ING Direct 2015 Annual Report Download - page 167

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
To manage country risk effectively, ING Bank uses two components, which together form the country risk framework: the first
component is to set a maximum economic capital consumption and the second component is to assign country reference
benchmarks, which define the maximum appetite for credit risk, that ING Bank has per country to ensure that exposures and potential
future losses do not exceed a certain agreed level. The country reference benchmark is based on the country’s GDP and the funds
entrusted locally in that country. In countries where ING Bank is active, the relevant country’s risk profile is regularly evaluated,
resulting in a country rating, which is used to set the country reference benchmark. Based on these two components country limits
are set and exposures derived from lending, investment, pre-settlement and money market activities are then measured and reported
against these country limits on a daily basis.
Every country where ING has exposure has a country limit which is reviewed monthly and updated when needed. The country limit is
a function of various factors including amount of capital consumption, GDP of the country, internal rating, and amount of funds
entrusted generated. In case the utilisation is above 90%, the respective credit risk manager is expected to take action to bring the
utilisation below 90% or to submit to the relevant approval mandate holders a country limit review requesting a higher limit to
accommodate the increasing exposure. In case of countries with elevated levels of geo-political or severe economic cycle risk like
Ukraine and Russia in 2014, the monitoring is performed on a more frequent basis with strict pipeline and exposure management to
protect ING Bank from adverse impacts.
Single name and sector concentration
ING Bank has established the concentration risk framework in order to identify, measure and monitor concentrations at country,
portfolio and/or counterparty level. It consists of single name concentration i.e. losses due to the unexpected default of a single
counterparty. Sector concentration (systemic risk): substantial increase of the ING Bank risk profile (expressed in increased risk
weighted assets) due to the joint deterioration of a group of correlated counterparty/transactions, sensitive to the same external
(macro-economic) factor(s) related to their geographic location, exposure class or industry. The LGD of a single name concentration is
measured against a maximum LGD amount.
Scenarios and stress tests
Stress testing is a valuable risk management tool. Stress testing evaluates the bank’s financial stability under severe but plausible
stress scenarios and assists in decision-making that assures the bank to remain a financially-healthy on-going concern after a severe
event occurs. In addition to the bank-wide stress test framework as described in the risk profile section of ING Bank, CR performs stress
tests on a monthly basis in order to continually assess the portfolio risks and concentrations. These monthly stress tests are consistent
with the stress scenario as established in the ING Bank wide credit risk appetite framework. The monthly stress tests are reviewed in
the Risk and Capital Integration team and potential management actions are proposed if necessary.
ING Bank performs periodical stress tests based on a standardised and pre-determined 1-in-10 year-stress event (i.e. at 90%
confidence level and 1 year horizon) which is similar to the one applied in the solvency risk appetite. Based on this confidence level, a
through the cycle rating migration for the entire portfolio is simulated. For this simulated portfolio, provisions, RWA and EC are
recalculated to assess what the combined impact of such a year would be. The additional CRWA that ING should allocate in such an
event is named CRWA-at-Risk. These stress test results are submitted to CPC on a periodical basis, in which the results are explained
and discussed. If needed, actions are formulated.
Next to the periodical pre-determined stress test related to CRWA-at-Risk, CR performs ad-hoc stress tests based on severe but
plausible scenarios. These stress tests can be for internal purposes or at the request of the regulators and are input for future Credit
Risk Appetite setting. Stress testing is used as an additional safety net within CR. Through stress tests the impact of severe but
plausible downturn scenarios are determined, which might not be captured in the regular rating models (Probability of Default, Loss
Given Default and Exposure at Default). Therefore, next to the Pillar I and Pillar II capital calculations, based on the results of various
stress test, ING Bank ensures that adequate levels of capital (and liquidity) are available to sustain such severe but plausible scenarios.
Product approvals
Across ING Bank the product approval and review process ensures effective management of risks associated with products. It ensures
that sound due diligence is performed by relevant stakeholders to ensure that risks (credit, operational, legal, etc.) are mitigated.
Risk programs
Within ING we distinguish between risk programs for Retail Banking and risk programs for Wholesale Banking business.
The Retail risk portfolio program is defined as a set of policies and processes, which are laid down to manage a retail risk portfolio
within a predefined risk appetite statement. A retail risk portfolio is defined as a group of sufficiently homogeneous credit assets,
where:
• A consistent set of credit policies and processes for approving a high volume of counterparties and transactions could be applied;
• Exposures could be pooled and managed through a set of standard policies and procedures over its entire life cycle.
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