ING Direct 2011 Annual Report Download - page 225

Risk management continued
ING Bank
Excluding ING Direct USA, the total EC would be EUR 25 billion and the total RC would be EUR 24.2 billion.
The above risk metrics and risk appetite framework do not cover liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet
its financial liabilities, at reasonable cost and in a timely manner, when they come due. ING Bank has a separate liquidity management
framework in place to manage this risk, which is described in the Liquidity Risk section of ING Bank. In 2011 the funding and liquidity risk
statements have been updated.
ONGOING CHANGES IN THE REGULATORY ENVIRONMENT
After the turmoil in the financial markets over the last couple of years and the need for governments to provide aid to financial institutions,
financial institutions have been under more scrutiny from the public, supervisors and regulators. The resulting revised regulations are
intended to ensure that a crisis in the financial system can be avoided in the future.
To accomplish this, regulations focus primarily at the following issues:
• More stringently aligning risk taking with the capital position of financial institutions (Basel III proposal). The Basel III proposal narrows
the definition of core Tier 1 and Tier 1 capital, and introduces a new definition for a leverage ratio that should become part of Pillar 1 of
the Basel framework. The Basel Committee has also issued a proposal for new liquidity requirements. Apart from the above mentioned
proposals, another aim is to reduce ‘pro-cyclicality’, to avoid that banks would be required to increase their capital in difficult financial
times when it is most scarce. Lastly, there is a proposal to introduce additional capital requirements for counterparty credit risk. In
addition, the Basel Committee and Financial Stability Board (FSB) are currently considering measures that may have the effect of
requiring higher loss absorbency capacity, liquidity surcharges, exposure limits and special resolution regimes for “systemically
important financial institutions” (SIFIs) and so-called “Global” SIFIs (G-SIFI). The deadlines for implementation of specific item
are set for the timeframe 2013 to 2018.
• Separate from but in line with the Basel III proposal, on a country level local regulators are becoming more stringent on the maximum
credit risk bank subsidiaries and branches are allowed to have on their holding companies. In the absence of a supranational
harmonisation this leads to so-called trapped pools of liquidity, i.e. excess liquidity in a country that can not merely be transferred
(unsecured) to a central treasury in another country.
ING BANK CREDIT RISK
ING Bank Credit Risk Management
Credit risk is the risk of loss from default by debtors (including bond issuers) or trading counterparties. Credit risks are split into five
principal risk categories: a) lending (including guarantees and letters of credit); b) investments; c) pre-settlement (derivatives, securities
financing and foreign exchange trades); d) money markets and e) settlement. Additionally a sixth category is determined: country risk,
which can include or relate to the earlier mentioned other five risk categories.
Governance
Credit Risk Management (CRM) is responsible for the measurement and management of credit risk incurred by all ING Bank entities,
including country-related risks. CRM is organised along the business lines of ING Bank. The CRM General Manager is functionally
responsible for the global network of credit risk staff, and the heads of the credit risk management functions for the business lines
report directly to him.
Credit risk management is supported by dedicated credit risk information systems and internal credit risk measurement methodologies
for debtors, issuers and counterparties. CRM creates consistency throughout the credit risk organisation by providing common credit risk
policies, methodologies, manuals and tools across the Bank.
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 within the banking sector is to expand relationship-banking activities, while
maintaining stringent internal risk/return guidelines and controls.
Credit analysis is risk/reward-oriented in that 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. For credit risk management purposes, financial obligations are classified into lending,
investments, pre-settlement, money market and settlement. Sophisticated RAROC-based tools are used internally to ensure a proper
balance of risk and reward within the portfolio and concentration parameters. ING Bank’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.
Credit Risk Measurement and Reporting
Figures associated with Money Market and Lending activities are generally the nominal amounts, while amounts associated with
Investment activities are based on the original amount invested less repayments. Off-Balance Sheet exposures include the letters of credits
and guarantees, which are associated with the Lending Risk Category. Additionally, Off-Balance Sheet exposures include a portion of the
unused limits, associated with the statistically expected use of the unused portion of the limit between the moment of measurement and
the theoretical moment of statistical default. Collectively, these amounts are called ‘credit risk outstandings’.
1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information
223ING Group Annual Report 2011