ING Direct 2013 Annual Report Download - page 301

Risk management continued 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. Therefore, hedges are only done to the extent that they can be hedge accounted for against equity. Taking this into account, 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 banking currency exposures banking books
Foreign Investments Hedges Net Exposure
amounts in millions of euros 2013 2012 2013 2012 2013 2012
US Dollar 2,191 2,847 –134 –198 2,057 2,649
Pound Sterling 325 –1,841 19 1,756 344 –85
Polish Zloty 1,852 1,714 –1,012 –818 840 896
Australian Dollar 3,478 2,686 –2,877 –1,763 601 923
Turkish Lira 1,861 2,168 –572 –574 1,289 1,594
Chinese Yuan 1,253 1,511 –150 –152 1,103 1,359
Canadian Dollar 000–2 0–2
Korean Won 723 1,256 –583 –975 140 281
Indian Rupee 856 287 00856 287
Other currency 2,907 3,026 –1,789 –1,794 1,118 1,232
Total 15,446 13,654 –7,098 –4,520 8,348 9,134
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 scenario for a
currency corresponds with that scenario that causes a drop in the core Tier 1 ratio, so a negative sign means that a depreciation of that
corresponding currency will result in a drop of the core Tier 1 ratio.
Core Tier 1 ratio sensitivity ING Bank
cTaR Stress Scenario
2013 2012 2013 2012
Currency
US Dollar 0.09% 0.08% 15% 15%
Pound Sterling 0.01% 0.04% 15% 15%
Polish Zloty 0.00% 0.01% 15% –15%
Australian Dollar 0.01% 0.02% –20% –20%
Turkish Lira 0.01% 0.01% –25% –25%
Chinese Yuan 0.00% 0.00% 15% 15%
Canadian Dollar 0.00% 0.00% 10% 10%
Korean Won 0.01% 0.00% –15% –15%
Indian Rupee 0.02% 0.02% –20% 20%
The US Dollar is the main currency in terms of Net Exposure as the risk-weighted assets position in US Dollar is most significant besides
Euro. In terms of sensitivities, fluctuations in the US Dollar are the main driver of the core Tier 1 ratio as the US Dollar Net Exposure
significantly deviates from the target. The core Tier 1 ratio is less sensitive for fluctuations in the other currencies.
Year-on-year variance analysis
The Foreign Investments in US Dollar decreased due to a currency conversion of a branch from US dollar to Euro that was partly offset by
realised profit and loss. The Pound Sterling Foreign Investment significantly increased and became positive due to a capital injection in a
branch. The increase of the Foreign Investments and the Hedges in Australian Dollar is due to a transfer of a subsidiary. The Foreign
Investments in Korean Won decreased due to the sale of the equity stake in Kookmin Bank. The increase of the Foreign Investments in
Indian Rupee is due to the inclusion of the minority interest.
299ING 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