ING Direct 2015 Annual Report Download - page 196

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
Commercial activities result in interest rate risk, as for example repricing tenors of assets differ from those of liabilities. Linear interest
rate risk is transferred from the commercial business to the treasury books (Bank Treasury), if necessary also based on estimations of
customer behaviour. The originating commercial business is ultimately responsible for estimating customer behaviour, leaving
convexity risk and (unexpected) customer behaviour risk with the commercial business.
Risk measurement and the risk transfer process take place on a monthly basis, but more often if deemed necessary, for instance in
volatile markets. The customer behaviour in relation to mortgages, loans, savings and demand deposits is modelled by BSR, based on
extensive research. Model parameters are determined from historical data and expert opinion. Models are periodically validated by
Model Validation. Models and parameters are back tested at least semi-annually and updated when deemed necessary. In the
modelling of savings and current accounts different elements play a role: pricing strategies, volume developments and the level and
shape of the yield curve. The analyses result in an estimated duration and an investment rule for the various portfolios. With respect
to mortgages and loans, prepayment behaviour including interest rate dependent prepayment behaviour is modelled, as well as the
interest sensitivity of embedded offered rate options.
Customer behaviour risk is defined as the potential future value loss due to uncertainty in the behaviour of clients towards embedded
options in commercial products. Customer behaviour risk is reported as part of business risk Economic Capital. General sources of
customer behaviour risk include the state of the economy, competition, changes in regulation, legislation and tax regime, and
developments in the housing market. Since these risk factors cannot be (fully) mitigated, ING holds capital to be able to absorb
possible losses as a result of changed customer behaviour.
Convexity risk is defined as the sensitivity towards interest rate movements and captures the second order changes in the interest
rate. Convexity risk is a result of products that contain embedded options, like mortgages. In some cases, convexity risk is transferred
from the commercial books to treasury books using swaption and cap/floor contracts.
Bank Treasury manages the strategic interest rate position excluding capital investments. The main objective is to maximise the
economic value of the book and to generate adequate and stable annual earnings within the risk appetite boundaries set by ALCO
Bank.
Risk profile
In the following sections, the interest rate risk exposures in the banking books are presented. ING Bank uses risk measures based on
both an earnings and a value perspective. Earnings Sensitivity (ES) is used to provide the earnings perspective and the Net Present
Value (NPV)-at-Risk and Basis Point Value (BPV) figures provide the value perspective. Note that the interest rate risk exposures do not
include pension risks. Also corrective management actions are not taken into account in these figures.
Earnings Sensitivity (ES)
ES measures the impact of changing interest rates on (before tax) net interest income of the banking books. The ES figures in the
tables below reflect an instantaneous shock of 1% and a time horizon of one year. For a downward shock it is assumed that interest
rates will not be negative after the shock is applied.
2015
2014
–100 bps
+100 bps
–100 bps
+100 bps
By currency
Euro
39
173
–107
68
US Dollar
–33
28
–5
5
Other
–28
39
–7
16
Total
–22
240
–119
89
2015
2014
–100 bps
+100 bps
–100 bps
+100 bps
By business
Wholesale Banking
–2
165
–19
7
Retail Banking Benelux
9
5
–39
101
Retail Challengers & Growth Markets
30
- 10
–27
–86
Corporate Line Banking
–59
80
–34
67
Total
–22
240
–119
89
Earnings Sensitivity banking book per currency (instantaneous parallel shock)
Earnings Sensitivity banking books per business (instantaneous parallel shock)
ING Bank Annual Report 2015 194