ING Direct 2011 Annual Report Download - page 226

Risk management continued
ING Bank
Exposures associated with Securitisations (Asset Backed Financing, Commercial/Residential Mortgage Backed Securities and Covered
Bonds) are shown separately. These amounts also relate to the amount invested prior to any impairment activity or mark-to-market
adjustments. This amount is also considered to be ‘outstandings’.
For the banking operations, ING Bank uses various market pricing and measurement techniques to determine the amount of credit risk on
pre-settlement activities. These techniques estimate ING Bank’s potential future exposure on individual and portfolios of trades. Master
agreements and collateral agreements are frequently entered into to reduce these credit risks.
Model Disclosure: ING Bank Economic Capital for Credit and Transfer Risk
Economic Capital for credit risk and for transfer risk is the portion of Economic Capital held to withstand unexpected losses inherent in the
credit portfolios related to (unexpected) changes in the underlying creditworthiness of debtors or the recovery value of underlying
collateral (if any). Credit risk and transfer risk capital are calculated on all portfolios which contain credit or transfer risk, including
investment portfolios.
Economic Capital for credit risk and for transfer risk are calculated using internally developed models with a 99.95% confidence level and
a time horizon of one year, which represents ING’s desired credit rating. ING Bank uses a series of credit risk models that can be grouped
into three principal categories: Probability of Default (PD) models, which measure the standalone creditworthiness of individual debtors;
Exposure at Default models (EAD) which estimate the size of the financial obligation at the moment of default in the future; and Loss
Given Default Models (LGD), which estimate the recovery value of the underlying collateral or guarantees received (if any) and the
unsecured part. Collectively, ING Bank uses over 100 models for credit risk. The various models can be grouped into three categories:
statistical, expert and hybrid.
The Economic Capital formula for credit and transfer risks relies on seven different risk drivers. In addition to the PD, EAD, and LGD models
mentioned above, the formula also considers the industry and the country of the debtor as well as the remaining term of the respective
underlying transactions. Lastly, the formula considers correlation of different asset class types.
The underlying formulas and models that are used for determining Economic Capital for credit and transfer risk are similar to those used
for determining the level of regulatory capital that is required under Basel II (Pillar 1). Despite the fact that the same underlying formulas
are used, (internal) Economic Capital and regulatory capital are not the same, due to various specific rules imposed by Basel II, such as
regulatory caps and floors, and the use of the standardised approach for certain portions of ING Bank’s portfolio. These differences are
permitted under the Basel II guidelines.
The table below summarises different capital measures used for different purposes and shows the difference in key elements and purposes.
Credit Risk Capital
Measurements Methodology Location Confidence level Inputs Purpose
Regulatory Capital Basel II Formula Vortex Basel Engine
(‘VBE’) in the Central
Risk Database
99.90% Basel II model outputs RWA
Economic Capital Risk Adjusted
Capital (RAC)
Closed Algebraic
Formula
Vortex Risk Engine
(‘VRE’) in the Central
Risk Database
99.95% Basel II model outputs
excluding Basel II caps
and floors, maturity,
repayment schedules,
correlation factors,
migration matrix.
Pricing, Economic
Capital for credit at
transactional level
and above
Economic Capital levels for credit and transfer risk are calculated regularly for most of the Commercial Bank, ING Retail Benelux, and the
Retail Direct & International banking operations. On a quarterly basis, the Economic Capital for credit risk and transfer risk figures are
consolidated with the corresponding Economic Capital components from other disciplines.
Economic and Regulatory Capital (Bank diversified only) by risk type
Economic Capital Regulatory Capital
2011 2010 2011 2010
Credit risk 14,365 15,245 22,473 22,452
224 ING Group Annual Report 2011