Commerzbank : Disclosure Report as at 31 December 2020 in accordance with CRR

2020Disclosure Report as at 31 December

in accordance with the Capital Requirements Regulation (CRR)

The bank at your side

Contents

• Introduction

• Equity capital, capital requirement and RWA

• Capital structure

• Connection between balance-sheet and regulatory positions
  13 Capital requirements and RWA

16 Risk-oriented overall bank management

16 Risk statement

18 Risk management organisation

18 Risk strategy and risk management

20 Risk-bearing capacity and stress testing

22 A. Credit risk (CR)

1. Risk management

1. Credit risk model

1. Credit risk mitigation

1. Credit risk and credit risk mitigation in the IRBA

1. Credit risk and credit risk mitigation in the SACR

1. Overarching portfolio analyses

1. Loan loss provisions for default risks

1. Investments in the banking book

69 B. Counterparty credit risk (CCR)

69 Risk management

71 Information on regulatory methods

1. Information by regulatory risk-weighting approach

1. Further information on counterparty credit risk

79 C. Securitisations (SEC)

1. Securitisation process
2. Risk management
3. Valuation methods and quantitative information

86 D. Market risk (MR)

1. Risk management

1. Market risk model

1. Quantitative information on market risks

1. Interest rate risk in the banking book

96 E. Liquidity risk (LR)

1. Risk management

1. Liquidity risk model

99 F. Operational risk (OR)

1. Risk management
2. OpRisk model

1. G. Other risks
2. Appendix

103 Additional tables (Appendix 1 to Appendix 5)

1. Overview: Compliance with the CRR requirements (Appendix 6)

1. List of abbreviations

Due to rounding, numbers and percentages presented throughout this report may not add up precisely to the totals provided.

Introduction

Equity capital

Risk-oriented overall bank management

Specific risk management

Appendix 3

Introduction

Commerzbank

Commerzbank is the leading bank for SMEs (the Mittelstand) and a strong partner to some 30,000 corporate client groups and around 11 million private and small-business customers in Ger- many. The Bank offers a comprehensive portfolio of financial services in two business segments - Private and Small-Business Customers and Corporate Clients.

Commerzbank focuses on German SMEs, large companies and institutional customers. In international business, the Bank supports customers who have business links with Germany and companies in selected future-oriented sectors. Following the integration of comdirect, private and small-business customers benefit from the services of one of Germany's most modern online banks combined with personal advisory services at a local level. The Polish subsidiary mBank is an innovative digital bank. It serves around 5.7 million private and small-business customers, mainly in Poland but also in the Czech Republic and Slovakia.

The two segments Private and Small-Business Customers and Corporate Clients are each managed by a member of the Board of Managing Directors. All staff and management functions are contained in Group Management: Group Audit, Group Communica- tions, Group Compliance, Group Finance, Group Human Re- sources, Group Investor Relations, Group Legal, Group Research, Group Risk, Big Data & Advanced Analytics, Group Strategy Transformation & Sustainability, Group Tax, Group Treasury and the central risk functions. The support functions are provided by Group Services. These include Group Corporate Clients&Treasury Platforms, Group Business Platform, Group Digital Transformation, Group Banking& Market Operations, Group Technology Founda- tions, Group Operations Credit, Group Organisation&Security, Group Delivery Centre and Group Client Data. The staff, management and support functions are combined in the Others and Consolidation division for reporting purposes.

On the domestic market, Commerzbank Aktiengesellschaft is headquartered in Frankfurt am Main, from where it manages its branch network serving all customer groups. Following the merger with comdirect Bank AG, Commerz Real AG is now the biggest domestic subsidiary. Outside of Germany, Commerzbank has 6 material subsidiaries, 20 operational foreign branches and 30 representative offices in just under 50 countries and is represented in all major financial centers, such as London, New York, Tokyo and Singapore. However, the focus of the Bank's international activities is on Europe.

A detailed description of Commerzbank Group is given in the Annual Report 2020.

Objective of the Disclosure Report

This report is intended to give the reader a detailed insight into Commerzbank's current risk profile and risk management. In par- ticular, it contains information on:

• the Commerzbank Group's structure from both a regulatory and accounting perspective,
• the Group's capital structure,
• the Commerzbank Group's general risk management system and
• the risk management in respect of specific types of risk.

