ING Direct 2011 Annual Report Download - page 27

1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information
Taking measured risks is part of ING’s business. As a financial
services company, ING is naturally exposed to a variety of risks.
Toensure measured risk-taking ING has integrated risk management
inits daily business activities and strategic planning.
ING plays an important role as a financial intermediary in society.
The essence of our business is transformation, which takes many
forms and serves various customer needs. In our retail banking
operations, for example, we transform on-demand entrusted
deposits into long-dated mortgage loans. Through our payments
and cash management operations we make money available when
and where customers need it. Our insurance business is all about
transformation through time by converting uncertain future cash
flows into fixed flows, whether they are in the form of life insurance
contracts or pensions. Geographic transformation takes place
through our international commercial banking network when we
help corporate customers fund their international business plans.
THREE LINES OF DEFENCE
The key objective of risk management at ING is to make sure
thatall risks are managed in the best possible way for all relevant
stakeholders. We adopt a ‘three lines of defence’ governance
model for risk management, whereby ownership for risk is taken
atall levels in the Group.
The commercial departments form the first line of defence.
Theyoriginate loans, deposits and other products, they know our
customers well and are best placed to act in both the customers’
and ING’s best interest. The second line of defence consists of the
risk management organisation, headed by the chief risk officer
(CRO), and the corporate legal function. The presence of the CRO
on the Bank and Insurance boards ensures that risk management
issues are heard and discussed at the highest level, thus establishing
the appropriate tone at the top. The CRO steers a functional,
independent risk organisation, which supports the commercial
departments in their decision-making, but which also has sufficient
countervailing power to avoid risk concentrations. The third line
ofdefence is the corporate audit function, which independently
oversees and assesses the functioning and effectiveness of the
firsttwo lines.
ADAPTING TO CHANGE
The transformational role of banks and insurers is long-established,
but the world in which they operate is changing rapidly. Risk
management at ING is all about anticipating and adapting to
thischange.
Distribution and communication channels are becoming more
direct and internet-based. This increases the speed and convenience
with which our customers can reach us to access their funds and
our services. ING is committed to providing this convenience
without compromising security or liquidity management standards.
Customer behaviour and demographics have an important bearing
on risk management of both our banking and insurance products.
Life expectancy, people’s propensity to move from one place to
another, tax changes and many other factors impact the pricing
and hedging of products such as mortgages and annuity contracts.
We therefore update lapse assumptions, prepayment assumptions
and all other relevant metrics regularly.
Our product offering has grown over the years to meet our
customers’ increased demands and expectations, as a result of
which it has become even more important to know them well
andunderstand their needs. We have invested in sales suitability
programmes over the last few years to ensure that customers
receive the appropriate products and services.
ING operates in financial markets that have become increasingly
interconnected as a result of globalisation. ING has a risk appetite
framework that captures and restricts the impact of adverse
markets on ING’s capital and liquidity position, based on a number
of different risk metrics. In addition, ING increasingly conducts
company-wide stress tests as a supplementary tool to assess
resilience to adverse market conditions.
Financial regulation and accounting standards are in a state of flux,
and ING is following the developments closely. Over the past year,
ING Insurance Eurasia has continued the implementation ofthe
requirements of the Solvency II directive. Meanwhile, the Bank has
taken further steps to prepare for the improved regulatory capital and
liquidity framework for banks, commonly referred to as Basel III.
ING is well positioned to operate under these new regulatory
frameworks once they are in force. This is also reflected in the
outcome of the EU capital exercise performed by the European
Banking Authority, which concluded that ING Bank is currently
adequately capitalised.
Risk Management plays an important role in performance
evaluation and determining remuneration under the Capital
Requirements Directive (CRD) III Framework, which was issued
bythe European Commission in 2010. This role extends both
tothesetting of risk-specific performance targets across the
organisation as well as the assessment of the performance of
seniormanagement in this respect, and is considered essential for
the alignment of compensation with the interest of all stakeholders.
Risk management’s involvement ensures that compensation
outcomes are symmetric with risk outcomes.
2011 was marked by the sovereign debt crisis in Europe, with
downgrades of several countries due to deteriorated deficits and
theassistance packages given to Greece, Ireland and Portugal.
Inthecourse of the year ING responded to these developments
byreducing its sovereign and financial institutions exposures
toeurozone countries with the biggest political and economic
uncertainties. Throughout the credit and liquidity crisis, ING Bank has
maintained its liquidity position within conservative internaltargets.
A more detailed section in the annual accounts provides further
insight into the risk management practices and exposures for
INGGroup.
25ING Group Annual Report 2011
Risk management