A Brief about ING Vysya Bank. NG has gained recognition for its integrated approach of banking, insurance and asset management. Furthermore, the company differentiates itself from other financial service providers by successfully establishing life insurance companies in countries with emerging economies, such as Korea, Taiwan, Hungary, Poland, Mexico and Chile. Another specialisation is ING Direct, an Internet and direct marketing concept with which ING is rapidly winning retail market share in mature markets. Finally, ING distinguishes itself internationally as a provider of ’employee benefits’, i.e. arrangements of nonwage benefits, such as pension plans for companies and their employees. Banks need a sense of caution in a Liberal credit environment, but they also need the courage and wisdom to take reasonable risks when credit is tight. Financial institutions succeed as long as the risks they assume are prudent and within defined parameters of portf olio objectives. This means policies and procedures must ensure that exposures are properly identified, monitored, and controlled, and that loan pricing, terms, and other safeguards against non-performance or default are commensurate with the Levels of risk that banks assume. Bank failures are the result of lax credit standards, ineffectual portfolio risk policies, risks assumed beyond limits of a bank’s capital, misreading performance barometers and neglecting technological upgrades (both system wide and specific), loan exposure, and ineffective risk rating systems. As we shall see, banks have come under increased regulatory scrutiny with many incurring losses on loan write-offs. An internationally known bank surveyed its problem loan portfolio and came up with a pattern of root causes.
One of the main risk management instruments for ING Bank is Economic Capital which is used to provide the amount of capital that a transaction or business unit requires to support the economic risks that it faces. ING Vysya Bank implemented Economic Capital for internal usage in 1998. Since 1999, ING Bank has been disclosing Economic Capital information externally. The tables below provide ING Bank’s Economic Capital by risk type and business line. Figures shown reflect all diversification effects within ING Bank, including reduction of Risk between the different types of risk. Diversification effects that arise as a result of combining ING Bank and ING Insurance activities are not taken into account. Business risk is included in the other risks category to cover unexpected losses that may arise as a result of changes in volumes, margins and costs. The ING Bank Economic Capital model is explained in detail in the Model Disclosure section. The following table provides the Economic Capital break down by risk category including diversification benefits proportionally allocated to the risk types:
In January 2009, ING Group entered into an Illiquid Assets Back-up Facility term sheet with the Dutch State covering ING’s Alt-A Residential Mortgage Backed Securities (RMBS) portfolio. Through this way of transaction, which is expected to close in the first quarter of 2009, subject to final documentation and regulatory approval, the Dutch State will become the economic owner of 80% of the Alt-A RMBS portfolio. This transaction is expected to be concluded at 90% of the par value with respect to the 80% portion of the portfolio of which the Dutch State will become the economic owner. Par value of the portfolio is approximately EUR 30 billion. Following the deteriorated economic outlook in the third and fourth quarter market prices for these securities had become depressed as liquidity dried up, which had an impact on ING’s results and equity far in excess of estimated credit losses. The transaction with the Dutch State is expected to significantly reduce the uncertainty regarding the impact on ING of any future losses in the portfolio. As condition to the Facility ING will commit to support the growth of the Dutch lending business for an amount of EUR 25 billion at market-conforming conditions. The Dutch State will also acquire certain consent rights with respect to the sale or transfer of the 20% proportion of the Alt-A RMBS portfolio that is retained by ING.
ING sold ING Life to other countries like Taiwan which resulted into a significant decrease of its interest rate risk exposure. This investment was in line with the strategy to allocate fund to those businesses that generate the higher profits. Further, ING has spread its asset duration in order to mitigate the impact of declining interest rates, herewith further reducing its interest rate risk exposure.
The overall increase in Economic Capital is mainly due to the inclusion of the core equity investments in market risk Economic Capital Bank, whereas previously it was taken as an add-on at Group level. Furthermore the increased Economic Capital can be explained by credit migrations, increased market volatility and model enhancements. So By this way, they are reducing their operational and business risk.
ING Bank addresses all the types of market risks, namely, liquidity risk, interest rate risk through a well-explained set of policies and procedures. Separate treatment is given to management of risks in trading ledgers and bank book recognising their differential impact on the balance sheet. The trading ledgers risks, which are more doubtful to market movements, are continuously measured and managed by marking the positions to the available market rates. In order to assess the likely impact of market movements, periodic analysis of the trading book is carried out on the basis of positions based on changes in market rates, past trends, stress tests through rate shocks, scenario analysis, etc. The overall positions and functions of market risks are run under the policy framework defined in Asset-Liability Management (ALM) Policy, Market Risk Policy and Investment Policy.
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