ING Direct 2008 Annual Report Download - page 187

ING has integrated risk management into the annual strategic planning process. This process aligns strategic goals, business strategies
and resources throughout ING Group. The process is such that the Executive Board issues a Planning Letter which provides the organisation
with the corporate strategic direction, and addresses key risk issues. Based on this Planning Letter the business lines and business units
develop their business plans which align with the Group’s strategic direction. The process includes a qualitative and quantitative assessment
of the risks involved in the plans. It is part of the process to explicitly discuss strategic limits and group risk appetite levels. At each level,
strategies and metrics are identified to measure success in achieving objectives and to assure adherence to the strategic plan. Based on
the business unit and line of business plans, the Executive Board formulates the Group Strategic Plan which is submitted to the
Supervisory Board for approval.
Group risk policies
ING has a framework of risk management policies, procedures and standards in place to create consistency throughout the organisation,
and to define minimum requirements that are binding on all business units. The governance framework of the business units aligns with
the Group level framework and meets local (regulatory) requirements. Senior Management is responsible to ensure policies, procedures
and standards are implemented and adhered to. Employees globally have access to the Group’s governance framework through an
internal website. Policies, procedures and standards are regularly reviewed and updated via the relevant risk committees to reflect
changes in markets, products and emerging best practices.
ING GROUP RISK PROFILE
ING Group uses an integrated risk management approach. The risk dashboard captures the risks in all Banking and Insurance business
lines in terms of Earnings at Risk and Capital at Risk, and shows the impact of diversification across the Group. The Executive Board uses
the risk dashboard to monitor and manage the actual risk profile in relation to the Group risk appetite. It enables the Executive Board to
identify possible risk concentrations and to support strategic decision making. The risk dashboard is reported to the Executive Board on
a quarterly basis and is subsequently presented to the Audit Committee.
ING Group’s risk appetite is defined by the Executive Board as part of the strategic planning process. Strict boundaries are established
with regard to acceptable risk types and levels. ING’s ‘three lines of defence’ governance framework ensures that risk is managed in line
with the risk appetite as defined by the EB. Risk appetite is cascaded throughout the Group, thereby safeguarding controlled risk taking.
The role of the business lines is to maximise the value within established risk boundaries. Each quarter, the Executive Board monitors that
the financial and non-financial risks are within the boundaries of the risk appetite as set in the strategic planning process.
ING Group risk metrics
The Group’s risk appetite is captured in three different metrics which are disclosed below:
Earnings at Risk; the potential reduction in IFRS earnings over the next year relative to expected IFRS earnings, during a moderate •
(i.e. ‘1 in 10’) stress scenario. Maintaining a high quality of earnings helps ING to safeguard against being downgraded by the rating
agencies;
Capital at Risk; the potential reduction of the current net asset value (based on fair values) over the next year relative to the expected •
value during a moderate (i.e. ‘1 in 10’) stress scenario;
Economic Capital; the amount of capital that is required to absorb unexpected losses in times of severe stress given ING Group’s ‘AA’ •
target rating.
ING Group’s risk metrics cover the most important aspects in terms of different severities (moderate vs. extreme stress) and performance
measures where risk can materialise (value vs. earnings). The Earnings and Capital at Risk metrics are important metrics from a shareholder
point of view since they provide insight in the level of risk ING takes under ‘moderate stress’ market expectations to generate return.
From the debt and policy holder point of view, Economic Capital is more important since it is the buffer against extreme losses.
The main differences and similarities between the risk metrics are illustrated below;
Earnings at Risk Capital at Risk Economic Capital
Confidence interval 90% 90% 99.95% (based on AA target rating)
Stressed metric IFRS earnings Value Value
Deviation from Expected IFRS earnings
(over next year)
Current net asset value based on
fair values (over next year)
Current net asset value based on
fair values (over next year)
Interpretation Potential IFRS earnings reduction against
expectation during a ‘moderate’ stress
scenario (i.e. 1 in 10)
Potential value reduction of net value
during a ‘moderate’ stress scenario
(i.e. 1 in 10)
Potential value reduction of net value
during an ‘extreme’ stress scenario
(i.e. 1 in 2000)
When interpreting the Earnings and Capital at Risk metrics it is important to note that these are not loss estimates of a specific adverse
scenario. Further, the metrics do not take into account discretionary management intervention in a specific crisis situation, and are based
on instantaneous shock scenarios.
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ING Group Annual Report 2008