ING Direct 2015 Annual Report Download - page 165

Contents
Who we are
Report of the
Management
Board
Corporate
Governance
Consolidated
annual accounts
Parent company
annual accounts
Other
information
Additional
information
Notes to the Consolidated annual accounts of ING Bank - continued
The Models Development Committee (MDC) serves as a technical advisor to CRC and is a planning body for future model development.
The MDC has a delegated mandate to approve credit risk models which cover smaller portfolios. The ING Bank Provisioning Committee
(IPC) is the sole Approval Authority that can approve Loan Loss Provisions (LLP) amounts for all ING Bank entities and can decide on the
quarterly debt, equity and real estate impairments in Available for Sale (AfS) books.
Credit and Trading Risk is the combination of Market Risk Management Bank (MRMB) in Trading books and Credit Risk Management.
This function integrates highly interdependent credit and market risk trading management activities. As such, it takes care of portfolio
management for retail, corporate and Financial Institutions/Financial Markets (FI/FM) (including the Market Risk Product Control
function), (transaction) approval, restructuring, ESR and policy and regulations within its area.
Credit risk definitions
Credit risk is the risk of loss from the default and/or credit rating deterioration of counterparties (including bond issuers). Credit risks
arise in ING Bank's lending, financial market and investment activities.
CR uses risk categories to differentiate between the different types of credit risk. All products within ING Bank are aggregated to one of
the following risk categories:
• Pre-settlement risk (PS): arises when a counterparty defaults on a transaction before settlement and ING Bank 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 Bank 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 a 3-7 year historical time horizon and a 97.5% confidence level.
• Money market risk (MM): arises when ING Bank 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. In the event of a counterparty default, ING Bank may
lose the deposit placed. Money market risk is measured as the notional value of the deposit, excluding any accrued and unpaid
interest or the effect of any impairment.
• Lending risk: arises when ING Bank grants a loan to a counterparty, or issues guarantees on behalf of a counterparty. This includes
term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured as the notional amount
of the financial obligation that the counterparty has to repay to ING Bank, excluding any accrued and unpaid interest,
discount/premium amortisations or impairments.
• Investment risk: is the credit default and risk rating migration risk that is associated with ING Bank’s investments in bonds,
commercial paper, securitisations, and other similar publicly traded securities. This can be viewed as the worst-case loss that ING
Bank may incur as a result of holding a position in underlying securities whose Issuer's credit quality deteriorates or defaults. All
investments in the banking book are classified in the investment risk category. The primary purpose of ING Bank’s investments in
the banking books is for liquidity management.
• Settlement risk: is the risk that a counterparty will fail to deliver on financial markets (PS or MM) transaction/contract at
Settlement and ING Bank could lose up to 100% of the value expected to be delivered. Settlement Risk arises when there is an
exchange of value (funds or instruments) for the same value date or different value dates and receipt is not verified or expected
until after ING has given irrevocable instructions to pay or has paid or delivered its side of the trade. The risk is that ING Bank
delivers but does not receive delivery from ING Bank’s counterparty. ING manages Settlement Risk in the same way as other risks
including a per borrower risk limit structure. However, because of the short term nature and per definition double count of
Settlement Risk, ING Bank does not hold provisions or capital for specific Settlement Risk. Although a relatively low risk, ING
increasingly uses DVP (Delivery versus Payment) and FITO (First In Then Out) payment techniques to reduce Settlement Risk.
For the reconciliation between credit risk outstanding categories and financial assets we refer to the section ’Credit risk management
classification’ as included in the chapter ‘Accounting policies’.
Credit Risk Appetite and Concentration Risk Framework
The Credit Risk Appetite and Concentration Risk Framework enables ING to prevent undesired high levels of credit risk and credit
concentrations within various levels of the ING portfolio. Concentration Risk is measured based on the Credit Risk Exposure
Amount. Credit risk exposure is the total amount of outstanding plus the unused portion of commitments. It can be measured on
various levels, such as customer, legal or economic one obligor group, product, portfolio, customer type, industry, and country. Each
level is in turn broken down from the consolidated ING Bank NV level to a local branch/unit level.
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