ING Direct 2011 Annual Report Download - page 222

Risk management continued
ING Bank
ING BANK RISK PROFILE
ING Bank uses risk assessment and risk measurement to guide decision making. As a result, the quality of risk models is important.
The governance process for approval of risk models, methods and parameters ensures business and regulatory requirements, via a
clear assignment of responsibility and accountability.
Nevertheless, users of the information in the risk management section should bear in mind that the analyses provided are forward looking
measures that rely on assumptions and estimates of future events, some of which are considered extreme and therefore unlikely to occur.
In the normal course of business ING Bank continues to develop, recalibrate and refine the various models that support risk metrics, which
may result in changes to the risk metrics as disclosed.
Risk types
ING Bank measures the following main types of risks that are associated with its business activities:
• Credit risk: the risk of potential loss due to default by ING Bank’s debtors (including bond issuers) or trading counterparties;
• Market risk: the risk of potential loss due to adverse movements in market variables. Market risks include interest rate, equity,
real estate, implied volatility, credit spread, and foreign exchange risks;
• Liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable
cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions;
• Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from
external events. It includes reputational risk, as well as legal risk;
• Compliance risk: is the risk of impairment of ING Bank’s integrity as a result of failure (or perceived failure) to comply with relevant laws,
regulations, ING Bank policies and standards as in ING Bank Business Principles; and
• Business risk: the exposure to value loss due to fluctuations in volumes, margins and costs, as well as client behaviour risk. These
fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal
efficiency, and as such strategic risk is included in business risk.
ING Bank Risk Appetite Framework
ING Bank uses an integrated risk management approach for its banking activities. The MBB uses the risk appetite frameworks to monitor
and manage the actual risk profile in relation to the risk appetite, which is derived from ING Bank rating ambition to be in the range of AA
rating. It enables the MBB to identify possible risk concentrations and to support strategic decision making. The risk appetite level is
reported to the MBB on a quarterly basis and is subsequently presented to the Risk Committee.
The overall risk appetite is translated into specific limits which are cascaded down into the organisation, e.g:
• Credit risk limits;
• ALM/Value at Risk limits; and
• Liquidity risk limits.
ING Bank’s ‘three lines of defence’ governance framework ensures that risk is managed in line with the risk appetite as defined by the
MBB and cascaded throughout the Bank, thereby safeguarding controlled risk taking. The role of the business lines is to maximise the
value within established risk boundaries. Each quarter, the MBB monitors that the financial and non-financial risks are within the
boundaries of the risk appetite as set in the strategic planning process.
ING Bank is engaged in selling a broad range of products, from which financial risks arise managed by the Credit and Market Risk
departments. Operational (non-financial) risks are managed by the Operational Risk department.
Financial Risks
For financial risks, ING Bank expresses its risk appetite as the tolerance to allow key capital ratios to deviate from their target levels.
Therefore, the risk appetite is closely aligned to Capital Management activities and policies.
ING Bank has expressed tolerances for its risk weighted solvency metrics (core tier 1 ratio), for non-risk weighted solvency metrics (leverage
ratio) and for more value based metrics (economic capital).
The metrics that are presented in the following sections relate to each of these metrics and present earnings sensitivity, economic and
regulatory capital.
Due to the way the risk departments are organised, these metrics are presented at a higher aggregation level than the identified segments
in Note 51 ‘Operating Segments’:
• Retail Banking Benelux contains Retail Netherlands, Retail Belgium (including Retail Luxemburg);
• Retail Banking Direct & International contains Retail Central Europe, Retail Asia and ING Direct;
• Commercial Banking corresponds to Commercial Banking (including ING Real Estate); and
• Bank Corporate Line coincides with the Corporate Line.
220 ING Group Annual Report 2011