ING Direct 2004 Annual Report Download - page 166

164 ING Group Annual Report 2004
Net economic capital includes diversification effects (between business units and between risk types). The applied one-sided confidence interval is 99.95%.
In order to protect ING against financial consequences of uncertain operational events ING has acquired insurance policies
issued by third-party insurers, with world-wide cover for (Computer) Crime, Professional Liability, Directors & Officers Liability,
Employment Practices Liability and Fiduciary Liability. The portion of the risks that ING retains is of a similar magnitude to the
risk retained for ING’s property and casualty business-related catastrophe exposures.
ECONOMIC CAPITAL
GENERAL
ING assesses internal capital requirements by using its own risk-based methodologies. ING continues to develop and refine its
internal capital models. For ING Bank the economic capital model is used.
MEASUREMENT
Economic capital is defined as the amount of capital required to bear the economic risks created by the activities of the
company and at the company’s desired level of comfort. ING Bank uses a one-sided confidence interval of 99.95% – consistent
with our target debt rating (AA/Aa2 long term) – and a one year time horizon.
Economic capital should be available to absorb all future unexpected losses and is calculated for credit, transfer, market,
operational and business risk. In 2004, economic capital was calculated for ING Bank in total.
ECONOMIC CAPITAL BREAK-DOWN BY RISK CATEGORY ING BANK
amounts in billions of euros 2004 2003
Credit risk (including Transfer risk) 7.3 7.6
Market risk 4.0 3.3
Operational risk 1.8 1.8
Business risk 1.8 1.8
Total 14.9 14.5
The figures shown by risk category reflect all diversification effects, including risk reduction between the risk categories.
The diversification effects that arise as a result of combining bank and insurance activities are not taken into account.
Business risk, which is shown in the table as a separate category, is used to cover unexpected losses that may arise as a result of
changes in volumes, margins and costs. Business risk can be seen as a result of management strategy (strategic risk) and internal
efficiency (cost efficiency risk).
All risks, except for business risk, are subject to an independent control process with a functional reporting line to the Corporate
Risk Managers. Although business risk is factored into the planning and budgeting process, business risk is not subject to an
independent control process, but is the responsibility of the relevant business units.
Each Corporate Risk Management Department is responsible for the consistency and correctness of the respective methodology,
including the calculation of economic capital (and expected loss) and the diversification within the risk type. In 2005 a central
database for credit risk will be introduced, to ensure data compliance between the internal capital calculations and data used
for Basel II and loan loss provisioning under IFRS.
RISK MANAGEMENT
(continued)
2.3
ADDITIONAL FINANCIAL
INFORMATION
Wholesale Banking
Retail banking
ING Direct
Corporate Items
ING Bank Total
1,319.0
482.8
242.8
10.1
2,054.7
Net Capital
before
scorecard
reduction
-11.8%
-6.1%
-31.4%
0%
-12.7%
Scorecard
add-on (+)
/ reduction (-)
1,163.8
453.4
166.5
10.1
1,793.8
Net Capital
after scorecard
reduction
NET ECONOMIC CAPITAL FOR OPERATIONAL RISK IN 2004
0500 1,000 1,500
Net Capital before scorecard reduction Net Capital after scorecard reduction