ING Direct 2013 Annual Report Download - page 296

Risk management continued ING Bank
Within ING Bank, market risk falls under the supervision of the ALCO function with ALCO Bank as the highest approval authority. ALCO
Bank determines the overall risk appetite for market risk. The ALCO function is regionally organised. The business lines Retail Banking (both
Benelux and International). Commercial Banking and Corporate Line are represented within the respective regional and local ALCO’s. The
ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk. This
ensures a correct implementation of the ING Bank risk appetite.
The Market Risk Management department (MRM) is the designated independent department that is responsible for the design and
execution of the bank’s market risk management functions in support of the ALCO function. The MRM structure recognises that risk
taking and risk management to a large extent occurs at the regional/local level. Bottom-up reporting allows each management level to
fully assess the market risk relevant at the respective levels.
MRM is responsible for determining adequate policies and procedures for managing market risk and for monitoring the compliance with
these guidelines. An important element of the market risk management function is the assessment of market risk in new products and
businesses. Furthermore MRM maintains an adequate limit framework in line with ING Bank’s risk appetite. The businesses are responsible
for adhering to the limits that ultimately are approved by ALCO Bank. Limit breaches are reported to senior management on a timely basis
and the business is required to take appropriate actions to reduce the risk position.
This market risk paragraph elaborates on the various elements of the risk management approach for:
• Market risk economic capital for trading and banking books
• Market risks in the banking books
• Market risks in the trading books
Economic capital for market risk
Economic capital for market risk is the economic capital necessary to withstand unexpected value movements due to changes in market
variables.
Model disclosure
Economic Capital for market risk is calculated for exposures both in trading portfolios and banking portfolios and includes interest rate risk,
equity price risk, foreign exchange rate risk, real estate risk and model risks. Economic capital for market risk is calculated using internally
developed methodologies with a 99.95% confidence interval and a horizon of one year.
For the trading books, the linear interest rate risk in the banking books and equity investments the VaR (measured at a 99% confidence
interval, a one day holding period and under the assumption of an expected value of zero) is taken as a starting point for the economic
capital calculations for market risk. To arrive at the economic capital for market risk, a simulation based model is used which includes
scaling to the required confidence interval and holding period. In determining this scaling factor, several other factors are also taken into
account like the occurrence of large market movements (events) and management interventions.
Embedded options, e.g. the prepayment option and offered rate option in mortgages in the banking books, result in non-linear interest
rate risk in the banking books. The embedded options are hedged using a delta-hedging methodology, leaving the mortgage portfolio
exposed to convexity and volatility risk. For the calculation of economic capital for this non-linear interest rate risk and volatility risk ING
Bank performs a Monte Carlo simulation.
Real estate price risk includes the market risks in both the investment portfolio and the development portfolio of ING Commercial Banking.
The economic capital for real estate price risk for the investment portfolio is calculated by stressing the underlying market variables.
While aggregating the different economic capital market risk figures for the different portfolios, diversification benefits (based on stressed
correlations) are taken into account as it is not expected that all extreme market movements will appear at the same moment.
Risk profile
The market risk Economic Capital is higher than the Regulatory Capital primarily due to the inclusion of the interest rate risk in banking
books in Economic Capital. The main drivers of the Market Risk Economic Capital are the linear interest rate risk positions of Capital
Investments and the strategic Equity Investments in the banking books.
Economic and Regulatory Capital (Bank diversified only) by risk type
Economic Capital Regulatory Capital
2013 2012 2013 2012
Trading 527 386 667 747
Interest rate risk in the banking books 2,629 3,271
Foreign exchange 130 217 37 25
Real Estate 563 722
Equity Investments 880 1,730
Market risk 4,729 6,326 704 772
294 ING Group Annual Report 2013