ING Direct 2015 Annual Report Download - page 172

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 figure below provides a high level summary of the application of model outcomes (PD, EAD and LGD).
Credit risk model governance
All PD, EAD and LGD models are built according to the ING Bank internal credit risk modelling methodology standards and model life
cycle. After thorough review of the documentation by the Model Development Committee (MDC) and Model Validation (MV), the Credit
Risk Committee (CRC) approves the models. For certain local models, the approval authority is delegated by the CRC to the MDC. Each
model has both a credit risk and a front office co-sponsor. Both the MDC and the CRC have participation from both credit risk officers as
well as the front office to ensure maximum acceptance by the organisation. The capital impact from the implementation of approved
models is reported to the ECB in a quarterly report. In addition, MV validates each model on an annual basis. During such periodical
validation the model performance is analysed via amongst others backtesting. Most of the credit models reviewed by MV show a
conservative observed performance compared to predicted levels.
Credit risk rating process
In principle all risk ratings are based on a Risk Rating (PD) Model that complies with the minimum requirements detailed in the CRDIV,
the ECB Supervisory Rules and EBA guidelines. This concerns all counterparty types and segments, including countries.
ING Bank’s PD rating models are based on a 1-22 scale (referred to as the ‘Masterscale’), which roughly corresponds to the same rating
grades that are assigned by external rating agencies, such as Standard & Poor’s, Moody’s and Fitch. For example, an ING Bank rating of
1 corresponds to an S&P/Fitch rating of AAA and a Moody’s rating of Aaa; an ING Bank rating of 2 corresponds to an S&P/Fitch rating of
AA+ and a Moody’s rating of Aa1, and so on.
Risk ratings for performing loans (1-19) are calculated in ING Bank IT systems with internally developed models based on data either
manually or automatically fed. Under certain conditions, the outcome of a manually fed model can be challenged through a clearly
defined rating appeal process. Risk ratings for non-performing loans (20-22) are set on the basis of an approved subjective
methodology by the global or regional restructuring unit. For securitisation portfolios, the external ratings of the tranche in which ING
Bank has invested are leading.
Risk ratings assigned to counterparties are regularly, at least annually, reviewed, and the performance of the underlying models
regularly monitored. Over 95% of ING Bank’s credit risks have been rated using one of the in-house developed PD rating models.
Within the AIRB Portfolio, the level of Regulatory compliant ratings exceeds 99% coverage by exposure. Some of these models are
universal in nature, such as models for Large Corporates, Commercial Banks, Insurance Companies, Central Governments, Local
Governments, Funds, Fund Managers, Project Finance and Leveraged Companies. While other models are more regional or country
specific, such as PD models for Small Medium Enterprise (SME) companies in Central Europe, the Netherlands, Belgium, Luxembourg, as
well as residential mortgage and consumer loan models in the various retail markets.
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