ING Direct 2011 Annual Report Download - page 228

Risk management continued
ING Bank
Credit Risk Mitigation
As with all financial institutions and banks in particular, ING Bank is in the business of taking credit risks in an informed and measured
fashion. As such, the creditworthiness of our customers, trading partners and investments is continually evaluated for their ability to
meet their financial obligations to ING Bank. ING Bank uses different credit risk mitigation techniques, of which entering into Master
Agreements, Collateral Agreements and CDS contracts are the main techniques used.
Compensation and master agreements
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.
ING Bank matches trades with similar characteristics to determine their eligibility for offsetting. This offsetting effect is called
‘compensation’. Subsequently, ING Bank reduces the amount by any legal netting that may be permitted under various types of Master
Agreements, such as ISDAs, GMRAs, GMSLAs, etc. Lastly, the amount is further reduced by any collateral that is held by ING Bank under
CSAs or other similar agreements.
Collateral policies
During the assessment process of creating new loans, trading limits, or making investments, as well as reviewing existing loans trading
positions and investments, ING Bank determines the amount and type of collateral, if any, that a customer may be required to pledge to
ING Bank. Generally, the lower the perceived creditworthiness of a borrower or financial counterparty, the more collateral the customer or
counterparty will have to provide. Within counterparty trading activities, ING Bank actively enters into various legal arrangements whereby
ING Bank and/or counterparties may have to post collateral to one another to cover market fluctuations of their relative positions. Laws in
various jurisdictions also affect the type and amount of collateral that ING Bank can receive or pledge. The type of collateral which is held
as security is determined by the structure of the loan or position. Consequently, since ING Bank’s portfolio is diversified, the profile of
collateral it receives is also diversified in nature and does not reflect any particular collateral type more than others.
As part of its securities financing business, ING Bank entities actively enter into agreements to sell and buy back marketable securities.
These transactions can take many legal forms. Repurchase and reverse repurchase agreements, buy/sellback and sell/buyback agreements,
and securities borrowing and lending agreements are the most common. The amount of marketable securities that ING Bank held as
collateral under these types of agreements was EUR 74.0 billion at 31 December 2011 and EUR 92.0 billion at 31 December 2010. The
decrease is commensurate with the overall decrease in open securities financing trades at year end 2011 compared to year end 2010.
These amounts exclude the cash leg of the respective transactions, as well as any pledges of securities under Tri-Party agreements (as the
underlying is not directly pledged to or owned by ING Bank). As a general rule, the marketable securities that have been received under
these transactions are eligible to be resold or repledged in other (similar) transactions. ING Bank is obliged to return equivalent securities in
such cases.
Repossession policy
It is ING Bank’s general policy not to take possession of assets of defaulted debtors. Rather, ING Bank attempts to sell the assets from
within the legal entity that has pledged these assets to ING Bank, in accordance with the respective collateral or pledge agreements signed
with the obligors. In those cases where ING Bank does take possession of the collateral, ING Bank generally attempts to sell the assets as
quickly as possible to prospective buyers. Based on internal assessments to determine the highest and quickest return for ING Bank, the
sale of repossessed assets could be the sale of the obligor’s business as a whole (or at least all of its assets), or the assets could be sold
piecemeal. With regard to the various mortgage portfolios, ING Bank often has to take possession of the underlying collateral but also tries
to reduce the amount of time until resale.
ING Bank Credit Risk Profile
ING Bank’s credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and other
securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to
businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Bonds in the
investment portfolio are generally unsecured. Securitised assets such as Mortgage Backed Securities and Asset Backed Securities are
secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and/or other
assets) held by the security’s issuer. The last major credit risk source involves pre-settlement exposures which arise from trading activities,
including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
226 ING Group Annual Report 2011