ING Direct 2011 Annual Report Download - page 241

Risk management continued
ING Bank
Risk Profile
Earnings Sensitivity (ES)
ES measures the impact of changing interest rates on (pre tax) IFRS-EU earnings. The ES figures in the table below reflect an instantaneous
shock up of 1% and a time horizon of one year. Management interventions are not incorporated in these calculations but balance sheet
dynamics (e.g. new business) are significant.
The ES is mainly influenced by the sensitivity of savings to interest rate movements. The investment of own funds only impacts
the ESmarginally, as only a relative small part has to be (re)invested within the 1-year horizon.
Earnings Sensitivity banking books (1% instantaneous upward shock to interest rates)
2011 2010
By currency
Euro 32 –237
US dollar –76 –114
Pound sterling –10 –15
Other 10 50
Total –44 –316
Excluding ING Direct USA earnings sensitivity is approximately 0. In 2011 short-term interest rates remained at low levels in both the
Eurozone and the US. Earnings sensitivity for an upward shock decreased to a small negative figure. This indicates that when rates go up
the increase in interest paid on liabilities only slightly exceeds the increase in interest received on assets. Earnings are therefore relatively
insensitive to rate changes.
Net Present Value (NPV) at Risk
NPV-at-Risk measures the impact of changing interest rates on value. As a full valuation approach is applied, the risk figures include
convexity risk that results from embedded optionalities like mortgage prepayment options. Like for ES calculations, an instantaneous shock
up of 1% is applied.
The full value impact cannot be directly linked to the balance sheet or profit and loss account, as fair value movements in banking books
are generally not reported through the profit and loss account or through equity. The largest part, namely the value mutations of the
amortised cost balances, is neither recognised in the balance sheet nor directly in the profit and loss account. The value mutations are
expected to materialise over time in the profit and loss account, if interest rates develop according to forward rates throughout the
remaining maturity of the portfolio.
The NPV-at-Risk is dominated by the interest rate sensitive long-term investments of own funds. The value of these investments is
impacted significantly if interest rates move up by 1%. Convexity risk in retail portfolios as well as the strategic interest position in FM ALM
also contributes significantly to the overall NPV at Risk.
NPV-at-Risk banking books (1% instantaneous upward shock to interest rates)
2011 2010
By currency
Euro –1,828 –2,446
US dollar 376 –205
Pound sterling –25 –19
Other 52 48
Total –1,425 –2,622
NPV-at-risk excluding ING Direct USA is –EUR 1,914 million. In the course of 2011 NPV-at-Risk decreased substantially. This was mainly
due to more expected prepayments of mortgages as a consequence of the low interest rate environment. This decreased the expected
duration of mortgages and subsequently the value sensitivity to a rate increase. Furthermore investments were shortened, leading to a
lower duration of assets. Finally the outright position in the strategic interest rate portfolio was reduced. This also contributed to the
decrease ofthe NPV sensitivity.
Basis Point Value (BPV)
BPV measures the impact of a 1 basis point increase in interest rates on value. To a large extent the BPV and NPV at Risk reflect the
same risk − the difference being that BPV does not reflect convexity risk, given the small shift in interest rates.
In line with NPV-at-Risk, the bank’s overall BPV position is dominated by the long-term investment of capital, as the present value
of this position is significantly impacted if interest rates move up by 1 basis point.
1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information
239ING Group Annual Report 2011