Funding Strategy

Liquidity Risk Management

Liquidity risk arises from our potential inability to meet payment obligations when they come due or only being able to meet these obligations at excessive costs. The objective of the Group’s liquidity risk management framework is to ensure that the Group can fulfill its payment obligations at all times and can manage liquidity and funding risks within its risk appetite. The framework considers relevant and significant drivers of liquidity risk, whether on-balance sheet or off-balance sheet.

 

Liquidity Risk Management framework

In accordance with the ECB’s SREP, Deutsche Bank has implemented an Internal Liquidity Adequacy Assessment Process (ILAAP), which is reviewed at least annually and approved by the Management Board. The ILAAP provides comprehensive documentation and assessment of the Bank’s Liquidity Risk Management framework, including: identifying the key liquidity and funding risks to which the Group is exposed; describing how these risks are identified, monitored and measured and describing the techniques and resources used to manage and mitigate these risks.

The Management Board defines the liquidity and funding risk strategy for the Bank as well as the risk appetite, based on recommendations made by the Group Risk Committee (GRC). The Management Board reviews and approves the risk appetite at least annually. The risk appetite is applied to the Group to monitor and control liquidity risk as well as our long-term funding and issuance plan.

Treasury is mandated to manage the overall liquidity and funding position of the Bank, with Liquidity Risk Management (LRM) acting as an independent control function. LRM is responsible for reviewing the liquidity risk framework, proposing the risk appetite, limits and stress test scenarios to GRC and the validation of Liquidity Risk models which are developed by Treasury, to measure and manage the Group’s liquidity risk profile.

Deutsche Banks has a dedicated Stress Testing and Risk Appetite Framework set by LRM, which ensures the Bank’s liquidity position is balanced throughout the Group and across currencies. Treasury manages liquidity and funding, in accordance with the Management Board-approved risk appetite across a range of relevant metrics, and implements a number of tools including business level risk appetites, to ensure compliance. As such, Treasury works closely with LRM and business divisions, to identify, analyze and monitor underlying liquidity risk characteristics within business portfolios. These parties are engaged in regular dialogue regarding changes in the Bank’s position arising from business activities and market circumstances.

The Management Board is informed about the performance against the key liquidity metrics for both internal and market indicators for which limits and thresholds are approved by either GRC or Management Board, via a weekly Liquidity Dashboard. Liquidity & Treasury Reporting & Analysis (LTRA) has overall accountability for the accurate and timely delivery of both external regulatory liquidity reporting and the internal management reporting of liquidity risk for DB Group. In addition LTRA ensure the development of management information systems (MIS) and analysis to support the liquidity risk framework and its governance for both Treasury and LRM.

Treasury, LRM and LTRA maintain a Liquidity policy landscape which articulates the overarching guiding principles for the robust and rigorous management of the Bank’s liquidity. The landscape outlines approaches to liquidity risk management and practices and is reviewed on an annual basis.

As part of the annual strategic planning process, Treasury project the development of the key liquidity and funding metrics including the USD currency exposure based on anticipated business consumption to ensure that the plan is in compliance with our risk appetite.

Deutsche Bank has a wide range of funding sources, including retail and institutional deposits, unsecured and secured wholesale funding and debt issuance in the capital markets. Group ALCo is the Bank’s decisive Governance body that has been mandated by Management Board to optimize the sourcing and deployment of the Bank’s balance sheet and financial resources in line with the Management Board risk appetite and strategy. As such, it has the overarching responsibilities to define, approve and optimize the Bank`s funding strategy.

Short-term Liquidity and wholesale Funding

Deutsche Bank tracks all contractual cash flows from wholesale funding sources, on a daily basis, over a 12-month horizon. For this purpose, we consider wholesale funding to include unsecured liabilities largely raised by Treasury Markets Pool, as well as secured liabilities primarily raised by our Investment Bank Division. Our wholesale funding counterparties typically include corporates, banks and other financial institutions, governments and sovereigns.

The Group has implemented a set of limits to restrict the Bank’s exposure to wholesale counterparties, which have historically shown to be the most susceptible to market stress. The wholesale funding limits are monitored daily, and apply to the total combined currency amount of all wholesale funding currently outstanding, both secured and unsecured with specific tenor limits. Our Liquidity Reserves are the primary mitigants against potential stress in the short-term.

Liquidity stress testing and scenario analysis

Global internal liquidity stress testing and scenario analysis is used for measuring liquidity risk and evaluating the Group’s short-term liquidity position within the liquidity framework. This complements the daily operational cash management process. The long-term liquidity strategy based on contractual and behavioral modelled cash flow information is represented by a long term funding analysis known as the Funding Matrix (refer to Funding Risk Management below).

Our global liquidity stress testing process is managed by Treasury in accordance with the Management Board approved risk appetite. Treasury is responsible for the design of the overall methodology, the choice of liquidity risk drivers and the determination of appropriate assumptions (parameters) to translate input data into stress testing output. LRM is responsible for the definition of the stress scenarios and the independent validation of liquidity risk models. LTRA is responsible for implementing these methodologies and performing the stress test calculation in conjunction with Treasury, LRM and IT.

We use stress testing and scenario analysis to evaluate the impact of sudden and severe stress events on our liquidity position. Deutsche Bank has selected four scenarios to calculate the Group’s stressed Net Liquidity Position (“sNLP”). These scenarios capture the historical experience of Deutsche Bank during periods of idiosyncratic and/or market-wide stress and are assumed to be both plausible and sufficiently severe as to materially impact the Group’s liquidity position. The most severe scenario assesses the potential consequences of a combined market-wide and idiosyncratic stress event, including downgrades of our credit rating. Under each of the scenarios we consider the impact of a liquidity stress event over different time horizons and across multiple liquidity risk drivers, covering all of our business, product areas and balance sheet. The output from scenario analysis feeds the Group Wide Stress Test, which considers the impact of scenarios on all risk stripes.

In addition, we include the potential funding requirements from contingent liquidity risks which might arise, including drawdowns on credit facilities, increased collateral requirements under derivative agreements, and outflows from deposits with a contractual rating linked trigger. We then take into consideration Countermeasures which are the actions we would take to counterbalance the outflows incurred. Countermeasures include utilizing the Liquidity Reserve and generating liquidity from unencumbered, marketable assets.

Stress testing is conducted at a global level and for defined material legal entities covering an eight-week stress horizon. In addition to the consolidated currency stress test, stress tests for material currencies (EUR, USD and GBP) are performed. We also perform stress testing out to 12 months in the U.S. Ad-hoc analysis may be conducted to reflect the impact of potential downside events that could affect the Bank’s liquidity for instance the COVID-19 pandemic and Brexit. Our suite of stress testing scenarios and assumptions are reviewed on a regular basis and are updated when enhancements are made to stress testing methodologies.

On a daily basis the liquidity stress test is calculated over a 12 month period however the initial eight-weeks, is considered the most critical time span during a liquidity crisis. Relevant stress assumptions are applied to reflect liquidity flows from risk drivers and on-balance sheet and off-balance sheet products.

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