Building a competitive advantage
The purpose of ING Risk Management is to build a sustainable competitive advantage by fully integrating risk management in ING’s daily business activities and strategic planning. Assuring maintenance of solvency, credit ratings and liquidity implies that products and portfolios are structured, underwritten, priced, approved and managed appropriately and that internal and external rules and guidelines are complied with.
Fully integrating risk management in ING’s daily business activities and strategic planning is further achieved through a transparent disclosure of ING’s risks and a risk strategy that is consistent with the overall Group strategy and the risk appetite.
In recent years ING has systematically invested to improve its risk management capabilities. This has become necessary as investor demands have increased, regulation has become more sophisticated, technology has grown more complex and as secondary markets have continued to evolve. After years of targeted investments in people and technology, ING ended 2007 with around 4,500 employees dedicated to risk management.
In April 2007, ING made a strong commitment to risk management by appointing Koos Timmermans to the Executive Board as chief risk officer. It was decided to separate this function from the role of the chief financial officer because of the increasing complexity and importance of both the risk and finance functions in ING. Having Risk Management separately represented in the Executive Board ensures that risk is a key component of management decisions.
The risk appetite, or the willingness of the Group to take risks, is defined by the Executive Board and measured through three key measures: Earnings at Risk and Capital at Risk, which are measured in the ‘Risk Dashboard’, and Economic Capital. Business line managers try to maximise value relative to these measures, while Risk Management monitors and controls the actual risk profile against the Group’s risk appetite.
ING has a risk governance framework in place to ensure its risk appetite is communicated and enforced throughout the Group. The framework contains three lines of defence: the business lines themselves, which have the primary responsibility for day-to-day management; Risk Management, which provides high-level policies, limits and risk oversight; and Corporate Audit Services, the internal audit department within ING Group, which provides an independent assessment of the design and effectiveness of internal controls over the risks to ING’s business performance.
The Risk Dashboard
The Risk Dashboard, disclosed for the first time in September 2007, is a tool that enables the Executive Board to identify risk concentrations and potential risk mitigating actions. This tool gives an overview of risks inherent in all the banking and insurance businesses and facilitates monitoring the adherence of risk-taking with respect to the Groups’ risk appetite. It thereby allows ING to take strategic decisions using comparable risk measures and to maximise efficient capital allocation. The tool is unique to ING and will be reported annually. A full disclosure of the Risk Dashboard is included in the Risk section of the Annual Accounts.
Risk appetite measures
ING defines its risk appetite through three different measures: Earnings at Risk, Capital at Risk and Economic Capital.
Earnings at Risk (EaR) is a measure of the potential reduction in IFRS earnings from expectations, assuming no mitigating management actions, during a moderate (i.e. ‘1 in 10’) stress scenario. Internally this is compared to the next year’s forecast IFRS earnings and as such provides an indication of the quality of earnings. The overall risk appetite level for ING, decreased to 31% (from 32% in 2006). This is due to the earnings increasing stronger than EaR. ING Bank’s EaR dominates the overall ING Group EaR mainly due to credit and transfer risk. For further details on Earnings at Risk see the Risk section of the Annual Accounts.
Capital at Risk (CaR) is the potential reduction of the current net asset value (based on fair values) of the balance sheet over the next year relative to the expected value during a moderate (i.e. ‘1 in 10’) stress scenario, and assuming no mitigating management action. The Capital at Risk figure tends to be dominated by ING Insurance and is mainly interest rate risk related to long-term client guarantees and equity risk. The overall risk appetite level for ING Group in 2007, measured as Capital at Risk/Available Financial Resources (AFR), for ING Group increased to 21% (17% in 2006) as CaR increased while AFR decreased. For further details on Capital at Risk see the Risk section of the Annual Accounts.
Economic Capital (EC) is the amount of capital required to absorb unexpected losses in times of severe stress given ING’s AA target rating. ING Group Economic Capital increased to EUR 36.0 billion in 2007 (2006: EUR 35.5 billion) taking into account the Bank-Insurance diversification benefit and a risk capital estimate allocated to the group on top of the reported bank and insurance Economic Capitals. ING Bank stand-alone Economic Capital rose 13% to EUR 17.9 billion due to business growth and the inclusion of Oyak Bank, while at ING Insurance stand-alone Economic Capital remained remained stable at EUR 23.2 billion (2006: EUR 22.4 billion). The slight increase was mainly the result of model refinements and the acquisition of pension business in Latin America.
ING Group’s risk metrics cover the most important aspects in terms of different stress severities (non-extreme versus extreme situations) and performance measures where risk can materialise (value versus earnings). The Earnings at Risk and Capital at Risk metrics are important metrics from a shareholder point of view since they provide insight in the level of risk ING takes. From a debt-holder point of view Economic Capital is more important since it serves as the capital amount required to absorb losses in extreme circumstances.
