ING Direct 2009 Annual Report Download - page 242

Model Disclosures
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. 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 commercial result (IFRS earnings excluding volatile items) 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).
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).
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.
The first aggregation step is between ING Bank and ING Insurance for each major risk type. All risk capitals, except for credit risk that is
already aggregated for ING Bank and ING Insurance, are delivered on a standalone basis for ING Bank and ING Insurance. These risk capitals
are aggregated between ING Bank and ING Insurance using a variance-covariance approach. Depending on the accounting treatment the
Bank – Insurance correlation factors used for EaR may differ from CaR correlation factors (e.g. for interest rate risk). The result of this
aggregation step are Group diversified EaR and CaR figures for each major risk type.
Risk management (continued)
2.1 Consolidated annual accounts
ING Group Annual Report 2009
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