The report may also be seen as complementary to the Annual Report pursuant to the German Commercial Code (Han- delsgesetzbuch - HGB), since in contrast to the Annual Report it focuses primarily on the supervisory perspective.

In this report Commerzbank Aktiengesellschaft as the ultimate parent company of the regulated banking group is complying with the disclosure requirements of Articles 431 - 455 of regulation (EU) No. 575/2013 - the Capital Requirements Regulation (CRR) and the guidelines on the disclosure requirements under Part Eight of Regulation (EU) No. 575/2013 - EBA/GL/2016/11 - as at 31 December 2019.

The tables defined according to the EBA's guidelines and integrated into the report are indicated by the table names provided with the prefix EU.

Fulfilment of the CRR requirements within the Commerzbank Group is presented in detail in the "Overview: Compliance with the CRR requirements" in the appendix (table APP6).

Scope

This Disclosure Report is based on the group of companies consolidated for regulatory purposes. The companies consolidated for regulatory purposes only include those carrying out banking and other financial business. The consolidated group consists of a domestic parent company and its affiliated companies. The aim of regulatory consolidation is to prevent multiple use of capital that in fact exists only once by subsidiary companies in the financial sector. The companies consolidated under IFRS, by contrast, comprise all the companies controlled by the ultimate parent company.

In the context of the disclosure requirements (Article 431 (3) CRR), besides the Disclosure Report itself, all policies and processes have to be documented as a main component to fulfil the Pillar 3 requirements of the Basel framework. The appropriateness and practicality of the Bank's disclosure practice has to be reviewed on a regular basis. For this purpose, Commerzbank has defined guidelines for the Disclosure Report which regulate the overarching,

• Commerzbank Disclosure Report 2020

strategic part of the instructions. The operative targets and responsibilities are additionally defined in separate documents.

Commerzbank is one of the largest institutions in Germany and with its consolidated balance sheet total it is regularly well above the €30bn limit relevant for the annual disclosure. Hence, Com- merzbank has implemented the reporting requirements during the period from Q2 2015 on and discloses the quarterly and semi- annually required information as appropriate.1

Waiver rule pursuant to Article 7 CRR

Under the waiver rule pursuant to Article 7 CRR in conjunction with section 2a (1) of the German Banking Act (KWG), subsidiary companies in a banking group may apply for exemption from the requirements of Article 6 (1) CRR (on capital, large exposures, exposures to transferred credit risk and disclosure) at single entity level. This is on condition, among other things, that both the parent company and subsidiary are licensed in the same member state and the subsidiary is included in the supervision on a consolidated basis of the parent company.

Exemption is also on condition that there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or the repayment of liabilities by the parent company, that the parent company guarantees the commitments entered into by the subsidiary, the risk evaluation, measurement and control procedures of the parent company cover the subsidiary, and the parent company holds more than 50% of the voting rights in the subsidiary or can appoint or remove a majority of the members of

the management body and can therefore exercise a dominant influence over the subsidiary.2

In the case of institutions and parent companies that were already making use of a waiver before the CRR came into effect under the rules of the German Banking Act (KWG) applicable at the time, using the disclosure procedure then specified, exemption is deemed to have been granted under Article 7 CRR and the relevant standards under section 25a (1) sentence 3 KWG (see section 2a (5) KWG).

Until the merger of comdirect Bank AG into Commerzbank Ak- tiengesellschaft on 2 November 2020 was completed, the waiver was invoked by comdirect Bank AG. The supervisory authorities were informed upon notification of completion according to §10 sentence 3 of the German law, that this claim became void with the completion of the merger.

According to Article 7 CRR in conjunction with section 2a (1) KWG, parent companies within the group of companies consolidated for regulatory purposes are also entitled to this exemption. The opportunity this offers for Commerzbank Aktiengesellschaft as the ultimate parent company of the Commerzbank Group to be exempted from the requirements at single entity level has been utilised since 2007. The conditions for claiming the waiver continue to apply.

