ING Direct 2015 Annual Report Download - page 158

Contents
Who we are
Report of the
Management
Board
Corporate
Governance
Consolidated
annual accounts
Parent company
annual accounts
Other
information
Additional
information
Notes to the Consolidated annual accounts of ING Bank - continued
The solvency risk appetite is closely aligned with capital management activities and policies. ING Bank has expressed tolerances for its
risk-weighted solvency position (CET1 ratio), for non-risk-weighted solvency (leverage ratio) and for a more economic value based
solvency (economic capital utilisation expressed via the Overall Supervisory Review and Evaluation Process (SREP) Capital
Requirement). The CET1 ratio and leverage solvency risk appetite statements are not only compared to the actual reported level, but
also include the potential impact of a standardised and pre-determined 1-in-10-year stress event (i.e. at a 90% confidence level with a
1-year horizon). Based on this mild stress scenario, the impact on ING Bank’s earnings, revaluation reserve and risk-weighted assets
(RWA) is calculated (these are labelled earnings-at-risk, revaluation reserve-at-risk and RWA-at-risk). These stressed figures are used
as input for a two-year simulation which depicts the developments of ING Bank’s solvency level versus its risk appetite.
Funding and liquidity risk has two dimensions: liquidity risk focuses on having a sufficient buffer to cope with the short-term situation,
funding risk ensures long-term compliance with both internal and external targets. Managing funding and liquidity risk focuses both
on ‘business as usual’ (based on the run-off profile to show the stickiness of deposits combined with the run-off of assets without new
production) and on a stressed situation. There, we define liquidity risk as the time to survive a specific scenario, while for funding risk
we focus on the maximum funding gap allowed.
The concentration and event risk appetite set at ING Bank level are directly translated into corresponding limits in the underlying
credit, market and liquidity & funding risk appetite statements.
Non-financial risk
ING Bank has set up an NFR Risk Appetite Statement (RAS) in which the MBB expresses the type and level of non-financial risk it is
willing to tolerate in pursuit of the strategic objectives of the bank, to ensure that the organisation’s actual risk exposure is
commensurate with its strategic objectives and that exposure moving beyond the tolerance risk levels is timely identified and acted
upon.
ING measures and monitors its exposure to non-financial risk on an ongoing basis by assessing risks, analysing scenarios and
mitigating actions as a result of audit and risk assessment findings. The aggregation of the assessed risk levels is expressed in an
expected loss figure on non-financial risk, which is compared to the tolerance levels as captured in the NFR RAS based on a percentage
of the operational income. The overall non-financial risk levels and tolerance breaches are periodically reported through the Non-
Financial Risk Dashboard (NFRD). The NFRD consists of comprehensive and integrated NFR information on a quarterly basis. Changes in
capital are monitored and reported in the NFRD as well. In addition, changes outside the capital tolerance band are reported to the
Operational Risk Measurement Committee (ORMC) and Bank NFRC. In case risk events cause ING to move towards or beyond the
tolerance level, management is required to undertake action.
Step 3. Cascade into statements per risk type and per business
The Bank Risk Appetite is translated per risk type, which is further cascaded down into the organisation to the lowest level .The risk
appetite statements are then translated into dedicated underlying risk limits which are used for day-to-day monitoring and
management of ING Bank’s risks.
For financial risks, a sequence of different risk appetite frameworks is implemented to address the most significant risks. This implies
that a whole framework of credit risk limits is in place that monitors the overall quality of the ING Bank credit portfolio and that of all
the underlying portfolios as well. In addition, specific concentration risk appetites are defined on product level, geographic level and
(single name) counterparty level which are cascaded down into the organisation. The risk appetite for the trading book activities within
Financial Markets is accompanied by a risk appetite framework for market risks in the banking books. For both types of market risk,
limits at Bank level are translated into the organisation. The liquidity & funding risk appetite statements that are defined on ING Bank
level are translated into the organisation, taking the liquidity & funding specific situation of each (solo) unit into account.
The NFR RAS is cascaded to the divisions and business units through a set of quantitative and qualitative statements.
Step 4. Monitor and manage underlying risk limits
In order to verify that it remains within the risk appetite framework as it is executing its budget, ING Bank reports its risk positions vis-
à-vis its limits on a regular basis towards senior management committees. The Risk and Capital Management Report reflecting the
exposure of ING Bank against the risk appetite targets is submitted quarterly to the MBB and to the (Risk Committee of the) SB.
Stress testing
Stress testing is an important risk management tool that supports the MBB with respect to strategic and capital planning. The purpose
of stress testing is to investigate whether ING Bank will be able to meet its solvency and liquidity requirements in severe but plausible
stress scenarios. Stress tests provide insight into vulnerabilities of certain portfolios, given certain assumptions related to the economy,
financial markets and the political climate. It is also used to assess whether the risk profile of ING Bank is in line with risk appetite.
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