ING Direct 2008 Annual Report Download - page 205

Overnight non-trading currency exposures ING Bank
2007
Foreign
investments Tier-1 Gross exposure Hedges Net position
US dollar 2,644 –3,630 –986 –483 –1,469
Pound sterling –848 – 817 –1,665 1,635 –30
Polish zloty 1,076 1,076 –656 420
Australian dollar 1,228 1,228 –136 1,092
Turkish lira 1,848 1,848 1,848
Other currency 5,719 5,719 –3,871 1,848
Total 11,6 67 –4,447 7, 220 –3,511 3,709
The US dollar position at the end of 2007 was adjusted (reduced) in order to match with lower risk-weighted assets under the new Basel
II rules starting January 1 2008. As a result of changing market circumstances this reduction was undone and the net position in US
dollars increased significantly in 2008, for two reasons. Firstly, on the back of the credit crisis, the (credit) risk-weighted assets in US
dollars increased significantly. The second reason is because of negative market value revaluations of Alt-A RMBS positions within ING
Direct US, US dollar funding of ING Direct Holding was converted to EUR in order to avoid P/L volatility. As a consequence, a (net) long US
dollar position emerged at ING Direct Holding level which has been added to the Capital Management position in the 2008 table above.
The net position in Australian dollar dropped by EUR 762 million. This is a consequence of a large drop in risk-weighted assets under Basel
II (compared to Basel I).
The drop in the Turkish lira position is caused by a depreciation of the currency. The position in local currency did not change significantly.
The FX risk in the non-trading books is measured by using the Value-at-Risk methodology as explained in the trading risk section. The
VaR for FX quantifies with a one-sided confidence interval of 99%, the maximum overnight loss in 99% of the cases that could occur due
to changes in foreign exchange rates.
Consolidated non-trading FX VAR ING Bank
2008
Low
2007 2008
High
2007 2008
Average
2007 2008
Year-end
2007
FX VaR 36 14 135 62 72 22 112 62
During 2008, the FX VaR increased significantly. The major contributor was the long position in US dollars.
Equity Price Risk in Banking Books
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other
instruments whose price reacts similarly to a particular security, a defined basket of securities, or a securities index. ING Bank maintains
a strategic portfolio with substantial equity exposure in its banking books. This equity exposure mainly consists of the investments in
associates of EUR 1,813 million (2007: EUR 2,010 million) and equity securities held in the Available-for-Sale portfolio of EUR 1,863 million
(2007: EUR 3,627 million). The value of equity securities held in the Available-for-Sale portfolio is directly linked to equity security prices with
increases/decreases being recognised (except in the case of impairment) in the revaluation reserve. During the year ended 31 December
2008 the revaluation reserve relating to equity securities held in the Available-for-Sale portfolio fluctuated between a month-end low
amount of EUR 776 million (2007: EUR 518 million) and a high amount of EUR 1,969 million (2007: EUR 2,580 million). Investments in
associates are measured in accordance with the equity method of accounting and the balance sheet value is therefore not directly linked
to equity security prices.
Real Estate
Real estate price risk arises from the possibility that real estate prices will fluctuate affecting both the value of real estate assets and
earnings related to real estate activities.
ING Bank has three different categories of real estate exposure on its banking books. First, ING Bank owns buildings it occupies. Second,
ING Bank has a Real Estate Development company for which results are dependent on the overall real estate market, although the
general policy is to mitigate risk by pre-sale agreements where possible.
Third, ING Bank is one of the largest real estate investment management companies in the world in terms of assets under management.
For various real estate funds, ING Bank has co-invested seed capital and bridge capital to support the launch of new funds. A decrease in
real estate prices will cause the value of this seed and bridge capital to decrease and will lower the level of third party assets under
management, which in turn will reduce the fee income from this activity.
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ING Group Annual Report 2008