Operational Risk

In the first three months of 2015 our operational risk losses continued to be driven by legal operational risk losses including legal provisions. For a description of our current legal and regulatory proceedings, please see Section “Other Contingencies” of this Interim Report. Our non-legal operational risk losses continued to be lower than for the first three months of 2014. The outlook for the rest of year remains cautious, due to the legal and regulatory environment that we believe will continue to affect our business. Our operational risk management fosters a forward looking risk management with regard to monitoring of potential profits and losses, focusing on trend analyses based upon available losses and key risk indicator data.

Economic Capital Usage for Operational Risk by Business Division

 

 

 

2015 increase (decrease) from 2014

in € m.
(unless stated otherwise)

Mar 31, 2015

Dec 31, 2014

in € m.

in %

Corporate Banking & Securities

5,746

3,569

2,177

61

Private & Business Clients

543

1,088

(545)

(50)

Global Transaction Banking

604

150

454

303

Deutsche Asset & Wealth Management

1,173

722

451

62

Non-Core Operations Unit

399

2,070

(1,671)

(81)

Total economic capital usage for operational risk

8,464

7,598

866

11

The economic capital usage for operational risk as of March 31, 2015 was € 8.5 billion, € 0.9 billion or 11 % higher compared to year-end 2014. This is mainly driven by external data, primarily US related settlements, used in our capital model and reflects an increased operational risk loss profile in the industry. Besides the overall increase of the economic capital, the quarter over quarter changes for the business divisions are due to a change in the allocation methodology. In particular the capital allocation methodology used for the Non-Core Operations Unit (NCOU) was adjusted to be based on assets. The new allocation replaces the more complex but less precise former allocation and as we believe better reflects the decreasing residual risk in a wind-down business.

Operational Risk Framework Development

The AMA (advanced measurement approach) model is subject to continuous validation and enhancement, as we attempt to adequately reflect our risk profile. As part of the continuous enhancement and validation of our model we submitted model changes to BaFin and are awaiting approval from the joint supervisory team (BaFin and ECB). These model changes include an improved validation and recalibration methodology for insurance parameters, changes to the modeling of the loss frequency as well as an enhanced scoring mechanism for the self assessment results in our AMA model.

Further, we have submitted an additional model change request to BaFin to replace the € 1 billion economic capital safety margin, which we have continuously applied since its implementation in 2011. This model change, which adds increased forward looking aspects to the AMA model, will result in higher economic capital even after we remove the safety margin. This change will make our model more risk sensitive by including reasonably possible litigation losses in our “Relevant Loss Data” set. Reasonably possible litigation losses may result from ongoing and new legal matters which are reviewed quarterly and are based on the judgment provided by our Legal Department.

While our dialogue with the joint supervisory team on these model enhancements is on-going, management has decided to recognize the impact of these model changes in the second quarter 2014 wherever they will lead to an increase in the capital requirement over the models that have previously been approved by BaFin.

In the first quarter 2015 the joint supervisory team allowed us to use an enhanced divisional capital allocation methodology featuring division specific severity distributions for the Core Divisions and improved allocation to the Non-Core Operations Unit. We believe the major benefits from using this methodology are an improved focus on divisional standalone risk profiles and a significant reduction of cross-divisional effects. In addition, we have transitioned from using a complex allocation not fully reflecting the winding down of the NCOU business to a new NCOU allocation based on assets. Moreover the allocation of the € 1 billion economic capital safety margin moving RWA from Core to non-Core is no longer considered appropriate and has been removed. The changes have already been implemented and are reflected in the results of the first quarter 2015.