ING Direct 2013 Annual Report Download - page 268

Risk management continued ING Bank
Credit approval process
The credit approval process ensures that individual transactions are assessed on a name-by-name basis. For each type of counterparty
(corporate, banks/financial institution, structured products clients) there is a separate process. The line credit risk managers are organised
along the business lines of ING Bank and are specialised in the relevant area of expertise. The credit approval process is supported by,
amongst others, a credit approval system which ensures consistency and completeness; a risk rating (PD) system which contains all the risk
rating models to ensure a proper rating is given to a counterparty and a limit and exposure monitoring system which subsequently feeds
into the credit approval system. The rating model is used to indicate a counterparty’s creditworthiness, and to determine the maximum risk
appetite that ING Bank may have for a given type of counterparty (reference benchmark). The determination of the delegated authority
(the amount that can be approved at various levels of the organisation) also depends on the risk rating. ING Bank has a rating system with
in total 22 grades (1=highest rating; 22=lowest rating) and are split in the following categories:
• Investment grade (Risk Rating 1-10);
• Non-investment grade (Risk Rating 11-17);
• Problem Loan grade (Risk Rating 18-22);
– Restructuring (Risk Rating 18-19);
– Default (Risk Rating 20-22).
Credit risk capital and measurement
Credit risk capital
Regulatory Capital is a law based prudent measure defined by regulators and serves as the minimum amount of Tier 1, Tier 2 and
supplementary capital required to absorb for unexpected losses. RC is the minimum amount of capital (based on 99.90% confidence level)
that ING Bank must hold from a regulatory perspective as a cushion to be able to survive large unexpected losses.
RWA comparison
Comparison of RWA and risk weights across institutions is inherently challenging. Differences in RWA among banks have been classified by
BIS in 3 categories:
1. Risk based drivers that stem from the differences in underlying risk at the exposure/ portfolio level and in business models/strategies
including asset class mix.
2. Practice-based drivers including approaches to risk management and risk measurement
3. Regulating environment such as supervisory practices, implementing laws and regulations including national discretion and accounting
standards.
For further analyses of the ING RWA density compared with the BIS study, we refer to the Pillar 3 section.
The European Banking Authority (EBA) published an analysis in December 2013, containing an RWA breakdown of the investigated 60
banks from 12 different countries in Europe(1). The sample period of this study is 2012. In the below table, we have compared the
breakdown of the RWA of the peers with ING Bank for the same period and for 2013.
RWA breakdown comparison with EBA Study Group (1)
SA AIRB AIRB composition
Sovereigns Institutions Corporate Retail Total
ING exposure classes 2013 11.5% 88.5% 3.5% 9.7% 51.8% 35.0% 100.0%
2012 (2) 14.8% 85.2% 1.6% 11.3% 52.6% 35.0% 100.0%
EBA Study Group 2012 29.0% 71.0% 3.0% 8.0% 61.0% 28.0% 100.0%
(¹) ‘Report on the pro-cyclicality of capital requirements under the Internal Ratings Based Approach’, EBA - 17 December 2013
(²) For comparison purposes, we have aligned the 2012 exposure class structure for corporate and institutions with 2013.
This table illustrates that ING has a significantly higher percentage of its portfolio covered by Advanced Internal Rating Based (AIRB)
models compared to the European peers. DNB requires Dutch banks to have a minimum of 85% of RWA covered by AIRB models before
allowing AIRB applicability. In general, capital calculated with AIRB has a lower risk weight than using the Standardised Approach (SA).
This Supervisory Practice has an influence on the comparability of RWA across institutions.
From the table, it is also clear that ING has relatively less exposure in the Corporate exposure class than European peers and consequently
higher exposure in other classes especially mortgages. Within ING, the Corporate exposure class has by far the highest risk weight.
Therefore, it would be expected that ING has a lower blended risk weight than European peers all other elements being equal. This
Business Mix element has an influence on the comparability of RWA across institutions.
For further analyses of the ING RWA density, compared to its European peers, we refer to the Pillar 3 section.
Risk based drivers
ING Bank portfolio is heavily dominated by secured lending especially in the areas of residential mortgages, structured finance, leasing and
commercial real estate. Secured lending tends to have a much lower LGD, given the collateral involved, which is a key driver of RWA.
Another key element of the ING business model is the focus on retail exposures collateralised by residential property. ING’s retail portfolio
is mainly comprised of residential mortgages. The regulatory formula for this exposure class tends to result in the lowest RWA, all other
factors being equal.
266 ING Group Annual Report 2013