Benefiting from Basel II
Much work was done during 2007 to finalise the preparations for Basel II, which creates guidelines that banks have to use to determine the minimum amount of capital they need to put aside to offset unexpected losses associated with financial and operational risks that they may face.
Basel II applies to ING Bank N.V., ING Investment Management B.V. and their legal entities. The Tier-1 ratio under Basel II as of 1 January 2008 is approximately 9.9% and the total BIS ratio is 13.8%. These numbers, although indicative as ING Bank will only report formally under Basel II as of the first quarter 2008, compare very favourably to the capital ratios under Basel I and are a reflection of the moderate risk in the ING Bank balance sheet, mainly as a result of ING Bank’s large mortgage portfolio. It is the intention that over the coming years the capital ratios will be brought back down to their existing targets. The additional Tier-1 capital available under Basel II is approximately EUR 7 billion.
Measures to manage capital
ING increasingly looks at available financial resources and economic capital employed when managing capital. These concepts come from our internal risk management models. Economic capital (EC) is a measure for the totality of risks run in the company over a one-year time horizon and with a AA confidence interval of 99.95%. Available financial resources (AFR) equal market value of assets minus market value of liabilities, excluding hybrids issued by ING Group which is counted as capital.
At ING Bank the proxy for AFR is Tier-1 capital, in the absence of a full market value balance sheet for ING Bank plus the revaluation reserve equities. AFR should exceed EC for both ING Bank and ING Insurance. EC for ING Group is defined as EC ING Bank plus EC ING Insurance minus the diversification benefit (10% in the past and 15% going forward) plus any EC specifically allocated to ING Group. AFR Group equals AFR ING Bank plus AFR ING Insurance minus core debt ING Group. The target is that ING Group AFR should be at least 120% of ING Group EC. It is policy that any buffer should be able to be deployed with maximum flexibility and therefore be kept centrally.
During 2007 ING Bank submitted to the Dutch bank regulator, de Nederlandsche Bank (DNB) the pillar 2 internal capital adequacy assessment process filing, which contains an overview of the most important capital management policies, procedures and reports. This filing is the basis for the supervisory review of the capital adequacy of ING Bank.
The new Financial Supervision Law also defines the necessary supervision on financial conglomerates. Here also ING Bank has worked with the regulator to make sure ING meets all regulations.