Deutsche Bank

Annual Report 2017

Drivers for Operational Risk Capital Development

In 2017, our Operational Risk losses have been predominantly driven by losses and provisions arising from civil litigation and regulatory enforcement. Such losses account for 70 % of Operational Risk losses and account for the majority of Operational Risk regulatory and economic capital demand. For a description of our current legal and regulatory proceedings, please see section “Current Individual Proceedings” in Note 29 “Provisions” to our consolidated financial statements. The Operational Risk losses from civil litigation and regulatory enforcement decreased by € 2.5 billion or 85 % while our non-legal Operational Risk losses were € 29 million or 19 % higher compared to 2016.

In view of the relevance of legal risks within our Operational Risk profile, we dedicate specific attention to the management and measurement of our open civil litigation and regulatory enforcement matters where the Bank relies both on information from internal as well as external data sources to consider developments in legal matters that affect the Bank specifically but also the banking industry as a whole. Reflecting the multi-year nature of legal proceedings the measurement of these risks furthermore takes into account changing levels of certainty by capturing the risks at various stages throughout the lifecycle of a legal matter.

Conceptually, the Bank measures Operational Risk including legal risk by determining the maximum loss that will not be exceeded with a given probability. This maximum loss amount includes a component that due to the IFRS criteria is reflected in our financial statements and a component that is expressed as regulatory or economic capital demand that is above the amount reflected as provisions within our financial statements.

The legal losses which the Bank expects with a likelihood of more than 50 % are already reflected in our IFRS group financial statements. These losses include net changes in provisions for existing and new cases in a specific period where the loss is deemed probable and is reliably measurable in accordance with IAS 37. The development of our legal provisions for civil litigations and regulatory enforcement is outlined in detail in Note 29 “Provisions” to our consolidated financial statements.

Uncertain legal losses which are not reflected in our financial statements as provisions because they do not meet the recognition criteria under IAS 37 are expressed as “regulatory or economic capital demand” reflecting our risk exposure that consumes regulatory and economic capital.

To quantify the litigation losses in the AMA model the Bank takes into account historic losses, provisions, contingent liabilities and legal forecasts. Legal forecasts are generally comprised of ranges of potential losses from legal matters that are not deemed probable but are reasonably possible. Reasonably possible losses may result from ongoing and new legal matters which are reviewed at least quarterly by the attorneys handling the legal matters.

We include the legal forecasts in the “Relevant Loss Data” used in our AMA model. Hereby the projection range of the legal forecasts is not restricted to the one year capital time horizon but goes beyond and conservatively assumes early settlement of the underlying losses in the reporting period - thus considering the multi-year nature of legal matters.