Liquidity and Funding 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 Group’s risk taxonomy differentiates between two aspects of liquidity risk: Short-term liquidity risk and Structural funding risk, both embedded in one liquidity risk management framework. Its objective is to ensure that all necessary governance and controls are established within the Group to fulfil its payment obligations at all times (including intraday) and to manage its liquidity and funding risks within the Management Board approved risk appetite, when executing the strategic plan. The framework considers relevant and significant drivers of liquidity risk, whether on-balance sheet or off-balance sheet.

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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 defining the liquidity risk management framework providing independent risk oversight, challenge, and validation of activities conducted by the first line of defence, including establishing the risk appetite.
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 risk appetite across a range of relevant metrics, and implements several tools including business level risk appetites, to ensure compliance. As such, Treasury works closely with LRM under its delegated authority 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 Group’s performance against the key liquidity metrics including the risk appetite and internal and market indicators via a weekly Liquidity Dashboard. Finance - Liquidity & Treasury Reporting & Analysis (LTRA) and Finance - Global Reporting – LTRA together have overall accountability for the accurate and timely production of both external regulatory liquidity reporting (Pillar 1) as well as internal management reporting (Pillar 2) for liquidity risk of the Group. In addition, Liquidity & Treasury Reporting & Analysis is responsible for the development of management information systems and the related analysis to support the liquidity risk framework and its governance for Treasury and Liquidity Risk Management.

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 approach to liquidity risk management and practices and is reviewed on an annual basis.

As part of the annual strategic planning process, Treasury projects the development of the key liquidity and funding metrics including the USD currency exposure based on anticipated business consumption to ensure that the strategic plan can be executed in accordance with the Group’s risk appetite.
The Group relies on a vast range of funding sources such as e.g., deposits, unsecured wholesale funding, Capital Markets Issuances and secured funding. 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.

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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.

The global liquidity stress testing process is managed by Treasury a respective 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. Under the principles and policy requirements laid out by Model Risk Management, Liquidity Risk Management and Model Risk Management perform the independent validation of liquidity risk models and non-model estimates. Finance -Liquidity & Treasury Reporting & Analysis and Finance - Global Reporting are responsible for implementing these methodologies and performing the stress test calculation in conjunction with Treasury, Liquidity Risk Management, Group Strategic Analytics and IT.

Stress testing and scenario analysis are used to evaluate the impact of sudden and severe stress events on the Group’s liquidity position. Deutsche Bank has selected four scenarios to calculate the Group’s stressed Net Liquidity Position (“sNLP”). These scenarios are designed to capture potential outcomes which may be experienced by the Group. The most severe scenario assesses the potential consequences of a combined market-wide and idiosyncratic stress event, including downgrades of our Deutsche Bank credit rating. Under each of the scenarios, the impact of a liquidity stress event over different time horizons and across multiple liquidity risk drivers, covering all business lines and product areas and with that all portfolios and balance sheet, is considered. The output from this scenario analysis feeds the Group Wide Stress Test, which considers the impact of scenarios across all risk stripes.

In addition, the potential funding requirements from contingent liquidity risks which might arise, including drawdowns on lending facilities, increased collateral requirements under derivative agreements, and outflows from deposits with a contractual rating linked trigger are include in the analysis. Subsequently, countermeasures which are the actions the Group would take to counterbalance the outflows incurred during a stress event, are taken into consideration. Those countermeasures include the usage of the Group’s liquidity reserve and generating liquidity from other unencumbered, marketable assets without causing any material impact on the Group’s business model.

Stress testing is conducted at a global level and for defined entities relevant for liquidity risk management covering an eight-week stress horizon. In addition to the consolidated currency stress test, stress tests are performed for material currencies. On a global level and in the U.S. liquidity stress tests a twelve-months period is covered. Additionally, stress test results are monitored over a twelve-month period with specific risk limits, if required by local regulators. Ad-hoc analysis may be conducted to reflect the impact of potential downside events that could affect the Group such as climate / ESG-related events. The suite of stress testing scenarios and assumptions are reviewed on a regular basis and are updated when enhancements are made to stress testing methodologies.

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Deutsche Bank’s funding risk framework covers structural funding risks and the established governance is integrated into the overall liquidity risk management governance.

In line with regulatory guidelines, Deutsche Bank has developed a set of internal indicators to measure its inherent funding risks. These are considered for risk management and steering purposes in addition to Pillar 1 requirements. Deutsche Bank’s tool for monitoring and managing the Group’s funding profile for the greater than one year time horizon is the Funding Matrix. To produce the Funding Matrix, all funding-relevant assets and liabilities are mapped into time buckets corresponding to their contractual or modeled maturities. This allows the Group to identify expected excesses and shortfalls in term liabilities over assets in each time bucket, facilitating the management of potential liquidity exposures.

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Diversification of our funding profile in terms of investor types, regions and products is an important element of our liquidity risk management framework. Our most stable funding sources stem from capital markets issuances and equity, as well as from Private Bank and Corporate Bank deposits. Other customer deposits, unsecured Wholesale funding, secured funding and short positions are additional sources of funding. Unsecured Wholesale funding comprises a range of institutional products, such as Certificate of Deposits, Commercial Papers as well as Money Market deposits sourced primarily by Group Treasury. Given the relatively short-term nature of these liabilities, they are predominantly used to fund liquid trading assets.

To promote the additional diversification of our refinancing activities, we hold a license to issue mortgage Pfandbriefe. We continue to run a program for the purpose of issuing Covered Bonds under Spanish law (Cedulas) and participate in the TLTRO III program. In addition, Deutsche Bank is issuing Green Bonds and Structured Notes as well as sourcing Green Deposits under its Sustainable Finance Framework which was introduced in June 2020. Various teams work on expanding the Framework via increasing its Green footprint on the asset and the liability side as well as the introduction of Social financing instruments.