Alt-A RESIdENtIAl MORtGAGE BACKEd SECURIty (Alt-A RMBS) A type of US residential mortgage which is considered riskier than ‘prime’ and less risky than ‘sub-prime’ mortgages. Parameters generally taken into account are borrower credit scores, residential property values and loan-to-value ratios. Alt-A mortgages are further characterised by a limited degree of income and/or asset verification.
AMORtISEd COSt The amount at which the financial asset or liability is measured at initial recognition less principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction for impairment or uncollectibility.
ASSEt lIABIlIty MANAGEMENt (AlM) The practice of managing a business such that decisions on assets and liabilities are coordinated. It involves the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities.
ASSEt BACKEd COMMERCIAl PAPER (ABCP) Commercial paper that is collateralised by other financial assets.
ASSEt BACKEd SECURItIES (ABS) A type of bond or note that is based on pools of assets, or collateralised by the cash flows from a specified pool of underlying assets.
AvAIlABlE-FOR-SAlE FINANCIAl ASSEtS Those non-derivative financial assets that are designated as available-for-sale or are not classified as: loans and receivables;• held-to-maturity investments; or• financial assets at fair value through profit and loss. •
BIS An international organisation which fosters international monetary and financial co-operation and serves as a bank for central banks. BIS has set a minimum for the solvency ratio reflecting the relationship between capital and risk weighted assets. The ratio should be at least 8%.
CAPItAl At RISK (CAR) The maximum negative impact on ING Group’s economic surplus over a one year forward looking horizon under normal market conditions. CaR is calculated at a 90% confidence interval.
CERtIFICAtES OF dEPOSIt Short-term negotiable bearer debt instruments issued by banks.
ClAIMS RAtIO Claims, including claims handling expenses, expressed as a percentage of net earned premiums.
COSt RAtIO Underwriting costs expressed as a percentage of premiums written.
CREdIt INStItUtIONS All institutions that are subject to banking supervision by public authorities, including mortgage banks, capital market institutions, multilateral development banks and the International Monetary Fund (IMF).
dEFINEd BENEFIt PlAN Post-employment benefit plans other than defined contribution plans.
dEFINEd CONtRIBUtION PlAN Post-employment benefit plans under which an enterprise pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
dEltA hEdGE The delta hedge minimises the exposure of the employee option scheme by holding an appropriate number of (depositary receipts for) ordinary shares. The exposure is reassessed every quarter and, if necessary, ordinary shares are bought from the market.
dERIvAtIvES Financial instruments, which include forwards, futures, options and swaps, whose value is based on an underlying asset, index or reference rate.
COMBINEd RAtIO The sum of the claims ratio and the cost ratio for a non-life insurance company or a reinsurance company. A combined ratio of more than 100% does not necessarily mean that there is a loss on non-life insurance policies, because the result also includes the allocated investment income.
COMMERCIAl PAPER Promissory note (issued by financial institutions or large firms) with very-short to short maturity period (usually 2 to 30 days, and not more than 270 days), and unsecured.
COMPlIANCE RISK Compliance risk is defined as the risk of damage to ING’s reputation as a result of failure (or perceived failure) to comply with relevant laws, regulations, internal policies and procedures or ethical standards.
CONCENtRAtIONS OF CREdIt RISK Concentrations of credit risk exist when changes in economic, industry or geographical factors similarly affect groups of counterparties whose aggregate exposure is material in relation to ING Group’s total exposure.
CONtINGENt lIABIlItIES Possible obligations that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events but is not recognised because: it is not probable that an outflow of resources embodying • economic benefits will be required to settle the obligation; or the amount of the obligation cannot be measured with • sufficient reliability.
CONtROl The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
CONvExIty The non-linear relationship between changes in the interest rates and changes in bond prices and their Net Present Value. It is a very important market risk measure for portfolios containing (embedded) options.
FINANCIAl ASSEt Any asset that is: cash;• an equity instrument of another company;• a contractual right to;•
FOREIGN ExChANGE RAtE RISK Probability of loss occurring from an adverse movement in foreign exchange rates.
FORWARd CONtRACtS Commitments to exchange currencies or to buy or sell other financial instruments at specified future dates.
EMBEddEd vAlUE PROFIt (EvP) Embedded value profit is the change in embedded value over a given period over and above the amount related to the unwinding of the discount rate.
EMPlOyEE BENEFItS All forms of consideration given by a company in exchange for service rendered by (current and former) employees.
FAIR vAlUE The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
lIQUIdIty RISK The risk that ING Group or one of its subsidiaries cannot meet its financial liabilities when they fall due, at reasonable costs and in a timely manner.
MARKEt vAlUE At RISK (MvAR) A calculation method which measures the decrease in the market value surplus caused by movements in financial markets, at a 99.95% confidence level over a one year horizon.
