ING Bank aims to be more selective in the financing of Real Estate. As this sector has proven to be significantly impacted during the crisis, the value of collaterals for this portfolio is of specific importance. The REF portfolio, which mostly focuses on the business whereby ING Bank finances or refinances income producing real estate in office, retail, residential and industrial (logistics) segments or a mix of commercial properties, presents approximately 56.4% of the Real Estate sector’s outstanding.
For properties located in the Netherlands, if the risk profile remains stable or improves during this three year cycle, an annual indexation is performed. The indices used are from ROZ/IPD (Vereniging Raad voor Onroerende Zaken – Association of Real Estate Council/ Investment Property Databank). If the risk profile deteriorates, a revaluation is required.
The assessment of risk profile is performed based on certain defined factors, such as external drivers including macro developments (GDP, unemployment rate, Consumer confidence rate, Interest rate) and meso indicators (Real Estate quarterly data from Real Estate institution) and internal drivers including micro deteriorations (vacancy, WALE – weighted average lease expiry, EBITDA) and individual deteriorations (being Watch Listed, Credit event, suspension of payments, bankruptcy of a major tenant, actual or expected increase in vacancy level).
In general the amount of covers increased. The percentage of fully collateralised loans increased while the proportion of non-covered loans decreased. This was amongst others driven by a big decline in outstandings (29.0%) to Central Banks for which there is no collateral put aside.
Cover values including guarantees received – Investment and Money Market Portfolio (1)(2)
In the Investment portfolio, the cover mainly relates to government guarantees and supranational institution guarantees.
The increase in the gross MtM (25.4%) was mainly observed in the UK (Rest of Europe), due to Clearing Houses. After netting the increase for Clearing Houses was only EUR 1.5 billion. Main part of this increase came from the interest rate derivatives (IRD) portfolio which represents 68.7% (2013: 66.1%) of the total pre-settlement gross.
Within ING Bank, market risk falls under the supervision of the ALCO function with ALCO Bank as the highest approval authority. ALCO Bank determines the overall risk appetite for market risk. The ALCO function is regionally organised. The business lines Retail Banking (both Benelux and International), Commercial Banking and Corporate Line are represented within the respective regional and local ALCO’s. The ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk. This ensures a correct implementation of the ING Bank risk appetite.
This market risk paragraph elaborates on the various elements of the risk management approach for: › Market risk economic capital for trading and banking books › Market risks in the banking books › Market risks in the trading books
Real estate price risk includes the market risks in both the real estate investment and the development portfolio of ING Commercial Banking. The economic capital for real estate price risk is calculated by stressing the underlying market variables.
While aggregating the different economic capital market risk figures for the different portfolios, diversification benefits (based on stressed correlations) are taken into account as it is not expected that all extreme market movements will appear at the same moment.
Interest rate risk in banking book Interest rate risk in the banking books is defined as the exposure of a bank’s earnings, capital and market value to adverse movements in interest rates originated from positions in the banking books.
Risk measurement and the risk transfer process take place on a monthly basis, but more often if deemed necessary, for instance in volatile markets. The customer behaviour in relation to mortgages, loans, savings and demand deposits is modelled by MRM, based on extensive research. Model parameters are determined from historical data and expert opinion. Models are periodically validated by Model Validation. Models and parameters are backtested at least semi-annually and updated when deemed necessary. In the modelling of savings and current accounts different elements play a role: pricing strategies, outstanding and expected volumes and the level and shape of the yield curve. The analyses result in an estimated duration and an investment rule for the various portfolios. With respect to mortgages and loans, prepayment behaviour including interest rate dependent prepayment behaviour is modelled, as well as the interest sensitivity of embedded offered rate options.
Risk profile – FX translation result The following table presents the currency exposures in the banking books for the most important currencies for FX translation result: ING Group Annual Report 2014
Common Equity Tier 1 ratio sensitivity ING Bank cTaR Stress Scenario
Risk Profile Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments whose value reacts similarly to a particular security, a defined basket of securities, or a securities index. This equity exposure mainly consists of the investments in associates and joint ventures of EUR 861 million (2013: EUR 937 million) and equity
Risk profile ING Bank has two main different categories of real estate exposure on its banking books: first, the own buildings ING Bank occupies, and second - development assets, which mostly consists of former Real Estate Development and Real Estate Investment Management activities.
