Financial Conglomerates
Koos Timmermans
General Manager, Market Risk Management
IMF Conference, Washington, 1 June 2005
Table of contents
1. Introduction on ING Group
2. Being a financial conglomerate
3. Risk and capital initiatives
4. Concluding remarks
2
1. Introduction on ING Group
3
ING in a nutshell
• Created from a merger in 1991
• Financial Conglomerate: Banking, insurance and asset mgt
• Over 50 countries, around 115,000 employees
• Strong presence in emerging markets
• Market capitalization around EUR 50 billion
• Broad international share ownership
• Modern corporate governance
• Top 100 global brand
4
Top 20 global financial institutions
#
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Name
Market value in EUR billion as of 25 April 2005
CITIGROUP INC
BANK OF AMERICA CORP
HSBC HOLDINGS
AIG
JPM CHASE
BERKSHIRE HATHAWAY INC
WELLS FARGO
ROYAL BANK SCOTLAND
UBS
WACHOVIA CORP
BANCO SANTANDER
BARCLAYS
ING
AMERICAN EXPRESS
BNP PARIBAS
HALIFAX BANK OF SCOTLAND
MITSUBISHI TOKYO FINANCIAL
MORGAN STANLEY DEAN WITTER
MIZUHO FINANCIAL GROUP
BBVA
185.4
138.8
134.9
101.0
95.3
80.2
76.3
74.9
70.4
61.4
57.4
52.7
48.8
47.9
46.6
45.3
43.3
42.1
42.1
41.2
Source : Bloomberg
5
Group organized along six business lines
ING Group
Insurance
Americas
Insurance
Europe
Insurance
Asia/Pacific
Wholesale
Banking
Retail
Banking
Benefits of structure:
•
•
•
Simple, clear and transparent
Client focus and business logic leads
Personal accountability and empowerment
•
Short and direct reporting lines
•
Appropriate attention and place for growth engines
•
Capture the benefits of the Group
6
ING Direct
Composition of Group capital base
(31 March 2005, EUR bn)
Group
Net equity
Insurance
Bank
25.9
Hybrid capital
5.9
Debt
3.2
Total capitalisation/equity
35.0
14.9
20.1
Minorities
1.0
0.5
Hybrid capital
2.5
Other (incl. ING shares)
0.1
Capital base
18.4
7
20.7
2. Being a financial conglomerate
8
What is a financial conglomerate?
• A financial conglomerate is a company that
combines different types of financial
institutions under one roof:
• Banking
• Insurance
• Asset management
• The legal structure of the conglomerate is
relevant
9
ING believes in the benefit of being
a financial conglomerate…
• Diversification between bank, insurer and asset
manager (regions, activities, clients)
• Reduced economic capital
• Better ratings, also at holding-level
• Cross-balance-sheet utilization
• The whole is worth more than the sum of its parts,
provided that operations are integrated
•
•
•
•
•
Risk and capital management
Back office / systems
Distribution channels, branding and marketing
HR&MD
Culture
10
…however, managing a financial
conglomerate also poses challenges
• Financial conglomerates are a relatively new
phenomenon and not allowed in some countries
• Large, complex organization
• Different systems, accounting, risk management
• Different cultures to combine
• Myriad of regulation – often local and specific to
banking, insurance or asset management
• Basel II for Banks, EU Solvency II Directive for Insurance,
IFRS / US GAAP, Corporate Governance (SOX, etc.)…
• Lack of external understanding and transparency
• Most analysts specialized in either banks or insurers - not both
• Not straightforward to quantify and justify diversification benefit
11
3. Risk and capital initiatives
12
To reap the benefit of being a financial conglomerate
ING is integrating risk and capital management
• Risk and capital tend to be managed in ‘silos’
• Risk silos (credit, market, operational, insurance etc.)
• Business silos (bank, insurance and asset
management)
• Regional / country silos
• ING has recently launched two initiatives to gain
an integrated view
• Group-level risk appetite framework with Board
involvement
• Integrated Capital Management function
13
The Risk Dashboard is a quarterly report providing
Senior Management with a holistic risk view
1. Current risk profile
2. Evolution of risk metrics
• Presents current and
projected risk profile
of ING Group
8. Action tracking
3. Stress analysis
Risk Dashboard
7. Limit breaches
4. Threat scenarios
6. Concentrations
5. Key risk trends
14
•
•
•
Aggregate level
By risk type
By Line of Business
• Board-level discussion
takes place at least
quarterly
• Risk issues with
Group-level impact are
addressed and agreed
actions are tracked
ING has set up an integrated Capital
Management Function
• Internally, ING Group uses economic capital
as a core management metric
• Externally, ING is evaluated on accounting
measures:
• Integrated Capital Management centralizes
the mismatch between internal requirements
and external reporting/regulation
15
Future: The role of risk management at ING
is expanding
Evolution of risk management philosophy
Link to
strategy
#6
High
#5
Strategic
planning
integration
• Shareholders care about
absolute levels of risk and
about the relativity between
risk and return
#4
Return
optimization
#3
Medium
Risk
management
#2
Risk
measurement
#1
• Risk management can
provide value-adding input to
risk/return optimization and
strategic planning (threats
and opportunities)
Loss
minimization
Low
Compliance
Risk
controller
Balance sheet
protection
Industry standard
(last five years)
• Most financial institutions
have developed effective
mechanisms to control
downside risk
Risk/return
optimization
Value
creation
Industry best practice
(next five years)
16
4. Concluding remarks
17
Several themes have triggered a move
towards integrating financial management
• Benefit of financial conglomerate visible
through risk dashboard
• First step to risk measurement per risk category
• Economic capital = priority in bank & insurance
• Integrated capital management deals with
regulatory vs economic capital differences
18