ING Direct 2002 Annual Report Download - page 72

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Additional information
RAROC BY EXECUTIVE CENTRE
RAROC (PRE-TAX) ECONOMIC CAPITAL
in billions of euros
2002 2001 2002 2001
ING Europe (excl. ING Direct) 13.8% 13.7% 13.6 13.7
ING Asset Management 5.2% 9.5% 0.7 0.6
Total banking operations (excl. ING Direct) 13.3% 13.5% 14.3 14.3
RAROC BY SEGMENT
RAROC (PRE-TAX) ECONOMIC CAPITAL
in billions of euros
2002 2001 2002 2001
Retail (excl. ING Direct) 26.7% 28.6% 2.7 2.9
Wholesale 10.2% 9.7% 11.6 11.4
Total banking operations (excl. ING Direct) 13.3% 13.5% 14.3 14.3
Annual Report 2002 · ING Group 69
 
RAROC
ING applies the Risk Adjusted Return on Capital (RAROC) framework for its banking operations to
consistently measure performance on a risk-adjusted basis which is linked to shareholder value
creation. The use of RAROC increases focus on decision-making in terms of risk rewards and allows
ING Bank to use its scarce capital in the most efficient way. RAROC forms an integral part of the
Group’s planning cycle and quarterly RAROC figures are calculated and analysed for all major
banking business units, business lines and segments. The development of the economic capital
concept anticipates on the future internal model approach to be introduced as part of the Basle II
regulatory framework. ING Group continues to develop and refine the models and data supporting
the RAROC calculations. Risk-adjusted pricing tools are used as a basis for pricing certain transactions
and as an important determinant in credit approval procedures.
RISK-ADJUSTED RETURN AND ECONOMIC CAPITAL
RAROC is calculated as the risk-adjusted return divided by economic capital.
The risk-adjusted return is based on similar valuation principles as applied in the financial
accounts, with two important exceptions: the credit risk provisioning is replaced by expected losses
reflecting statistically calculated average credit losses over the entire economic cycle; and secondly
the P&L is adjusted for effects that relate to replacing actual book capital by economic capital.
Economic capital is defined as the amount of capital required to support the economic risks
created by the activities employed and at the company’s desired level of comfort. ING uses a
confidence interval of 99.95% – consistent with the target debt rating (AA/Aa2 long term) – and a
one-year time horizon. Economic capital can be regarded as the capital one should have to comply
with all debt obligations.
RAROC FOR TOTAL BANKING OPERATIONS
The tables provide pre-tax RAROC figures for the banking business units of the respective Executive
Centres and by segment.
The total banking operations pre-tax RAROC corresponds to an after-tax RAROC of 10.3% (excluding
ING Direct) that can be compared with 10.5% for 2001. The Executive Board has set the overall after-
tax target at 12%.