Risk Inventory

We face a variety of risks as a result of our business activities, as

described below. Credit risk, market risk and operational risk attract
regulatory capital. As part of our internal capital adequacy assessment
process, we calculate the amount of economic capital from credit,
market, operational and business risk to cover risks generated from our
business activities taking into account diversification effects across those
risk types. Furthermore, our economic capital framework implicitly covers
additional risks, e.g. reputational risk and refinancing risk, for which no
dedicated economic capital models exist. Liquidity risk is excluded from
the economic capital calculation since it is covered separately. The risk
inventory is updated, regularly at least once a year or at other times if
needed, by running a risk identification and materiality assessment
process in line with MaRisk. In 2014 reputational risk, compliance risk
and model risk were newly assessed as material.

Credit Risk
Credit risk arises from all transactions where actual, contingent or
potential claims against any counterparty, borrower, obligor or issuer
(which we refer to collectively as “counterparties”) exist, including those
claims that we plan to distribute (see below in the more detailed
section Credit Risk). These transactions are typically part of our
traditional nontrading lending activities (such as loans and contingent
liabilities), traded bonds and debt securities available for sale or our
direct trading activity with clients (such as OTC derivatives, foreign
exchange forwards and Forward Rate Agreements). Carrying values of
equity investments are also disclosed in our Credit Risk section. We
manage the respective positions within our market risk and credit risk
frameworks.
We distinguish between three kinds of credit risk:

 Default (Counterparty) risk, the most significant element of credit

risk, is the risk that counterparties fail to meet contractual obligations in
relation to the claims described above;
 Settlement risk is the risk that the settlement or clearance of a
transaction may fail. Settlement risk arises whenever the exchange of cash,
securities and/or other assets is not simultaneous leaving us exposed to a
potential loss should the counterparty default; and
 Country risk is the risk that we may experience unexpected
default or settlement risk and subsequent losses, in a given country, due to
a range of macro-economic or social events primarily affecting
counterparties in that jurisdiction including: a material deterioration of
 economic conditions, political and social upheaval, nationalization and
expropriation of assets, government repudiation of indebtedness, or
disruptive currency depreciation or devaluation. Country risk also includes
transfer risk which arises when debtors are unable to meet their obligations
owing to an inability to transfer assets to non-residents due to direct
sovereign intervention.

Market Risk
Market risk arises from the uncertainty concerning changes in market
prices and rates (including interest rates, equity prices, foreign exchange
rates and commodity prices), the correlations among them and their
levels of volatility. We differentiate between three different types of
market risk:

 Trading market risk arises primarily through the market-making

activities of the Corporate Banking & Securities division (CB&S). This
involves taking positions in debt, equity, foreign exchange, other securities
and commodities as well as in equivalent derivatives.
 Trading default risk arises from defaults and rating migrations
relating to trading instruments.
 Nontrading market risk arises from market movements, primarily
outside the activities of our trading units, in our banking book and from off-
balance sheet items. This includes interest rate risk, credit spread risk,
investment risk and foreign exchange risk as well as market risk arising from
our pension schemes, guaranteed funds and equity compensation.
Nontrading market risk also includes risk from the modeling of client
deposits as well as savings and loan products.

Operational Risk
Operational risk means the risk of loss resulting from inadequate or
failed internal processes, people and systems or from external events,
and includes legal risk. Operational risk excludes business and
reputational risk.

Liquidity Risk
Liquidity risk is the risk arising from our potential inability to meet all
payment obligations when they come due or only being able to meet
these obligations at excessive costs.

Business Risk
Business risk describes the risk we assume due to potential changes in
general business conditions, such as our market environment, client
behavior and technological progress. This can affect our results if we fail
to adjust quickly to these changing conditions. Business risk consists of
 strategic risk, tax risk and refinancing risk, of which only strategic risk is
assessed as material.

Reputational Risk
Within our risk management processes, we define reputational risk as
the risk that publicity concerning a transaction, counterparty or business
practice involving a client will negatively impact the public’s trust in our
organization.

Model Risk
Model risk is the risk of possible adverse consequences of decisions
taken based on models that are inappropriate, incorrect, or misused. In
this context, a model is defined as a quantitative method, system, or
approach that applies statistical, economic, financial, or mathematical
theories, techniques, and assumptions to process input data into
quantitative estimates.

Compliance Risk
Compliance risk (MaRisk, i.e. minimum requirements for risk
management) is defined as the current or prospective risk to earnings
and capital arising from violations or non-compliance with laws, rules,
regulations, agreements, prescribed practices or ethical standards and
can lead to fines, damages and/or the voiding of contracts and can
negatively impact an institution’s reputation.

Insurance Specific Risk

Our exposure to insurance risk relates to Abbey Life Assurance
Company Limited and our defined benefit pension obligations. There is
also some insurance-related risk within the Pensions and Insurance Risk
Markets business. In our risk management framework, we consider
insurance-related risks primarily as nontrading market risk that has been
classified as material risk. We monitor the underlying assumptions in the
calculation of these risks regularly and seek risk mitigating measures
such as reinsurances, if we deem this appropriate. We are primarily
exposed to the following insurance-related risks:

 Longevity risk: the risk of faster or slower than expected

improvements in life expectancy on immediate and deferred annuity
products;
 Mortality and morbidity risks: the risks of a higher or lower than
expected number of death or disability claims on insurance products and of
an occurrence of one or more large claims;
 Expenses risk: the risk that policies cost more or less to
administer than expected; and
 Persistency risk: the risk of a higher or lower than expected
percentage of lapsed policies.
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.

Risk Concentrations
Risk concentrations refer to clusters of the same or similar risk drivers
within specific risk types (intra-risk concentrations in credit, market,
operational, liquidity and other risks) as well as across different risk
types (inter-risk concentrations). They could occur within and across
counterparties, businesses, regions/countries, industries and products.
The management of concentrations is integrated as part of the
management of individual risk types and monitored on an ongoing basis.
The key objective is to avoid any undue concentrations in the portfolio,
which is achieved through a quantitative and qualitative approach, as
follows:

 Intra-risk concentrations are assessed, monitored and mitigated

by the individual risk disciplines (credit, market, operational, liquidity risk
management and others). This is supported by limit setting on different
levels and/or management according to risk type.
 Inter-risk concentrations are managed through quantitative top-
down stress-testing and qualitative bottom-up reviews, identifying and
assessing risk themes independent of any risk type and providing a holistic
view across the bank.
The most senior governance body for the oversight of risk
concentrations throughout 2014 was the Portfolio Risk Committee
(PRC), which is a subcommittee of the Capital and Risk Committee
(CaR) and the Risk Executive Committee (Risk ExCo).

Risk Type Diversification Benefit

The risk type diversification benefit quantifies diversification effects
between credit, market, operational and strategic risk in the economic
capital calculation. To the extent correlations between these risk types
fall below 1.0, a risk type diversification benefit results. The calculation of
the risk type diversification benefit is intended to ensure that the
standalone economic capital figures for the individual risk types are
aggregated in an economically meaningful way.