassified to loans3

0

(363)

Noncontrolling Interests4

0

0

Hybrid Tier 1 capital instruments

16,158

12,182

Tier 2 capital instruments

6,620

9,689

Capital supply

82,759

67,980

 

 

 

Capital demand

 

 

Economic capital requirement

31,866

27,171

Intangible assets

14,951

13,932

Capital demand

46,817

41,103

 

 

 

Internal capital adequacy ratio

177 %

165 %

A ratio of more than 100 % signifies that the total capital supply is sufficient to cover the capital demand determined by the risk positions. This ratio was 177 % as of December 31, 2014, compared with 165 % as of December 31, 2013. The change of the ratio was driven by an increase in capital supply. Shareholders’ equity increased by € 13.6 billion mainly driven by the capital increase on June 25, 2014. Hybrid Tier 1 capital instruments increased by € 4.0 billion mainly driven by the completed issuances of Additional Tier 1 Notes on May 20, 2014 and November 19, 2014. Tier 2 capital instruments decreased by € 3.1 billion mainly due to called capital instruments. Further details are explained in the section “Capital Management”. The increase in capital demand was driven by higher economic capital requirement as explained in the section “Overall Risk Position” and an increase in intangible assets by € 1.0 billion.

The above capital adequacy measures apply to the consolidated Group as a whole (including Postbank) and form an integral part of our Risk and Capital Management framework, further described in the respective sections of this report (please refer in particular to sections “Credit Risk Tools – Economic Capital for Credit Risk”, “Economic Capital for Market Risk”, “Economic Capital Usage for Our Nontrading Market Risk Portfolios per Business Area”, “Carrying Value and Economic Capital Usage for Nontrading Market Risk Portfolios”, “Measuring Our Operational Risks” and “Economic Capital usage for Operational Risk”).