ING Direct 2008 Annual Report Download - page 259

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’.
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’.
Unless otherwise stated, the tables included in this Section focus on the measurement of Exposure at Default (EAD) and Risk Weighted
Assets (RWA) under the Basel II definitions. EAD is generally the sum of the on-balance and off-balance sheet lending, investment and
money market activities plus an estimated portion of the unused credit facilities extended to the obligor. Additionally, the risk weighting
amounts (plus add-ons) are included. Multiplying RWA by 8% will result in the level of Regulatory Capital (RECAP) that is required to be
held against these portfolios (for the credit risk portion of the activities). In this section a threshold of 2% of the total value reported is
used for determining materiality where applicable. All categories below that threshold have been reported in the category ‘Other’.
CREDIT RISK AT ING
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 obligors and obligor groups. The aim is to expand relationship-banking activities, while maintaining stringent internal risk/
return guidelines and controls.
Credit Risk is the risk of loss from the default by debtors or counterparties. Credit risks arise in ING Bank’s lending, money market,
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.
ING Bank’s credit exposure is mainly related to traditional lending to individuals and businesses, bonds held in the investment portfolios
and financial markets trading activities. 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 obligors’ creditworthiness. Financial Markets
activities include derivatives trading, securities financing, and Foreign Exchange (FX) transactions, which we collectively refer to as
Pre-Settlement risks. 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.
PILLAR 3 CREDIT RISK IN PRACTICE
The Basel II Accord not only changes the way ING reports its credit risk for regulatory purposes; it also affects the daily operations and
practices of all types of risk management at all levels within ING Bank. It has no effect on ING Insurance or Asset Management
operations.
One of the key elements of the Basel II Accord is the ‘Use Test’, which requires ING to use Basel concepts in its day-to-day activities.
The diagram below illustrates where ING has incorporated the Basel II concepts into its daily activities, both globally and locally:
Loan Pricing
Economic Capital
Performance measurement
Loan Loss Provisioning
Regulatory Capital/RWA
Credit Scoring/Acceptance
Basel II Risk Components
PD EAD LGD
Maturity
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ING Group Annual Report 2008