ING Direct 2011 Annual Report Download - page 224

Risk management continued
ING Bank
Correlation factors between risk types used for diversification are based on best estimate assumptions supported by statistical analysis
ofhistorical data, ING Bank risk expert judgement, external benchmark studies and common logic. As shown in the flow-chart, the
correlation factors are stressed upwards where necessary to account for potential measurement inaccuracy in extreme events due
tolimited historic data observations. Expert opinion is used for aggregating business and operational risk.
The Economic Capital for ING Bank involves the aggregation of the underlying EC of five risk types, namely credit, transfer, market,
operational and business risks. Model disclosures are given in the respective risk sections. These risk types are aggregated to provide
atotal diversified ING Bank Economic Capital by applying the variance-covariance approach with a 5 x 5 inter-risk correlation matrix.
For allocation of Economic Capital to units and products, diversification factors are calculated for each risk type. These factors are applied
consistently throughout ING Bank. The level of diversification benefit is dependent on both the inter-risk correlations as well as the relative
size of the undiversified EC exposure for each risk type.
Reporting Framework
For each business unit and product line, the gross Economic Capital for each risk type is delivered. The net Economic Capital figures are
calculated by taking the product of the gross EC and one minus the diversification factor. Total Economic Capital is calculated as the sum
of the net EC for each risk type at all reporting levels.
ING Bank Economic Capital and Regulatory Capital
Main risk management tools for ING Bank are Economic Capital (EC) and Regulatory Capital (RC). Both of these Capital metrics are used
todetermine the amount of capital that a transaction or business unit requires to support the economic risks it faces. RC is driven by
methodologies prescribed by regulators whereas EC is driven by internally developed models (all of which are approved by the Dutch
Central Bank).
Economic capital is a non-accounting measure which is inherently subject to dynamic changes and updates as a result of ING Bank’s
portfolio mix and general market developments. ING Bank has been and will continue recalibrating the underlying assumptions to its
economic capital models, which may have a material impact on the economic capital values going forward.
The tables below provide ING Bank’s Economic Capital and Regulatory Capital by risk type and business line. The EC figures shown reflect
all diversification effects within ING Bank, including risk reduction between the risk categories; while for RC no diversification is taken into
account. In 2010, Credit Risk Regulatory Capital still included Transfer Risk for an amount of EUR 202 million. Economic Capital is including
Transfer Risk both in 2011 and 2010.
Economic and Regulatory Capital (Bank diversified only) by risk type
Economic Capital Regulatory Capital
2011 2010 2011 2010
Credit risk 14,365 15,245 22,474 22,452
Market risk 8,262 7, 233 1,124 364
Business Risk 2,448 2,435
Operational Risk 1,683 1,619 2,836 2,872
Total banking operations 26,758 26,532 26,434 25,688
Economic Capital (Bank diversified only) by business line combination
Economic Capital Regulatory Capital
2011 2010 2011 2010
Commercial Banking 9,726 10,695 11,615 11,395
Retail Banking Benelux 4,445 4,613 5,552 5,498
Retail Banking Direct & International 9,475 8,881 8,783 8,587
Corporate Line Bank (1) 3,112 2,343 484 208
Total banking operations 26,758 26,532 26,434 25,688
(1) Corporate Line includes funding activities at ING Bank level, internal transactions between business units and the Corporate Line,
and is managed by Capital Management.
Differences between RC and EC are mainly due to:
• The credit risk EC is lower than RC. Economic Capital (EC) is defined as ING’s own methodology for credit risk. It is the amount
ofcapital that is needed at a minimum to cover for Unexpected Losses within a certain confidence level and a certain time horizon;
• The market risk Economic Capital is higher than the Regulatory Capital primarily due to the inclusion of the interest rate risk banking
books in Economic Capital. The market risk RC includes a stressed VaR charge, while EC does not; the EC figures take the diversification
across risk types into account;
• The EC figures include Business risk, while RC does not ; and
• A 99.95% confidence level is used for EC, while the confidence level is 99.9% for RC. Correcting for the difference in confidence
level will lead to an EC figure that is lower than the RC figure.
222 ING Group Annual Report 2011