ING Direct 2008 Annual Report Download - page 275

MARKET RISK
The general description of market risk in ING Bank can be found in the Risk management section, where the organisation, measurement
and management of market risk is explained. Further, contrary to the Risk management section where several banking books are
governed by the trading risk process, for Pillar 3 non-trading exposures are excluded from the trading governance. As a result the figures
for both trading and non-trading books differ from the risk paragraph.
CAPITAL REQUIREMENTS
Capital requirements
2008
Standardised
approach
Internal Model
Approach Total
Interest rate risk 255 456 711
Equity position risk 80 80
Foreign exchange risk (1) 194 51 245
Total 449 587 1,036
(1) The FX exposure under the Standardised Approach contains FX exposures on both trading and banking books.
MODEL APPROACH
According to the Dutch regulation, regulatory capital for trading portfolios can be calculated using the standardised approach (CAD1) or
an internal model approach (CAD2). In 1998, ING received approval from the Dutch Central Bank (DNB) to use an internal Value-at-Risk
(VAR) model to determine the regulatory capital for the market risk in the trading book of ING Bank. Market risk capital of CAD2 trading
books is calculated according to the internal VaR model, where correlations and volatilities are taken into account. On the other hand,
market risk capital of CAD1 books is calculated using standardised fixed risk weights.
In 2008, ING applied the CAD2 model for most of its trading activities. The standard CAD1 model is used for some trading books in
smaller locations and/or products for which the internal model is not yet CAD2 compliant. The aim of ING is to receive CAD2 status for
all its trading books. It should be noted that due to the conservative nature of the CAD1 model the capital charge for the standardised
approach is much larger than for the internal model approach.
VAR Values for IMA Portfolios
Over the reporting Period 2008 31 Dec 2008
High Mean Low Period-end
Interest rate risk 50 37 22 40
Equity position risk 11 7 4 7
Foreign exchange risk 8 5 2 6
Diversification effect 5 3
Total 44 50
For a summary of the Value-at-Risk measurement applicable to the internal model approach please refer to the Market Risk segment in the
Risk Management section. It should be noted that the VaR figures in the above table only relate to the CAD2 trading books for which the
internal model approach is applied. The VaR figures reported in the Risk management section relate to all books under trading governance.
OPERATIONAL RISK
The Operational Risk Capital model of ING is based on a Loss Distribution Approach (LDA). The Loss Distribution is based on both
external and internal loss data exceeding EUR 1 million. The model is adjusted for the scorecard results, taking into account the specific
quality of control in a business line and the occurrence of large incidents (‘bonus/malus’). This provides an incentive to local (operational
risk) management to better manage operational risk. The capital calculation meets industry standards and was approved in April 2008
by DNB. Originally, the model was designed for Economic Capital (99.95% confidence level) and the Financial Risk Dashboard (90%
confidence level). From 2008 onwards, the model is used for regulatory capital reporting purposes as well (AMA approach). Insurance
reduction because of risk mitigation by insurance has not been applied to the AMA capital of 2008.
The Operational Risk Capital using AMA significantly increased to EUR 3,368 million in 2008 (as stated in the operational risk part of the
risk management section) due the periodic update of the external loss data, which reflected the increased uncertainty/turmoil in the
financial market. Two acquisitions took place that impacted capital and the related diversification benefit as well: ING Turkey and ING
Direct Interhyp.
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ING Group Annual Report 2008