ING Direct 2015 Annual Report Download - page 42

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
Credit risk management classification
Credit risk management disclosures are provided in the section ‘Risk management – Credit risk’. The relationship between credit risk
classifications in that section and the consolidated balance sheet classifications above is explained below:
• Pre-settlement risk 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
classification mainly relates to the balance sheet classification Financial assets at fair value through profit and loss (trading assets
and non-trading derivatives) and to securities financing;
• Money market risk arises when ING Bank places short term deposits with a counterparty in order to manage excess liquidity and
among others relates to the balance sheet classifications Amounts due from banks and Loans and advances to customers;
• Lending risk arises when ING Bank grants a loan to a customer, or issues guarantees on behalf of a customer and mainly relates to
the balance sheet classification Loans and advances to customers and off balance sheet items e.g. obligations under financial
guarantees and letters of credit;
• Investment risk comprises the credit default and migration risk that is associated with ING Bank’s investment portfolio and mainly
relates to the balance sheet classification Investments (available-for-sale and held-to-maturity); and
• Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value
dates and receipt is not verified or expected until ING Bank has paid or delivered its side of the trade. Settlement risk mainly relates
to the risk arising on disposal of financial instruments that are classified in the balance sheet as Financial assets at fair value
through profit and loss (trading assets and non-trading derivatives) and Investments (available-for-sale and held-to-maturity).
Maximum credit risk exposure
The maximum credit risk exposure for items on the balance sheet is generally the carrying value for the relevant financial assets. For
the off-balance sheet items the maximum credit exposure is the maximum amount that could be required to be paid. Reference is
made to Note 43 ‘Contingent liabilities and commitments’ for these off-balance sheet items. Collateral received is not taken into
account when determining the maximum credit risk exposure.
The manner in which ING Bank manages credit risk and determines credit risk exposures for that purpose is explained in the section
‘Risk management – Credit risk’.
Derivatives and hedge accounting
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently
measured at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions
and valuation techniques (such as discounted cash flow models and option pricing models), as appropriate. All derivatives are carried
as assets when their fair value is positive and as liabilities when their fair values are negative.
Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks
are not closely related to those of the host contract, the host contract is not carried at fair value through profit and loss, and if a
separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. These embedded
derivatives are measured at fair value with changes in fair value recognised in the profit and loss account. An assessment is carried
out when ING Bank first becomes party to the contract. A reassessment is carried out only when there is a change in the terms of the
contract that significantly modifies the expected cash flows.
The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging
instrument and, if so, the nature of the item being hedged. ING Bank designates certain derivatives as hedges of the fair value of
recognised assets or liabilities or firm commitments (fair value hedge), hedges of highly probable future cash flows attributable to a
recognised asset or liability or a forecast transaction (cash flow hedge), or hedges of a net investment in a foreign operation. Hedge
accounting is used for derivatives designated in this way provided certain criteria are met.
At the inception of the transaction ING Bank documents the relationship between hedging instruments and hedged items, its risk
management objective, together with the methods selected to assess hedge effectiveness. ING Bank also documents its assessment,
both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective
in offsetting changes in fair values or cash flows of the hedged items.
ING Bank applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-
EU. The EU ‘carve-out’ macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly
designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core
deposits and under-hedging strategies. Under the IFRS-EU ‘carve-out’, hedge accounting may be applied to core deposits and
ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the
designated amount of that bucket.
ING Bank Annual Report 2015 40