ING Direct 2004 Annual Report Download - page 157

ING Group Annual Report 2004 155
Group risk measurement is described by risk category for ING Bank and ING Insurance in two separate sections below. For ING
Bank the following risk categories apply: credit risk, market risk and operational risk. For ING Insurance the relevant risks are:
actuarial and underwriting risk, credit risk, market risk and operational risk.
In the sections below, the risk categories are sub-divided by types of risk and for each type of risk the applicable risk
measurement method that ING practices is described, including a quantification of the risks.
Both sections also include a description of capital measurement methods.
ING BANK
CREDIT RISK
GENERAL
ING Bank’s credit policy is to maintain an internationally diversified loan and bond portfolio, while avoiding large risk
concentrations. The emphasis is on managing business developments within the business lines by means of top-down
concentration limits for countries, individual borrowers and borrower groups. The aim is to expand relationship-banking
activities, while maintaining stringent internal risk/return guidelines and controls.
In anticipation of the planned introduction of new global capital regulations from the Basel Committee, ING has commenced
a bank-wide Basel project led by CCRM. The goal of this project is to ensure ING’s compliance with the new regulations by the
required implementation date of 31 December 2006. A key element of the project is the continued development, implementation
and back-testing of in-house objective risk rating and loss-given default models for use in the credit approval process, risk
reporting, performance monitoring and portfolio management. Simultaneously, ING is refining its credit risk management
governance and practices to conform to industry best practices and regulatory requirements.
MEASUREMENT
Credit risk is the risk of loss from the default by debtors or counterparties. Credit risks arise in ING Bank’s lending, pre-settlement
and investment activities, as well as in its trading activities. Credit risk management is supported by dedicated credit risk
information systems and internal rating methodologies for debtors and counterparties.
Credit analysis is risk/reward-oriented whereby the level of credit analysis is a function of the risk amount, tenor, structure (e.g.
covers received) of the facility, and the risks entered into. Continually more sophisticated RAROC-based tools are used internally
to ensure a proper balance of risk and reward within the portfolio and concentration parameters. ING’s credit analysts make use
of publicly available information in combination with in-house analysis based on information provided by the customer, peer-
group comparisons, industry comparisons and other quantitative techniques.
The credit exposure of ING Bank is mainly related to traditional lending to individuals and businesses. Loans to individuals are
mainly mortgage loans secured by residential property. Loans to businesses are often collateralised, but can be unsecured
based on internal analysis of the borrowers’ creditworthiness. Pre-settlement credit exposure arises also from trading activities,
for instance in derivatives, repurchase transactions and securities lending/borrowing. ING uses various market pricing and
measurement techniques to determine the amount of credit risk on pre-settlement activities. These techniques estimate ING’s
potential future exposure on individual and portfolios of trades. Master agreements and collateral agreements are frequently
entered into to reduce these credit risks.
Risk classes are defined based upon the quality of the exposures in terms of creditworthiness, varying from investment grade
to problem grade expressed in Moody’s and S&P equivalents.