ING Direct 2009 Annual Report Download - page 212

ING Bank
For those transactions where DVP settlement is not possible, ING establishes settlement limits through the credit approval process.
Settlement risk is then monitored and managed by the credit risk management units. Risk is further mitigated by operational procedures
requiring trade confirmations to counterparties with all transaction details, and by entering into internationally accepted documentation,
such as International Swaps and Derivatives Association (ISDA) Master Agreements for derivative transactions. Additionally, ING regularly
participates in projects with other financial institutions to improve and develop new clearing systems and clearing mechanisms to further
reduce the level of settlement risk. Due to the very short term nature of settlement exposure (daily), settlement risks do not attract
economic or regulatory capital and are excluded from risk reporting disclosures.
Country risk
Country risk is the risk specifically attributable to events in a specific country (or group of countries). It can occur within each of the five
above described risk categories. All transactions and trading positions generated by ING include country risk which is further divided into
economic and transfer risk. Economic risk is the concentration risk relating to any event in the risk country which may affect transactions
and any other exposure in that country, regardless of the currency. Transfer risk is the risk incurred through the inability of ING or its
counterparties to meet their respective foreign currency obligations due to a specific country event.
In countries where ING is active, the relevant country’s risk profile is regularly evaluated, resulting in a country rating. Country limits are
based on this rating and ING’s risk appetite. Exposures derived from lending, investment pre-settlement and money market activities are
then measured and reported against these country limits on a daily basis. Country risk limits are assigned for transfer risk mainly for
emerging markets.
Determination of credit risk outstandings
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 oustandings’.
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’.
Collateral policies
As with all financial institutions and banks in particular, ING 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. During the assessment process of creating new loans, trading limits, or making investments, as well as
reviewing existing loans trading positions and investments, ING determines the amount and type of collateral, if any, that a customer may
be required to pledge to ING. 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 actively enters into various legal
arrangements whereby ING 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 can receive or pledge. Additionally, ING will
sometimes enter into credit default swaps, and other similar instruments, in order to reduce the perceived credit risk on a given borrower
or portfolio. The type of collateral which is held as security is determined by the structure of the loan or position. Consequently, since ING’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.
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 (MBS) and Asset Backed Securities
(ABS) are secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and
other assets) held by the issuer of the security. The last major area of credit risk involves pre-settlement credit exposures which arise from
trading activities, including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
For the banking operations, 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.
Risk management (continued)
2.1 Consolidated annual accounts
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