ING Direct 2009 Annual Report Download - page 211

ING Bank
ING BANK – CREDIT RISKS
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. Corporate Credit Risk Management (CCRM) is responsible
for the measurement and management of credit risk incurred by all ING Group entities, including country-related risks. CCRM is organised
along the three business lines of ING Bank (e.g. Retail Banking, Commercial Banking and ING Direct) and ING Insurance. The CCRM
General Manager is functionally responsible for the global network of credit risk staff, while 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. CCRM creates consistency throughout the credit risk organisation by providing common credit
risk policies, methodologies, manuals and tools across the Group.
ING Group’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. ING Bank applies a Risk Adjusted Return on Capital framework (RAROC)
which measures the performance of different activities and links to shareholder value creation. The use of RAROC increases focus on risks
versus rewards in the decision making process, and consequently stimulates the use of scarce capital in the most efficient way. 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.
Lending risk
Lending risk arises when ING grants a loan to a customer, or issues guarantees on behalf of a customer. This is the most common risk
category, and includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured at the
notional amount of the financial obligation that the customer has to repay to ING, excluding any accrued and unpaid interest, discount/
premium amortisations or impairments.
Investment risk
Investment risk is the credit default and risk rating migration risk that is associated with ING’s investments in bonds, commercial paper,
securitisations, and other similar publicly traded securities. Investment risk arises when ING purchases a (synthetic) bond with the intent to
hold the bond for a longer period of time (generally through maturity). Bonds that are purchased with the intent to re-sell in a short period
of time are considered to be trading risks, which are measured and monitored by the Corporate Market Risk Management department. For
credit risk purposes, Investment risk is measured at original cost (purchase price) less any prepayments or amortisations and excluding any
accrued and unpaid interest or the effects of any impairment.
Money market risk
Money market risk arises when ING places short term deposits with a counterparty in order to manage excess liquidity, as such, money
market deposits tend to be short term in nature (1-7 days is common). In the event of a counterparty default, ING may lose the deposit
placed. Money market risk is therefore measured simply as the notional value of the deposit, excluding any accrued and unpaid interest or
the effect of any impairment.
Pre-settlement risk
Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING has to replace the contract by a trade
with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk (potential or expected risk) is
the cost of ING replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps,
and securities financing transactions. Where there is a mutual exchange of value, the amount of credit risk outstanding is generally based
on the replacement value (mark-to-market) plus a potential future volatility concept, using an historical 7 year time horizon and a 99%
confidence level.
Settlement risk
Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and
receipt is not verified or expected until ING has paid or delivered its side of the trade. The risk is that ING delivers, but does not receive
delivery from the counterparty. Settlement risk can most commonly be contained and reduced by entering into transactions with delivery-
versus-payment (DVP) settlement methods, as is common with most clearing houses, or settlement netting agreements.
2.1 Consolidated annual accounts
Risk management (continued)
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