entire - Deutsche Bank Annual Report 2012

Deutsche Bank 01 – Management Report 58
Financial Report 2010 Risk Report
To the extent that actual experience is less favorable than the underlying assumptions, or it is necessary to
increase provisions due to more onerous assumptions, the amount of capital required in the insurance entities
may increase.
Concentration Risk
Risk Concentrations are not an isolated risk type but are broadly integrated in the management of credit, market,
operational and liquidity risks. Risk concentrations refer to a bank’s loss potential through unbalanced distribution
of dependencies on specific risk drivers. Risk concentrations are encountered within and across counterparties,
regions/countries, industries and products, impacting the aforementioned risks. Risk concentrations are actively
managed, for instance by entering into offsetting or risk-reducing transactions. Management of risk concentration
across risk types involves expert panels, qualitative assessments, quantitative instruments (such as economic
capital and stress testing) and comprehensive reporting.
Risk Management Tools
We use a comprehensive range of quantitative tools and metrics for monitoring and managing risks. As a matter
of policy, we continually assess the appropriateness and the reliability of our quantitative tools and metrics in
light of our changing risk environment. Some of these tools are common to a number of risk categories, while
others are tailored to the particular features of specific risk categories. The following are the most important
quantitative tools and metrics we currently use to measure, manage and report our risk:
— Economic capital. Economic capital measures the amount of capital we need to absorb very severe unexpected
losses arising from our exposures. “Very severe” in this context means that economic capital is set at
a level to cover with a probability of 99.98 % the aggregated unexpected losses within one year. We calculate
economic capital for the default risk, transfer risk and settlement risk elements of credit risk, for market risk
including traded default risk, for operational risk and for general business risk. We continuously review and
enhance our economic capital model as appropriate. Notably during the course of 2009 and 2010 we revised
the correlation model underlying our credit risk portfolio model to align it more closely with observable default
correlations. In addition, the model is now capable of deriving our loss potential for multiple time steps, which
is expected to enable it to also determine the regulatory Incremental Risk Charge going forward. Within our
economic capital framework we capture the effects of rating migration as well as profits and losses due to
fair value accounting. We use economic capital to show an aggregated view of our risk position from individual
business lines up to our consolidated Group level. We also use economic capital (as well as goodwill and
unamortized other intangible assets) in order to allocate our book capital among our businesses. This enables
us to assess each business unit’s risk-adjusted profitability, which is a key metric in managing our financial
resources. In addition, we consider economic capital, in particular for credit risk, when we measure the riskadjusted
profitability of our client relationships. For consolidation purposes Postbank economic capital has
been calculated on a basis consistent with Deutsche Bank methodology, however, limitations in data availability
may lead to portfolio effects that are not fully estimated and thereby resulting in over or under estimation.
See “Overall Risk Position” below for a quantitative summary of our economic capital usage.