ING Direct 2013 Annual Report Download - page 297

Risk management continued ING Bank
Year-on-year variance
During 2013, market risk economic capital decreased significantly from EUR 6.3 billion to EUR 4.7 billion. In all underlying risk areas, except
for trading, economic capital decreased. A short explanation for the main items:
• Trading: increase in economic capital is largely driven by updated LGD model parameters for the sovereign bond portfolio, which led to
an increase in Incremental Risk Charge (IRC) and the annual update of the model parameters underlying the Trading Risk EC model.
Both adjustments led to an increase in Economic Capital for trading.
• Interest rate risk in the banking books: the exposure of the capital investments decreased significantly. Main drivers for this change
were the exclusion of the volatile rates in 2008 out of the historical period taken into account in calculating the underlying VaR, a
decreased duration of capital investments and a decrease in the overall capital available for investment.
• Real estate: mainly resulting from impairments and the sale of assets.
• Equity investments: mainly resulting from the lower value of equity investments (sale of Kookmin Bank and price decreased in July/
August of 2013) and the lower volatility in equity markets, as the 2008 volatile period started dropping out of the historical period
taken into account in Q3 2013.
The decrease in market risk Regulatory Capital for Trading is due to position changes, relative calm (less volatile) markets combined with
more volatile scenarios dropping out of the VaR calculation. This led to a decrease in the VaR and Stressed VaR component of the
regulatory capital calculation, which was partially offset by an increase in IRC due to updated LGD model parameters for the sovereign
bond portfolio.
Market risk in banking books
ING Bank makes a distinction between trading and banking (non-trading) books. Positions in banking books can originate from the market
risks inherent in commercial products that are sold to clients. Both the commercial products, and the products used to hedge market risk
exposures in these products are intended to be held until maturity, or at least for the long-term. ING Bank distinguishes the following
types of market risk in banking books:
• Interest Rate Risk, including customer behaviour risk;
• Credit Spread Risk;
• Foreign Exchange (FX) Risk;
• Equity Price Risk; and
• Real Estate Price Risk.
An important element of the management of market risks in the banking books is the process of risk transfer. In this process the interest
rate, FX and liquidity risks are transferred from the commercial books through matched funding to Bank Treasury, where it is centrally
managed. The scheme below presents the transfer and management process of market risks in the banking books:
Model disclosure of banking risk measures
See Risk model governance and model validation section
ING Bank
Retail Banking International Commercial BankingRetail Banking Benelux
Model Risk
(replication, prepayments)
Risk transfer to
Bank Treasury
Model Risk
(replication, prepayments)
Risk transfer to
Bank Treasury/Market
Model Risk
(replication, prepayments)
Risk transfer to
Bank Treasury
Real Estate Price Risk
Bank Treasury Capital Management
FX, Interest and Liquity Risk Equity and Structural FX Risks
295ING Group Annual Report 2013
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