Liquidity Stress Testing Scenario modelling in a globally operating bank APRA Liquidity Risk Management Conference Sydney, 3-4 May 2007 Andrew Martin Head of Funding & Liquidity Risk Management, Asia/Pacific Treasury & Capital Management [email protected]+65 6423 6887
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Liquidity Stress Testing
Scenario modelling in a globally operating bank
APRA Liquidity Risk Management Conference Sydney, 3-4 May 2007
Andrew MartinHead of Funding & Liquidity Risk Management, Asia/PacificTreasury & Capital [email protected] +65 6423 6887
Rating agencies place increasing emphasis on comprehensive liquidity risk management
For the measurement of banks’ liquidity risk, Moody’s does not rely solely on any numeric indicator and insists on stress-tests demonstrating the capacity of the bank to continue operating over a one year horizon under very difficult market conditions. Moody’s Methodology for Risk Management Assessments of Diversified Global Banking Groups, March 2005
“… the solid liquidity profile and management capabilities are a key determinant of, as much as a crucial prerequisite for, Deutsche Bank’s credit quality. We expect the group to retain a prudent approach to its liquidity and funding.”
Main Objective: Quantify potential liquidity gaps in specified stress scenarios and identify means of closing those gaps
Liquidity Gaps are created by:– Loss of Funding Capacity (e.g. reduction in deposits, CP and CD rollover)– Demand for Liquidity (e.g. funding contingent liabilities)
These Gaps are closed by:– Secured funding or liquidation of unencumbered assets – Reduction of external placements
Analysis of Stress Testing ResultsIf liquidity gap cannot be closed, action must be taken:– Raise term-funding or tap alternative funding sources– Change business structure: e.g. reduce exposure to contingent liabilities
Scenarios were defined top-down in co-operation with other risk areas and the Bank’s business divisionsSeveral represent real events that have occurred in the market e.g. 1 notch downgrade and emerging markets crisis Not one size fits all!
Phase one:Global stress testing using globally applied stress assumptions– Monthly analysis on the entire balance sheet of the Bank
Phase two:Local assumptions developed and applied to:– Monthly global stress tests– Local stress tests, using global or ad hoc local scenarios– Frequency of local stress tests: in some cases bilaterally agreed with regulators, in
others performed as required e.g. when prospective or real changes in local environment demands it
– Local assumptions incorporated into quarterly local limit setting process
Underlying assumptionsChanges have been made over time as we’ve learned from experience
Step one - Based on expected cash flow profile of each LRD and the respective scenario assumptions it is determined how fast the liquidity gap opens over time:
Roll-over ratio of maturing wholesale fundingImpact on the stability of modelled liabilitiesAdditional liquidity requirement from contingent liabilitiesRoll-over assumption on assets (i.e. no change of business model)
Step two - Assess counterbalancing capacity from LRD which provide inflows under the respective scenario
Determine liquidity value of trading assetsQuantify inflows from loans which are not rolled under stress (e.g. O/N inter-bank)
Definition of contingency levels: – no check-list approach, but assessment based on combination of factors
– DB specific or market-wide (currency fluctuations, investment outflow)
Contingency plans incorporate:– different scenarios– liquidity management tools– sources of contingent assets and liabilities– measures to increase liquidity of assets and stability of liabilities
Clear assignment of responsibilities and authorities is required
Cautionary statement regarding forward-looking statements and non-U.S. GAAP financial measuresThis presentation contains forward-looking statements. Forward-looking statements are statements that are not historical facts; they include statements about our beliefs and expectations. Any statement in this presentation that states our intentions, beliefs, expectations or predictions (and the assumptions underlying them) is a forward-looking statement. These statements are based on plans, estimates and projections as they are currently available to the management of Deutsche Bank. Forward-looking statements therefore speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.
By their very nature, forward-looking statements involve risks and uncertainties. A number of important factors could therefore cause actual results to differ materially from those contained in any forward-looking statement. Such factors include the conditions in the financial markets in Germany, in Europe, in the United States and elsewhere from which we derive a substantial portion of our trading revenues, potential defaults of borrowers or trading counterparties, the implementation of our management agenda, the reliability of our risk management policies, procedures and methods, and other risks referenced in our filings with the U.S. Securities and Exchange Commission. Such factors are described in detail in our SEC Form 20-F of 27 March 2007 under the heading "Risk Factors." Copies of this document are available upon request or can be downloaded from www.deutsche-bank.com/ir.
This presentation contains non-U.S. GAAP financial measures. For a reconciliation to directly comparable figures reported under U.S. GAAP refer to the 4Q2006 Financial Data Supplement, which is accompanying this presentation and available on our Investor Relations website at www.deutsche-bank.com/ir.