15 – Fair Value of Financial Instruments not carried at Fair Value

The valuation techniques used to establish fair value for the Group’s financial instruments which are not carried at fair value in the balance sheet and their respective IFRS fair value hierarchy categorization are consistent with those outlined in Note 14 “Financial Instruments carried at Fair Value”.

As described in Note 13 “Amendments to IAS 39 and IFRS 7, ‘Reclassification of Financial Assets’”, the Group reclassified certain eligible assets from the trading and available for sale classifications to loans. The Group continues to apply the relevant valuation techniques set out in Note 14 “Financial Instruments carried at Fair Value”, to the reclassified assets.

Other financial instruments not carried at fair value are not managed on a fair value basis, for example, retail loans and deposits and credit facilities extended to corporate clients. For these instruments fair values are calculated for disclosure purposes only and do not impact the balance sheet or income statement. Additionally, since the instruments generally do not trade there is significant management judgment required to determine these fair values.

Short-term financial instruments – The carrying value represents a reasonable estimate of fair value for the following financial instruments which are predominantly short-term:

Assets

Liabilities

Cash and due from banks

Deposits

Interest-earning deposits with banks

Central bank funds purchased and securities sold under repurchase agreements

Central bank funds sold and securities purchased under resale agreements

Securities loaned

Securities borrowed

Other short-term borrowings

Other assets

Other liabilities

For longer-term financial instruments within these categories, fair value is determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and credit risks and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued, at the balance sheet date.

Loans – Fair value is determined using discounted cash flow models that incorporate parameter inputs for credit risk, interest rate risk, foreign exchange risk, loss given default estimates and amounts utilized given default, as appropriate. Credit risk, loss given default and utilization given default parameters are determined using information from the loan agreement or credit default swap markets, where available and appropriate.

For retail lending portfolios with a large number of homogenous loans (i.e., German residential mortgages), the fair value is calculated on a portfolio basis by discounting the portfolio’s contractual cash flows using risk-free interest rates. This present value calculation is then adjusted for credit risk by discounting at the margins which could be earned on similar loans if issued at the balance sheet date. For other portfolios the present value calculation is adjusted for credit risk by calculating the expected loss over the estimated life of the loan based on various parameters including probability of default and loss given default and level of collateralization. The fair value of corporate lending portfolios is estimated by discounting a projected margin over expected maturities using parameters derived from the current market values of collateralized loan obligation (“CLO”) transactions collateralized with loan portfolios that are similar to the Group’s corporate lending portfolio.

Securities purchased under resale agreements, securities borrowed, securities sold under repurchase agreements and securities loaned – Fair value is derived from valuation techniques by discounting future cash flows using the appropriate credit risk-adjusted discount rate. The credit risk-adjusted discount rate includes consideration of the collateral received or pledged in the transaction. These products are typically short-term and highly collateralized, therefore the fair value is not significantly different to the carrying value.

Long-term debt and trust preferred securities – Fair value is determined from quoted market prices, where available. Where quoted market prices are not available, fair value is estimated using a valuation technique that discounts the remaining contractual cash at a rate at which an instrument with similar characteristics could be issued at the balance sheet date.

Estimated fair value of financial instruments not carried at fair value on the balance sheet1

 

Dec 31, 2014

in € m.

Carrying value

Fair value

Quoted prices in active market (Level 1)

Valuation technique observable parameters (Level 2)

Valuation technique unobservable parameters (Level 3)

Financial assets:

 

 

 

 

 

Cash and due from banks

20,055

20,055

20,055

0

0

Interest-earning deposits with banks

63,518

63,518

30,334

33,184

0

Central bank funds sold and securities purchased under resale agreements

17,796

17,796

0

17,796

0

Securities borrowed

25,834

25,834

0

25,834

0

Loans

405,612

410,769

0

29,786

380,983

Other financial assets

120,838

120,827

0

120,820

7

Financial liabilities:

 

 

 

 

 

Deposits

532,931

532,581

2,754

529,826

0

Central bank funds purchased and securities sold under repurchase agreements

10,887

10,887

0

10,887

0

Securities loaned

2,339

2,339

0

2,339

0

Other short-term borrowings

42,931

42,929

0

42,825

105

Other financial liabilities

159,930

159,930

2,575

157,300

55

Long-term debt

144,837

146,215

0

135,016

11,199

Trust preferred securities

10,573

12,251

0

11,075

1,176

 

Dec 31, 2013

in € m.

Carrying value

Fair value

Quoted prices in active market (Level 1)

Valuation technique observable parameters (Level 2)

Valuation technique unobservable parameters (Level 3)

1

Amounts generally presented on a gross basis, in line with the Group’s accounting policy regarding offsetting of financial instruments as described in Note 1 “Significant Accounting Policies and Critical Accounting Estimates”.

2

In 2014 the prior year numbers were restated (increase of € 3.0 billion to level 1 other financial liabilities, decrease of € 3.0 billion to level 2 other financial liabilities).

Financial assets:

 

 

 

 

 

Cash and due from banks

17,155

17,155

17,155

0

0

Interest-earning deposits with banks

77,984

77,985

2,413

75,571

0

Central bank funds sold and securities purchased under resale agreements

27,363

27,363

0

27,363

0

Securities borrowed

20,870

20,870

0

20,870

0

Loans

376,582

378,085

0

27,171

350,913

Other financial assets

92,507

92,532

0

90,379

2,153

Financial liabilities:

 

 

 

 

 

Deposits

527,750

527,609

3,888

523,721

0

Central bank funds purchased and securities sold under repurchase agreements

13,381

13,385

0

13,385

0

Securities loaned

2,304

2,304

0

2,171

134

Other short-term borrowings

59,767

59,763

0

59,717

45

Other financial liabilities2

142,649

142,666

3,031

139,627

8

Long-term debt

133,082

134,359

0

105,954

28,406

Trust preferred securities

11,926

12,915

0

11,828

1,087

Loans – The difference between fair value and carrying value arose predominantly due to an increase in expected default rates and reduction in liquidity as implied from market pricing since initial recognition. These reductions in fair value are offset by an increase in fair value due to interest rate movements on fixed rate instruments.

Long-term debt and trust preferred securities – The difference between fair value and carrying value is due to the effect of changes in the rates at which the Group could issue debt with similar maturity and subordination at the balance sheet date compared to when the instrument was issued.