Regulatory Capital Requirements

Under CRR/CRD 4, overall capital requirements have to be calculated and compared with the regulatory capital described above. The overall capital requirements are frequently expressed in risk-weighted asset terms whereby total capital requirements are 8 % of risk-weighted assets. The information presented below is based on the regulatory principles of consolidation.

Starting January 1, 2014, the calculation of our regulatory capital, our risk-weighted assets and capital ratios are based on the CRR/CRD 4 framework published on June 27, 2013.

This framework predominantly introduced the following additional requirements in relation to RWA:

  • Credit Valuation Adjustment (CVA): a new regulatory capital charge which captures the volatility of expected losses from counterparty credit risk exposure in connection with OTC derivatives in a value-at-risk model. Deutsche Bank calculates the majority of CVA RWA based on the advanced approach using an internal model as approved by BaFin.
  • Changes to Counterparty Credit Risk (CCR): various changes have been introduced for the use of the internal model method (IMM) for the determination of counterparty credit risk exposures, among others the usage of a current and a stressed calibration and the increase of the margin period of risk used in the IMM calculation.
  • Central Clearing Counterparty (CCP): zero-weighted exposures against CCPs under Basel 2.5 now become subject to capital charges for both trade exposures and default fund exposures. Trade exposures arise from derivatives and security financing transactions. The regulatory EAD is calculated using the internal model method and for transactions, for which a simulation cannot be computed, is derived from the mark-to-market method. A risk weight of 2 % is applied for the trade exposures to a qualifying CCP. Default fund exposures arise from the clearing member’s contribution to the loss mutualisation scheme of the CCP and are used to cover losses arising from defaults of one or more of its clearing members if the margins and the CCP’s own funds are not sufficient to cover the resulting losses. The risk weight for default fund exposures varies between 2 % and 1,500 % depending on the hypothetical capital requirement of the CCP compared with the financial resources being the pre-funded default fund contributions and the own funds of the CCP.
  • Financial Sector Exposure: for exposures under the advanced IRBA and to financial sector entities as defined in Article 142 (1) CRR, the asset correlation parameter increases by 25 %.
  • Securitization Positions: exposures in the regulatory banking and trading book that were deducted half from each of Tier 1 and Tier 2 capital under Basel 2.5 are subject to a risk weight of 1,250 %.
  • Significant Investments and Deferred Tax Assets (DTA): significant investments in CET 1 instruments of financial sector entities and DTA that rely on future profitability and arise from temporary differences which are subject to the threshold exemptions as outlined in Article 48 CRR receive a risk weight of 250 %.

Against this background, we calculate our RWA based on the following approaches:

In December 2007 the BaFin approved the use of the advanced IRBA for the majority of our counterparty credit risk positions, which excludes the exposures consolidated from Postbank. Additional advanced IRBA-related BaFin approvals have been obtained during the period 2008 to 2014. The advanced IRBA constitutes the most sophisticated approach available under the Basel regime. Postbank has BaFin approval for the advanced IRBA to be applied to the retail business and certain exposures in the exposure classes “institutions” and “corporate”, and the foundation IRBA for a portion of the other counterparty credit risk exposures.

The remaining IRBA eligible exposures are covered within the standardized approach either temporarily (where we are seeking regulatory approval for some remaining small portfolios) or permanently (where exposures are treated under the standardized approach in accordance with Article 150 CRR). More details on this topic are provided in the Section “Counterparty Credit Risk: Regulatory Assessment”.

The capital requirement for securitization positions is calculated substantially using the IRBA approach; only minor exposures are captured under the standardized approach. More details on the treatment of securitization positions can be found in the Section “Securitization”.

For equity investments entered into before January 1, 2008, we use the transitional arrangement to exempt these positions from an IRBA treatment and apply the grandfathering rule, using a 100 % risk weighting. For investments in equity positions entered into since January 1, 2008, we apply the simple risk weight approach within the IRBA for our exposures. For more details regarding equity investments please refer to the Sections “Nontrading Market Risk – Investment Risk” and “Nontrading Market Risk – Equity Investments Held”.

The new CVA (credit valuation adjustment) capital charge was introduced in the Basel 3 framework and implemented in the EU via the Capital Requirement Directive (EU 575/2013). The charge aims to capture volatility in the expected losses from derivative exposures. This is done by calculating the derivative exposures for each counterparty, deriving a credit spread sensitivity based on the exposure and the credit spread of the counterparty, and applying a value-at-risk model on those sensitivity including any eligible hedges.

Deutsche Bank has received approval from the BaFin to use the advanced method to calculate the CVA capital charge. This means that derivative exposures are calculated using approved internal model methods, the same models that are also used for counterparty credit risk RWA. Netting and collateral are applied to the exposures where applicable.

The CVA sensitivities that feed into the existing approved market risk value-at-risk model are calculated using the prescribed sensitivity formula as defined in the regulation. Where credit spreads for a counterparty are not available in the market, an appropriate proxy credit spread is used instead that is identified using a waterfall methodology. The value-at-risk model used for CVA is the same as used for the market risk value-at-risk calculation for the trading book. Each counterparty’s CVA sensitivity and any eligible CDS hedges are assigned to a risk factor based on the characteristics of the counterparty or hedge, in the same way that a corporate bond or CDS on the trading book would be assigned to a risk factor for market risk value-at-risk.

The scope for the CVA capital charge is over-the-counter derivatives excluding those traded with counterparties that are exempt from CVA as defined in the regulation. During 2014, the new proxy methodology for value-at-risk as defined by the EBA was implemented by Deutsche Bank and is now used to calculate value-at risk for both the regular trading books and CVA.

The calculation of regulatory market risk capital requirements is generally based on an internal value-at-risk model, which was approved by the BaFin in October 1998 for our market risk exposures. In December 2011, we received model approvals from BaFin for the stressed value-at-risk, incremental risk charge and comprehensive risk measure. Our regulatory capital calculation for the specific interest rate risk of trading book securitizations and nth-to-default credit derivatives is based on the market risk standardized approach. Further market risk positions covered under the standardized approach include for example exposures in relation to Postbank, longevity risk and certain types of investment funds. More details on the aforementioned internal models are provided in the Section “Trading Market Risk”.

In December 2007, we obtained approval to apply the advanced measurement approach (AMA) to determine our regulatory operational risk capital requirements. On May 15, 2013 BaFin approved the integration of Postbank into our regulatory capital calculation, which has been reflected since second quarter of 2013.