SEC Form 20-F - Deutsche Bank Annual Report 2012

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Deutsche Bank Item 3: Key Information 10 Annual Report 2010 on Form 20-F Our nontraditional credit businesses materially add to our traditional banking credit risks. As a bank and provider of financial services, we are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. Many of the businesses we engage in beyond the traditional banking businesses of deposit-taking and lending also expose us to credit risk. In particular, many of the businesses we have engaged in through our Corporate Banking & Securities Corporate Division entail credit transactions, frequently ancillary to other transactions. Nontraditional sources of credit risk can arise, for example, from holding securities of third parties; entering into swap or other derivative contracts under which counterparties have obligations to make payments to us; executing securities, futures, currency or commodity trades that fail to settle at the required time due to nondelivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries; and extending credit through other arrangements. Parties to these transactions, such as trading counterparties, may default on their obligations to us due to bankruptcy, political and economic events, lack of liquidity, operational failure or other reasons. Many of our derivative transactions are individually negotiated and non-standardized, which can make exiting, transferring or settling the position difficult. Certain credit derivatives require that we deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold, and may not be able to obtain, the underlying security, loan or other obligation. This could cause us to forfeit the payments otherwise due to us or result in settlement delays, which could damage our reputation and ability to transact future business, as well as increased costs to us. The exceptionally difficult market conditions experienced during the recent financial crisis have severely adversely affected certain areas in which we do business that entail nontraditional credit risks, including the leveraged finance and structured credit markets, and may do so in the future. We have been subject to contractual claims and litigation in respect of our U.S. residential mortgage loan business that may materially and adversely affect our results. From 2005 through 2008, as part of our U.S. residential mortgage loan business, we sold approximately U.S.$ 85 billion of loans into private label securitizations and U.S.$ 71 billion through whole loan sales, including to U.S. government-sponsored entities such as the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. We have been, and in the future may be, presented with demands to repurchase loans or indemnify purchasers, other investors or financial insurers with respect to losses allegedly caused by material breaches of representations and warranties. Our general practice is to process valid repurchase claims that are presented in compliance with contractual rights. Where we believe no such valid basis for repurchase claims exists, we reject them and no longer consider them outstanding for our tracking purposes. We will continue to contest invalid claims vigorously as necessary and appropriate. As of December 31, 2010, we have approximately U.S.$ 588 million of outstanding mortgage repurchase demands (based on original principal balance of the loans). Against these claims, we have established reserves that are not material and that we believe to be adequate. As with reserves generally, however, it is possible that the reserves we have established may ultimately be insufficient, either with respect to particular claims or with respect to the full set of claims that have been or may be presented. As of December 31, 2010, we have completed repurchases and otherwise settled claims on loans with an original principal balance of approximately U.S.$ 1.8 billion. In connection with those repurchases and settlements, we have obtained releases for potential claims on approximately U.S.$ 21.9 billion of loans sold by us as described above. From 2005 through 2008, we or our affiliates have also acted as an underwriter of approximately U.S.$ 105 billion of U.S. residential mortgage-backed securities (“RMBS”) for third-party originators.
Deutsche Bank Item 3: Key Information 11 Annual Report 2010 on Form 20-F As is the case with a significant number of other participants in the mortgage securitizations market and as described in Note 28 “Provisions” to our consolidated financial statements, we have received subpoenas and requests for information from certain regulators and government entities concerning our RMBS businesses. We are cooperating fully in response to those subpoenas and requests for information. Also as described therein, we have a number of pending lawsuits against us or our affiliates as issuer and/or underwriter of RMBS. Such RMBS litigations pending are in early stages and we continue to defend these actions vigorously. As described further below, legal and regulatory proceedings are subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. We have a continuous demand for liquidity to fund our business activities. We may suffer during periods of market-wide or firm-specific liquidity constraints and are exposed to the risk that liquidity is not made available to us even if our underlying business remains strong. We are exposed to liquidity risk, which is the risk arising from our potential inability to meet all payment obligations when they become due or only being able to meet them at excessive costs. Our liquidity may become impaired due to a reluctance of our counterparties or the market to finance our operations due to actual or perceived weaknesses in our businesses. Such impairments can also arise from circumstances unrelated to our businesses and outside our control, such as, but not limited to, disruptions in the financial markets, like those experienced during 2008 and early 2009, negative developments concerning other financial institutions perceived to be comparable to us, or negative views about the financial services industry in general, or disruptions in the markets for any specific class of assets. Negative perceptions concerning our business and prospects could develop as a result of large losses, changes of our credit ratings, a general decline in the level of business activity in the financial services sector, regulatory action, serious employee misconduct or illegal activity, as well as many other reasons. Since the start of the financial crisis the major credit rating agencies have lowered our credit ratings or placed them on review or watch. Ratings downgrades may impact the cost and availability of our funding, collateral requirements and the willingness of counterparties to do business with us. We require capital to support our business activities and meet regulatory requirements. Losses could diminish our capital, and market conditions may prevent us from raising additional capital or increase our cost of capital. In the wake of the financial crisis in 2008 and early 2009, the price of our shares declined and the spreads on our credit default swaps widened. If the levels of market disruption and volatility experienced in 2008 and early 2009 recur, our ability to access the capital markets and obtain the necessary funding to support our business activities on acceptable terms may be adversely affected. Among other things, an inability to refinance assets on our balance sheet or maintain appropriate levels of capital to protect against deteriorations in their value could force us to liquidate assets we hold at depressed prices or on unfavorable terms, as well as forcing us to curtail business, such as extending new credit. This could have an adverse effect on our business, financial condition and results of operations. Also, regulatory reforms applicable to the financial services industry have been proposed that could subject us to more stringent regulatory capital requirements. Meeting any such requirements may require us to issue securities that qualify as regulatory capital, including equity securities, or to liquidate assets or curtail business, which may have adverse effects on our business, financial condition and results of operations, particularly if any such proposal becomes effective at a time when financial markets are distressed, but also under normal market conditions.
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Deutsche Bank Additional Notes F-13
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2011 April 28, 2011 Interim Report
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SEC Form 20-F - Deutsche Bank Annual Report 2012

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