ING Direct 2009 Annual Report Download - page 287

Expert models• are based on the knowledge of experts from both Risk Management and Front Office staff and literature from rating
agencies, supervisors and academics. These kinds of models are especially appropriate for portfolios for which limited historical defaults
exists thereby reducing the reliability of a statistical model. These portfolios are also often referred to as ‘Low Default Portfolios’;
Statistical models• are created where a large set of default or detailed loss data is available. They are characterised by a sufficient
number of data points which facilitate meaningful statistical estimation of the model parameters. The model parameters are estimated
with statistical techniques based on the data set available;
Hybrid models • contain characteristics of both expert and statistical models.
Next to the model choice, the definition of default is an important starting point for model building. ING uses a framework that integrates
elements of the regulatory definition of ‘Default’ and the loan loss provisioning indicators under IAS 39. The rationale is that several
indicators are very close to the indications of an obligor’s ‘unlikeliness to pay’ under Basel II and similar regulations.
Integration of both frameworks makes it possible to use the regulatory risk components PD, LGD and EAD in the collective provisioning
process under IAS 39, further enhancing ING’s compliance with the Basel II ‘use test’.
Independent Model Validation is one of the cornerstones of this framework. It consists of the process of determining that a model is
appropriate for its intended use. It is an ongoing process whereby the reliability of the model is verified at different stages during its
lifecycle: at conception, before approval, periodically after implementation, and when significant changes are made to the model. The
validation process contains a mix of developmental evidence, process verification and outcome analysis.
APPROACHES APPLIED BY ING BANK
On 1 January, 2008, ING adopted the AIRB to the majority of its significant portfolios that contain credit risk in accordance with the
approvals granted by DNB (Dutch Central Bank), and various local regulators, as required. However, there remains a small portion of the
portfolio that is subject to the Standardised Approach (SA). Individually, these portfolios are relatively small, very specialized, or are related
to new acquisitions in companies that themselves did not yet follow the AIRB Approach. In some cases, the Standardised Approach is
mandated in conjunction with transition restrictions imposed by local regulators.
During 2009 ING reduced its SA Portfolio by 28% in terms of credit risk outstandings, which fell short of the goal of reducing the SA
portfolio by 50%. The lower rate of reduction was caused by slower regulatory approvals of internal models in certain countries. ING
continues to work towards reducing the portion of its portfolio which falls under the Standardised Approach.
IING uses the AIRB and the Internal Assessment Approach (IAA) for liquidity lines provided to Asset Backed Commercial Paper
programs. For a number of portfolios that are either on an exit strategy or immaterial in terms of size and risk profile, the Standardised
Approach is used.
EXPOSURE CLASSES
The Basel II Accord has developed the concept of ‘Exposure Classes’. These are essentially groupings of credit risks associated with a
common obligor type or product type. For the AIRB Approach, most of the exposure classes have subcategories. ING has applied the
following definitions to determine Exposure Classes:
Governments include Sovereign Government entities, Central Banks and Basel II recognised Local / Regional Authorities as well as
Supranational Organisations;
Institutions include all Commercial Banks, non-Bank Financial Institutions, such as Leasing Companies, Funds and Fund Managers, and
Insurance Companies, as well as local and regional government entities not classified as governments;
Corporates includes all legal entities, that are not considered to be Governments, Institutions or Retail Other;
Residential Mortgages include all mortgage loans for residential properties that are not part of a securitisation;
Retail Other includes all other credit obligations related to Retail SMEs, such as partnerships, one-man businesses and private
individuals, such as consumer loans, car loans and credit cards.
Under these exposure class definitions, it is possible for a private individual to be included under both Residential Mortgages and Retail
Other. For other types of counterparties or issuers, there is no potential overlap.
ING Group Annual Report 2009 285
Additional Pillar 3 information for ING Bank only (continued)
2.4 Additional information