ING Direct 2011 Annual Report Download - page 242

Risk management continued
ING Bank
BPV per currency banking books
amounts in thousands of euros 2011 2010
By currency
Euro –15,545 –21,760
US dollar 4,551 –548
Pound sterling –136 –284
Other 879 175
Total –10,251 –22,417
The total BPV excluding ING Direct USA is –EUR 16 million. The total BPV decreased substantially mainly on the back of a lower expected
duration of mortgages leading as more prepayments are expected due to the low interest rate environment in the US and the Eurozone.
Next to that the bank’s strategic interest rate position turned to more neutral.
ING Bank Foreign exchange (FX) risk in banking books
FX exposures in banking books result from core banking business activities (business units doing business in other currencies than their
base currency), foreign currency investments in subsidiaries (including realised net profit and loss) and strategic equity stakes in foreign
currencies. The policy regarding these exposures is briefly explained below.
Governance – Core banking business
Every business unit hedges the FX risk resulting from core banking business activities into its base currency. Consequently, assets and
liabilities are matched in terms of currency.
Governance – FX Translation result
ING Bank’s strategy is to protect the target core Tier 1 ratio against FX rate fluctuations, whilst limiting the volatility in the profit and loss
account. Protecting the core Tier 1 ratio is achieved by deliberately taking foreign currency positions equal to certain target positions, such
that the target core Tier 1 capital and risk-weighted assets are equally sensitive in relative terms to changing FX rates.
Risk profile – FX Translation result
The following table presents the currency exposures in the banking books for the most important currencies:
Net currency exposures banking books
Foreign Investments Hedges Net Exposure
2011 2010 2011 2010 2011 2010
US dollar 7,641 7, 275 –2,677 –606 4,964 6,669
Pound sterling –997 –993 1,048 1,14 4 51 151
Polish zloty 1,404 1,371 –628 –643 776 728
Australian dollar 3,165 2,908 –2,459 –2,056 706 852
Turkish lira 1,830 1,891 –425 –444 1,405 1,447
Other currency 6,934 7,160 – 4,172 –4,028 2,762 3,132
Total 19,977 19,612 –9,313 –6,633 10,664 12,979
The US dollar Net Exposure decreased significantly in 2011. Anticipating on the announced sale of ING Direct USA, the risk-weighted
assets will decrease and therefore, a lower Net Exposure is required. This is then achieved by increasing the hedge. The decreased Net
exposure in the category ‘Other currency’ is mainly caused by changed share prices of strategic equity stakes. For example, the share price
of the bank’s equity stake in Bank of Beijing decreased around 20%, decreasing the Chinese renmimbi currency exposure.
In order to measure the remaining sensitivity of the target core Tier 1 ratio against FX rate fluctuations, the core Tier 1 ratio at Risk (cTaR)
measure is used. It measures the drop in the core Tier 1 ratio from the target when stressing a certain FX rate. The stress scenarios for the
FX rates that are used for calculating the cTaR, are presented in the last two columns. Only the scenarios that negatively impact the target
core Tier 1 ratio are presented: depending on whether the actual foreign currency position is above or below the target position, the worst
case scenario is either a negative or positive movement. A positive stress scenario means that the foreign currency appreciates against the
Euro. For the US dollar this means that at the end of 2011 the target core Tier 1 ratio would decrease by 0.12% in absolute terms (e.g.
from 9.12% to 9.00%) if the US dollar appreciates by 15%. The US dollar cTaR excluding ING Direct USA (not shown in the table below)
issignificantly lower at 0.01%, which shows that the core Tier 1 ratio excluding ING Direct USA is well protected. Back testing shows that
the strategy was effective in 2011; the core Tier 1 ratio was hardly affected by changing FX rates.
240 ING Group Annual Report 2011