ING Direct 2015 Annual Report Download - page 169

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
Regulatory environment
ING Bank is regulated by many host supervisors; however the primary supervising entity is ECB. ECB supervises that the regulatory
rules (CRR/CRDIV/Technical Standards) are adhered to, including through a strict ‘significant change’ approach that requires all
changes to the internal models (PD, LGD and EAD) above a threshold to be reviewed and approved by ECB.
Comparing capital levels across banks is a challenging exercise because of different risk profiles, differences in applied risk based
drivers, practice based drivers and regulatory environment (e.g. Advanced Internal Rating Based approach or the Standardised
Approach). These factors have a substantial impact on the regulatory capital / RWA of a financial institution. ING Bank continues to
work with industry groups including Enhanced Disclosure Task Force (EDTF) and strives to adhere to the latest BCBS recommendations
to improve the transparent reporting of our capital calculations.
Economic Capital (EC) reflects ING Bank’s own view on credit risk, which allows it to be used in decision making processes at
transaction level, counterparty level and (sub) portfolio levels. Credit risk and transfer risk capital are calculated on all portfolios which
contain credit or transfer risk, including investment portfolios. EC is the minimum amount of capital required to cover for unexpected
losses within a 99.95% confidence level and a 12 months’ time horizon. It is used throughout ING Bank in the decision making process
(mainly wholesale banking), in risk adjusted counterparty and portfolio profitability measurement tools (wholesale banking and retail),
in investment and divestment decisions, in the country risk framework and in concentration risk management such as risk appetite
statements (RAS), single name concentration and the systemic risk reports (sector concentration report).
An important characteristic of the CR infrastructure and framework is that models are built for several purposes, including EC, RC and
Loan Loss Provision. These rating models are broadly used throughout the ING Bank organisation which is therefore compliant with the
Basel Use Test requirement and ensures active feedback on the risk parameters by business units.
The short overview below shows the main differences between RC and EC, within ING Bank.
Regulatory Capital
Economic Capital
For portfolios which are reported on SA, the CRR/CRD IV compliant look-
up tables are used to determine risk weights.
EC for SA portfolios is calculated by means of AIRB based unexpected
loss formula which is based on the corresponding PD, Downturn LGD
and EAD inputs.
The 1.06 regulatory scaling-factor is used.
No scaling-factor is used.
Regulatory LGD values including potential downturn adjustment are
used.
Downturn LGD values which include potential downturn adjustments
are employed
For non-Sovereign exposures the PD values are floored at 3 BPS.
Non-floored economic PD values are used.
For Securitisations the risk weights are determined by applying the
CRDIV complaint external rating based look
-up tables. For
securitisations where ING acts as sponsor
the Internal Assessment
Approach is used.
EC for securitisations is calculated by applying the Corporates
formulae wi
thin the CRR framework (based on internal PD, EAD, DLGD
values and remaining maturity).
For exposures from 1 year and longer: PD values represent the PD for
12 months.
Shorter than 1 year: 1 year PD values are used. Next to the PD, there is
the maturity
adjustment: always set to 1 year (for tenors shorter than
1 year) unless, the product is placed on a list of self
-liquidation and or
trade related products that is CRC approved (in line with the CRR).
These should be seen as ‘not part of the institution’s
ongoing financing
of the obligor’ (CRR article 162).
For exposures from 1 year and longer: PD values represent the PD for
12 months.
Shorter than 1 year: except for lending to clients rated 11 and worse (1
year PD floor), all PD’s are floored at 1 month. S
o an exposure with a
remaining tenor of 6 months will have a PD value based on 6 months.
Regulatory EAD is employed for all exposures.
Economic EAD is employed for all exposures.
The CRR/CRDIV based confidence level of 99.90% is used.
Linked to Risk Appetite, a confidence level of 99.95% is used.
CRR/CRDIV compliant correlations are used.
ING specific correlations are used, in order to capture the ING portfolio
specifics including diversification benefits, concentration risk and
single name risk.
Since 2014 CVA Capital Charge is added to Regulatory Capital for credit
risk.
CVA risk is taken into account as calculated under Pillar I based on the
CRR Standardised Approach.
In the Solvency Report other non-credit obligation assets (ONCOA) are
included.
Credit risk related ONCOA items are included.
EC is calculated using the economic values of rating models (PD, EAD and LGD). In line with regulatory requirements, so-called
‘significant changes’ to these rating models are communicated to the regulator for approval. Significant changes relate to the impact
on Credit RWA (Pillar I) or to the significance (size) of the model for the ING Bank portfolio.
Conceptual differences between Regulatory Capital and Economic Capital
ING Bank Annual Report 2015 167