MINORIty INtEREStS The part of the profit or loss and net assets of a subsidiary attributable to an interest which is not owned, directly or indirectly, by the parent company.
MONEy MARKEt RISK Money market risk arises when ING Group places short term deposits with a counterparty in order to manage excess liquidity, as such, money market deposits tend to be short term in nature (1-7 days is common). In the event of a counterparty default, ING Group may lose the deposit placed. Money market risk is therefore measured simply as the notional value of the deposit , excluding any accrued and unpaid interest or the effect of any impairment.
MONOlINER A financial company that deals specifically with one particular branch of the financial industry.
INtERESt BEARING INStRUMENt A financial asset or a liability for which a time-proportionate compensation is paid or received in relation to a notional amount.
IN thE MONEy A call option is said to be in the money if the exercise price is lower than the price of the underlying value; a put option is said to be in the money if the exercise price is higher than the price of the underlying value.
OUt OF thE MONEy A call option is said to be out of the money if the exercise price is higher than the price of the underlying value; a put option is said to be out of the money if the exercise price is lower than the price of the underlying value.
A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of the reporting enterprise, if the proceeds of the policy: can be used only to pay or fund employee benefits under a • defined benefit plan; and are not available to the reporting enterprise’s own creditors (even • in bankruptcy) and cannot be paid to the reporting enterprise, unless either the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations or the proceeds are returned to the reporting enterprise to reimburse it for employee benefits already paid.
POSt-EMPlOyMENt BENEFIt PlANS Formal or informal arrangements under which a company provides post-employment benefits for one or more employees. Postemployment benefits are employee benefits other than termination benefits and equity compensation benefits, which are payable after the completion of employment.
PREFERENCE ShARE Similar to an ordinary share but carries certain preferential rights. These rights usually concern the guarantee of a fixed (cumulative) return to the shareholder or a guaranteed return on the investment.
NEW SAlES New sales of life insurance, measured as Annual Premium Equivalent (APE), have been defined as the total of annual premiums and 10% of single premiums received on production in a given period.
NOtIONAl AMOUNtS Represent units of account which, in respect of derivatives, reflect the relationship with the underlying assets. They do not reflect, however, the credit risks assumed by entering into derivative transactions.
OPERAtIONAl RISK The risk of a direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.
OPtION CONtRACtS Give the purchaser, for a premium, the right, but not the obligation, to buy or sell within a limited period of time a financial instrument or currency at a contracted price that may also be settled in cash. Written options are subject to market risk, but not to credit risk since the counterparties have already performed in accordance with the terms of the contract by paying a cash premium up front.
ORdINARy ShARE An equity instrument that is subordinate to all other classes of equity instruments. Ordinary shares participate in the net profit for the financial year after other types of shares such as preference shares.
RISK AdJUStEd REtURN ON CAPItAl (RAROC) A performance indicator that measures revenues in the perspective of the risks that had to be taken to obtain that revenue. RAROC is calculated by dividing the risk-adjusted-return by economic capital. In the RAROC calculation, the actual credit-risk provisioning is replaced by statistically expected losses reflecting the average credit losses over the entire economic cycle.
SEttlEMENt RISK 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 Group has paid or delivered its side of the trade. The risk is that ING Group delivers, but does not receive delivery from the counterparty.
SWAP CONtRACtS Commitments to settle in cash at a specified future date, based on differentials between specified financial indices as applied to a notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party.
PRE-SEttlEMENt RISK Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING Group has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk (potential or expected risk) is the cost of ING Group replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps, and securities financing transactions. Where there is a mutual exchange of value, the amount of outstanding is generally based on the replacement value (mark-to-market) plus potential future volatility concept, using an historical 7 year time horizon and a 99% confidence level.
PRIvAtE lOAN Loans to governments, other public bodies, public utilities, corporations, other institutions or individuals with a loan agreement as the only instrument of title.
PROJECtEd UNIt CREdIt MEthOd An actuarial valuation method that considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.
QUAlIFyING ASSEt (WIthIN thE MEANING OF BORROWING COStS) An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
RECOGNItION The process of incorporating in the balance sheet or profit and loss account an item that meets the definition of an element and satisfies the following criteria for recognition: it is probable that any future economic benefit associated with • the item will flow to or from the enterprise; and the item has a cost or value that can be measured reliably. •
RECOvERABlE AMOUNt The higher of an asset’s net selling price and its value in use.
REdEMPtION vAlUE With respect to investments in fixed-interest securities, the amount payable on the maturity date.
tRANSFER RISK Probability of loss due to currency conversion (exchange) restrictions imposed by a foreign government that make it impossible to move money out of the country.
tREASURy ShARES An entity’s own equity instruments, held by the entity or other members of the consolidated group.
vAlUE IN USE The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.