ING Direct 2011 Annual Report Download - page 240

ING Bank
Retail Banking
Benelux
Commercial
Banking
Model Risk
(replication,
prepayments)
Risk transfer to
FM ALM
Model Risk
(replication,
prepayments)
Risk transfer to
FM Treasury
Proprietary
risk taking
Financial Markets
ALM / Treasury
Model Risk
(replication,
prepayments)
Retail Banking Direct
& International
Risk transfer to
FM ALM
Model Risk
(replication,
prepayments)
Risk transfer
to market
Capital
Management
RB Direct RB International Commercial Bank Financial Markets
Trading
Risk management continued
ING Bank
ING Bank distinguishes three types of activities: investment of own capital (by Capital Management), commercial business (ING Direct,
Retail Banking and Commercial Bank) and the strategic interest rate position (Financial Markets ALM). The scheme below presents the
ALM framework:
Below, the three activities are described in more detail.
Capital Management is responsible for managing the investment of own funds (core capital), more information can be found in the Capital
Management section. Capital is invested for longer periods, targeting to maximise return, while keeping it stable at the same time.
Commercial activities lead to interest rate risk, as repricing tenors of assets differ from those of liabilities. Linear interest rate risk is
transferred out of the commercial business into the risk center (FM ALM), leaving convexity risk and model risk with the commercial
business. The convexity risk is a result of hedging products that contain embedded options, like mortgages, by using linear hedge
instruments. Model risk reflects the potential imperfect modelling of client behaviour. The risk transfer process takes place on a monthly
basis, but more often if deemed necessary, for instance in volatile markets.
In the risk transfer process, client behavioural characteristics play an important role. The behaviour in relation to mortgages, loans, savings
and demand deposits is modelled by MRM, following extensive research. Models and parameters are back-tested regularly and updated
when deemed necessary. In the modelling of savings and current accounts different elements play a role: pricing strategies, outstanding
and expected volumes and the level and shape of the yield curve. The analyses results in an investment rule for the various portfolios. With
respect to mortgages and loans, prepayment behaviour and the interest sensitivity of the embedded offered rate options are modelled.
In line with other commercial businesses, ING Direct transfers interest rate risk out of their commercial books to a large extent. The
difference being that the risks are transferred directly to the external market, instead of to the risk center (FM ALM).
Within ING Commercial Banking, FM ALM contains the strategic interest rate position. The main objective is to maximise the economic
value of the book and to generate adequate and stable yearly earnings within the risk appetite boundaries set by ALCO Bank.
In the following sections, the interest rate risks in the banking books are presented. ING Bank uses risk measures based on both an
earnings and a value perspective. Earnings Sensitivity (ES) is used to provide the earnings perspective and the Net Present Value (NPV)-at-
Risk and Basis Point Value (BPV) figures provide the value perspective. Several small banking books are governed by the trading risk process
and are therefore excluded from the following banking book risk tables. These are included in the trading risk graph and table in the
section ‘Market Risk in Trading Books’.
238 ING Group Annual Report 2011