Utilisation of the waiver rule was reported at the outset to BaFin and the Bundesbank with evidence of compliance with the requirements and is subsequently monitored and documented on occasion.

• See EBA/GL/2014/14, title V (18) and EBA/GL/2016/11 No. 46.

• Under Article 7 (1) d) CRR, a dominant influence means either having a majority of voting rights or having the right to appoint a majority of the members of the management body of the subsidiary.

Introduction

Equity capital

Risk-oriented overall bank management

Specific risk management

Appendix 5

Equity capital, capital requirement and risk-weighted assets

Capital structure

The main rules governing compliance with minimum regulatory capital ratios for solvency purposes in the EU are contained in the Capital Requirements Directive (CRD) IV, the Capital Requirements Regulation (CRR), a European regulation which, unlike the CRD IV Directive, has direct legal effect for all European banks, together with the SSM Regulation (Council Regulation No. 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions). This legislation is supplemented at national level in Germany by further provisions in the German Banking Act, the German Solvency Regulation and other regulations. In addition, Implementing Technical Standards (ITS) and Regulatory Technical Standards (RTS) provide explanations about particularly complex matters. The introduction of the new regulations in 2014 has strengthened the quality of regulatory capital compared with the previous regime, made capital requirements more stringent and set higher minimum requirements for banks' capital adequacy.

To avoid having all these requirements take effect on a single date, certain parts of the new rules which took effect in 2014 are subject to defined phase-in rules (with transitional provisions). The Phasing-in of the rules for capital deductions ended at the beginning of the 2018 financial year. The CRR Regulation published in 2013 now only contains transitional provisions for the Additional Tier 1 capital and Tier 2 capital, which will gradually reduce the recognition of non-CRR-compliant capital issues until 2022.

Common Equity Tier 1 (CET1) capital consists largely of subscribed capital plus reserves and non-controlling interests. Adjustments to this figure may be necessitated by any number of causes, for example goodwill, intangible assets, write-downs of assets (if assets are not valued cautiously enough in the regulator's view), shortfalls due to the comparison of expected losses (EL) with the provisions recognised for them and the correction of tax loss carry- forwards. Adding Additional Tier 1 capital (AT1), which can contain subordinated debt instruments with certain conditions, produces Tier 1 capital. Tier 2 capital consists largely of subordinated debt instruments which are not eligible as Additional Tier 1 capital. The eligibility of these capital components has been reduced, as over the final five years of their life they may now only be amortised on a straight-line basis.

Commerzbank seeks to achieve the following objectives in managing its capital:

• adherence to the statutory minimum capital requirements at Group level and in all companies included in the regulatory Group,
• ensuring that the planned capital ratios are met, including the new ECB/EBA requirements,
• provision of sufficient reserves to guarantee the Bank's free- dom of action at all times,
• strategic allocation of Tier 1 capital to business segments and divisions in order to exploit growth opportunities.

The financial crisis made the importance of adequate CET1 capital levels for banks become an issue of increasing public con- cern. At Commerzbank, Tier 1 capital has always been a key management target. The Bank's specifications for the capital ratios far exceed the minimum statutory requirements. The Bank's risk- bearing capacity and market expectations play an important role in determining the internal capital ratio targets. For this reason, Commerzbank has stipulated minimum ratios for regulatory capital.

CET1 capital is allocated via a regular process that takes account of the Bank's strategic direction, profitable new business opportunities in the core business of each business segment as well as aspects of risk-bearing capacity.

Measures relating to the Bank's capital are approved by the full Board of Managing Directors, subject to the authorisation granted by the annual general meeting. During the past year, Commerz- bank met the minimum statutory capital requirements as well as the requirements of the ECB and EBA at all times. In the pro forma calculation of the fully loaded implementation of the CRR require- ments, the above mentioned transitional regulations are completely disregarded.

For the Commerzbank Group, the transitional provisions laid down in Article 468 CRR and Article 473a shall not apply. We have received approval from the supervisor for the application of the transitional regime to IFRS 9 in accordance with Article 473a CRR. However, the effects from the application are so marginal that we do not take these into account as of 31 December 2020.

Information on equity capital, capital ratios and the leverage ratio reflect the full impact of the IFRS 9 introduction.