ING Direct 2015 Annual Report Download - page 193

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
Governance
A governance framework has been established defining specific roles and responsibilities of business management, market risk
management and internal approval bodies per activity.
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 organised in different levels, whereby the business lines
Retail Market Leaders, Retail Challengers and Growth Countries, Wholesale Banking and Corporate Line are represented within the
respective lower level 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.
As of June 2015, ING Bank has introduced a new risk governance structure, as described earlier in the section of ‘Risk governance’,
where it has decided to manage its trading and non-trading market risk exposures in separate risk departments. The former
department of Market Risk Management, following its core activities, was split in a ‘Balance Sheet Risk’ department to manage the
banking books (non-trading exposures), while trading book exposures merged with counterparty credit risk under ‘Credit & Trading
Risk’ department.
Despite these changes in the governance structure, the set-up of the Risk management paragraph has not change since it is based on
risk types instead.
The Balance Sheet Risk (BSR) department and the Credit & Trading Risk (C&TR) department are the designated independent
departments that are responsible for the design and execution of the bank’s market risk management functions in support of the
ALCO function. Balance Sheet Risk focuses on the market risks in the banking books, Capital Management department and the Bank
Treasury department, whereas Credit & Trading Risk is responsible for the market risks resulting from the Financial Market trading
books. The organisational 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.
BSR and C&TR are responsible for determining adequate policies and procedures for managing market risk and for monitoring the
compliance with these guidelines. An important element of the risk management function is the assessment of market risk in new
products and businesses. Furthermore the two departments maintain an adequate limit framework in line with ING Bank’s Risk
Appetite Framework. The businesses are responsible for adhering to the limits that ultimately are approved by ALCO Bank. Limit
excesses 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 and model risk.
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 Value at Risk (VaR) is taken as a
starting point for the economic capital calculations for market risk. The VaR is measured at a 99% confidence interval, a one day
holding period and under the assumption of an expected value of zero.
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 economically 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
ING Bank performs a Monte Carlo simulation.
ING Bank Annual Report 2015 191