ING Direct 2008 Annual Report Download - page 221

to meet applicable standards in these areas could result in, among other things, suspension or revocation of ING’s licenses, cease and
desist orders, fines, civil or criminal penalties and other disciplinary action which could materially damage ING’s reputation and financial
condition, and accordingly ING’s primary focus
is to support good business practice through its Business Principles and group policies.
Discontinuation of business with certain countries
As a result of our frequent evaluation of all businesses from economic, strategic and risk perspectives ING continues to believe that for
business reasons doing business involving certain specified countries should be discontinued, which includes that ING has a policy not to
enter into new relationships with clients from these countries and processes remain in place to discontinue existing relationships involving
these countries. At present these countries include Myanmar, North Korea, Sudan, Syria, Iran and Cuba. ING Bank N.V. is now in the final
stages of liquidating the Netherlands Caribbean Bank, which is now a 100% owned subsidiary.
MODEL DISCLOSURES
The risk profile of ING Group, as described in the risk management section is captured by three key risk metrics:
Earning at Risk;•
Capital at Risk;•
Economic Capital.•
The analyses set out in the risk management section provide a valuable guide to investors as to the risk profile of ING Group. Users of the
information should bear in mind that the analyses provided are forward looking measures that rely on assumptions and estimates of future
events, some of which are considered extreme and therefore unlikely to occur. In the normal course of business ING Group continues to
develop, recalibrate and refine the various models that support risk metrics, which may result in changes to the risk metrics as disclosed.
This model disclosure section explains the models applied in deriving these three metrics. The methodology to derive the Earnings at
Risk and Capital at Risk metrics, as presented in the ING Group risk dashboard, is described first. Thereafter, the methodologies used
to determine Economic Capital for ING Bank, ING Insurance and ING Group are described. The risk models used for the ING Bank and
Insurance Economic Capital calculations and the ING Group risk dashboard are reviewed on a periodical basis and validated by the
internal Model Validation department. The ING Bank Economic Capital calculation is also used as part of the Basel II Pillar 2 Internal
Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) that is performed regularly
by the Dutch Central Bank.
EARNINGS AND CAPITAL RISK
Earnings at Risk
Earnings at Risk (EaR) measures the potential reduction in IFRS earnings over the next year relative to expected IFRS earnings.
EaR is measured using a 90% confidence level (i.e. ‘1 in 10’ stress scenario). Discretionary management interventions are not explicitly
modelled unless their measurement can be based on historical performance tracking (e.g. regular or planned actions). It should be noted
that the 90% confidence level used for EaR is not an absolute requirement, but regarded as a general guideline. For each major risk type
the earnings sensitivities are calculated based on existing best-practice e.g. 1% instantaneous shock to interest rates. To reflect bottom-line
IFRS earnings as close as possible in EaR measurement, the amount is compared to the forecasted earnings to determine risk appetite
levels. The ING Bank credit risk component of EaR bank is adjusted for forecasted risk costs (addition to Loan Loss Provision).
The specific accounting treatments for AFS Debt Securities that requires a write down to market value regardless of the underlying
estimated credit loss are not reflected under EaR. Also potential goodwill impairments are not included in the EaR determination.
Capital at Risk
The Capital at Risk (CaR) measures the potential reduction of the net asset value (based on fair values) over the next year relative to
expected value. CaR is measured using a 90% confidence level (i.e. ‘1 in 10’ stress scenario). Discretionary management interventions
are not explicitly modelled unless their measurement can be based on historical performance tracking (e.g. regular or planned actions).
Economic value is defined as the mark-to-market net asset value (assets less liabilities). For each major risk type the value sensitivities
are calculated based on the existing Economic Capital methodology, applying the 90% confidence level. CaR risk appetite is measured
against Available Financial Resources.
Aggregation model risk dashboard
To derive the Earnings at Risk and Capital at Risk figures at an ING Group level, the underlying risk inputs from the ING Bank and ING
Insurance business units are aggregated bottom-up, using a combination of the ‘variance-covariance’ method and Monte Carlo
simulation. For aggregation up to Group level, two sets of correlation assumptions are required, namely the Bank-Insurance correlations
per risk type and inter-risk correlations.
The basic data input for the group risk dashboard is provided along 13 major risk types (e.g. equity risk Europe; see table below) and
diversified within ING Bank or ING Insurance.
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ING Group Annual Report 2008