ING Direct 2015 Annual Report Download - page 264

Contents
Report of the
Executive Board
Corporate
Governance
Consolidated
annual accounts
Parent company
annual accounts
Other
information
Additional
information
Additional Pillar III information - continued
The table below provides a back-testing of the PD models per exposure class. In order to better quantify the back-testing, ING has
analysed the 31 December 2015 portfolio. The average PD of 31 December 2014 per portfolio is split per exposure class. The 31
December 2014 portfolio is followed through 2015 to determine the observed default rate. The models are based on long series of
historical data. In the back-test the model based PD values are compared against the defaults observed in 2015. This back-test is only
representative of the year end 2014 portfolio and can be influenced by small sample sizes or incidents. Nonetheless, the back-test
gives a comparison of the predicted PD versus the observed default rate. In the table, the default rate is based on the weighted
average READ of the defaulted portfolio whereas the models are developed on an obligor basis.
2015
Sovereigns Institutions Corporate
Secured by
Res. Mortgage
Other retail Total
Average PD 2014*
0.08%
0.22%
1.57%
1.00%
3.09%
1.02%
Observed Default Rate 2015
0.00%
0.00%
1.29%
0.87%
2.35%
0.82%
Includes the AIRB portfolio only; excludes securitisations, equities and ONCOA.
* Average PD 2014 includes performing loans only.
The table below gives insight in the Expected Loss rate and the Observed Loss rate per exposure class. The expected loss as of 31
December 2014 for the performing portfolio is split per exposure class. The 31 December 2014 portfolio is followed through 2015 to
determine the defaulted exposures. The models are based on long series of historical data. In the comparison, the expected loss rate is
calculated by dividing the expected loss of the performing portfolio as of 31 December 2014 by the READ of the performing portfolio of
the same period. The Observed Loss rate is a result of multiplying the observed defaulted exposures by its LGD. This back-test is only
representative of the year end 2014 portfolio and can be influenced by small sample sizes or incidents. Nonetheless, the back-test
gives a comparison of the Expected Loss rate PD versus the observed Loss rate.
2015
Sovereigns
Institutions
Corporate
Secured by
Res. Mortgage
Other retail
Total
Expected loss rate 2014*
0.02%
0.06%
0.39%
0.19%
1.08%
0.25%
Observed Loss Rate 2015
0.00%
0.00%
0.33%
0.17%
0.98%
0.21%
Includes the AIRB portfolio only; excludes securitisations, equities and ONCOA.
* Expected loss rate 2014 includes performing loans only.
Back-testing observed default rates and observed losses for 2015 show observed results that are below predicted levels for all
exposure classes. This can be explained by the improved economic conditions that were experienced in 2015 as well as conservative
risk management. In 2015, no defaults were recorded for Sovereigns and institutions while default rates of corporates, residential
mortgages and other retail loans have continued to improve compared to the previous year.
Standardised Approach
A subset of the ING portfolio is treated with the Standardised Approach. The SA approach applies fixed risk weights to each exposure
class, split into credit quality steps (based on external ratings) as dictated by the Capital Requirement Directive (CRD). The SA Approach
is the least sophisticated of the CRR/CRD IV methodologies and is not as risk sensitive as the risk-based AIRB Approach.
In order to calculate the regulatory capital requirements under the SA approach, ING Bank uses eligible external ratings from Standard
& Poor’s, Moody’s and Fitch Ratings. Ratings are applied to all relevant exposure classes in the Standardised Approach. For the
mortgage portfolios, the fixed prescribed risk weights are used.
Average estimated PD under the Advanced AIRB approach versus the actual default rate per exposure class
Expected loss rate under the Advanced IRB approach versus the observed loss rate per exposure class
ING Bank Annual Report 2015 262