ING Direct 2015 Annual Report Download - page 203

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
Backtesting
Backtesting is a technique for the on-going monitoring of the plausibility of the VaR model in use. Although VaR models estimate
potential future results, estimates are based on historical market data. In a backtest, the actual daily result is compared with the 1-
day VaR. In addition to using actual results for backtesting, ING Bank also uses hypothetical results, which measure results excluding
the effect of intraday trading, fees and commissions. When the actual or hypothetical loss exceeds the VaR an ‘outlier’ occurs. Based
on ING Bank’s one-sided confidence level of 99% an outlier is expected once in every 100 business days. In 2015 there was no
occurrence where a daily trading loss exceeded the daily consolidated VaR of ING Bank. ING Bank reports the backtesting results on a
quarterly basis to ECB.
Basel Committee/CRD IV
ING Bank follows the regulatory framework set out in the Capital Requirements Regulation (CRR/CRD IV)for its regulatory capital
calculations. The Basel Committee is performing a Fundamental Review of the Trading Book, which may have a significant impact on
the Pillar I calculations. The final guidelines were published in January 2016 and full implementation is not expected before 2019.
Stressed VaR
The Stressed VaR (SVaR) is intended to replicate a VaR calculation that would be generated on the bank’s current portfolio with inputs
calibrated to the historical data from a continuous 12-month period of significant financial stress relevant to the bank’s portfolio. To
calculate SVaR, ING Bank uses the same model that is used for VaR (historical simulation). The historical data period used includes the
height of the credit crisis around the fall of Lehman brothers, and is reviewed regularly.
Incremental Risk Charge
With the Incremental Risk Charge (IRC) ING Bank calculates an estimate of default and migration risk for unsecuritised credit products
in the trading book over a one-year capital horizon at a 99.9% confidence level. For the calculation of IRC ING Bank performs a Monte
Carlo simulation based on a Gaussian copula model. For all issuers the rating is simulated over the different liquidity horizons (time
required to liquidate the position or hedge all significant risks) within one year. The financial impact is then determined based on the
migration to default (based on LGD), or migration to a different rating category (based on credit spread changes).
The liquidity horizon has been set to the regulatory minimum of three months for all positions in scope. Given the types of products in
ING Bank’s trading portfolio ING Bank considers this horizon to be conservative. We have demonstrated that ING Bank could still
actively trade its positions that are significant for IRC under stressed market circumstances, allowing ING Bank to fully redeem its
positions within three months.
Event risk
Event risk is a valuable risk management tool. Event risk evaluates the bank’s financial stability under severe but plausible stress
scenarios and assists in decision-making that assures the bank to remain a financially healthy going concern institution after a severe
event occurs. In addition to the bank-wide stress test framework as described in the ING Bank risk profile section, Credit & Trading Risk
performs separate stressed scenario tests to monitor market risks under extreme market conditions. Since VaR in general does not
produce an estimate of the potential losses that can occur as a result of extreme market movements, ING Bank uses structured
stressed scenario tests for monitoring the market risk under these extreme conditions. Event risk is based on historical as well as
hypothetical extreme scenarios. The result is an estimate of the profit and loss caused by a potential event and its world-wide impact
for ING Bank. The event risk number for the ING Bank trading activity is generated on a weekly basis. Like VaR, event risk is limited by
ALCO Bank.
ING Bank’s event risk policy is based on a large set of possible stress scenarios per risk type (fixed income, equity, foreign exchange,
credit and related derivative markets). For example, for equity products we assume both a crisis scenario (prices decreasing) as well as
a bull scenario (prices increasing). Stress parameters are set per country. Scenarios are calculated based on events happening
independently, jointly by region, or in all countries simultaneously. This way, for each risk type, a large set of scenarios is calculated.
The worst scenarios per market are combined across markets by assessing both independent events per market, and worst events
happening in all markets at the same time.
Other trading controls
VaR and Event Risk limits are the most important limits to control the trading portfolios. Additionally, limits have been set on SVaR and
IRC. Furthermore, ING Bank uses a variety of other controls to supplement these limits. Position and sensitivity limits are used to
prevent large concentrations in specific issuers, sectors or countries. In addition to this, other risk limits are set with respect to the
activities in complex derivatives trading. The market risk of these products is controlled by product specific limits and constraints.
Risk profile
The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon versus daily
trading profits and losses. The overnight VaR is presented for the ING Bank trading portfolio from 2011 to 2015.
ING Bank Annual Report 2015 201