Other pricing sources can be independent market vendors, brokers or market makers, or recent transactions. The range of prices obtained from these pricing sources can diverge. The choice of one or the other pricing source can therefore result in different estimates of fair value. Selecting the most appropriate price within this range requires expertise and judgement. The selection of the pricing sources used is subject to internal approval and review.
ING has chosen to align existing fair valuation adjustments with the new requirements, hence support only one valuation process which meets both IFRS and CRR requirements, where allowed. This approach is supported by a new bank-wide valuation policy framework, and by detailed methodologies for fair valued instruments, per product and degree of liquidity. Benefits of the revised framework and chosen approach are a significant increase in consistency, and transparency of the fair valuation of financial instruments across different locations and books. An additional valuation adjustment through capital on the concentrated positions (the Concentration AVA) of EUR 35 million after tax is booked for ING Bank in 2014.
Risk profile The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon versus daily trading profits and losses. The overnight VaR is presented for the ING Commercial Banking trading portfolio from 2010 to 2014.
We observed backtest outliers on two days in 2014: one actual and two hypothetical P&L outliers. On both days, the markets were more volatile than to the history captured in the VaR estimate. The hypothetical outlier in October was due to large moves in both interest rate and equity derivatives markets. This hypothetical outlier however results from being very prudent in taking into account basis risks in the hypothetical P&L calculation, in line with the VaR calculation model. The outlier in December (actual and hypothetical outlier on the same day) was mainly due to increased volatilities in certain credit spreads. Only two outliers in a period of a year – and no outliers in previous years – indicate that the VaR model is prudent.
The increase in market risk Regulatory Capital for Trading as of 2014 is mainly due to stressed VaR increase driven by position changes in the Equity Derivatives books; and due to 10D VaR increase as a result of increased volatilities in emerging markets.
(1) Credit Spread Sensitivity (CS01) measures the impact on value of a 1 basis point increase in credit spreads.
ING Bank incorporates funding and liquidity management in its business strategy. In order to optimise it’s funding and liquidity risk management ING Bank has developed a funding and liquidity risk framework aimed at maximising liquidity access and minimising funding risks and costs. The main objective of ING’s funding and liquidity risk management is to maintain sufficient liquidity to ensure safe and sound operations under normal market circumstances and in times of stress.
Funding and liquidity risk includes three types of risk, two under normal, and one under stress conditions: 1. Business as usual situation: › Structural funding & liquidity risk: The potential negative impact on an organisation’s income or cash position due to mismatches between expected liquidity tenors of assets and liabilities.
Governance Within ING Bank, next to the Management Board Bank, staff (Risk and Finance) departments, Capital Management and the Bank Treasury function have oversight of and are responsible for managing funding and liquidity risk.
The identification of liquidity risks is primarily a responsibility of the 1st line business management function.
Liquidity risk management framework ING’s liquidity risk management framework incorporates all relevant risk principles with regard to the daily and on-going management of funding and liquidity risk. The framework contains the following key elements: › Liquidity risk appetite: This is set by Management Board Bank in line with ING’s complexity, business mix and liquidity risk profile and is reviewed on an annual basis by ALCO Bank and forms part of the input of business units in their medium term business plans. The defined risk appetite is allocated to the regional ALCO’s.
› Intraday Liquidity Management: Bank Treasury actively manages its short term liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions.
› Collateral Position Management: Bank Treasury actively manages the liquidity risk of its collateral positions to meet ING’s collateral needs, and resources, under both normal and stressed conditions and in accordance with all internal and regulatory rules.
› Stress testing: ALCO ensures that liquidity stress tests are planned, designed, conducted and reviewed, to identify sources of potential liquidity strain, to determine how these can and will be addressed and to ensure that current exposures remain within the established liquidity risk tolerance.
Implementation of the framework Liquidity risk appetite ING’s liquidity risk appetite is expressed in a set of limits to manage the level of liquidity risk ING is willing to take in the pursuit of its strategic objectives. These limits are embedded in risk appetite statements (RAS) which reflect three pillars of addressing risk: › Structural sources of risk: › Limits on liquidity mismatches › Limits on exposures to short term professional money markets › Defining target Loan-to-Deposit ratios
The risk appetite statements are also directly linked to liquidity stress testing.
Funding In detailing the activities of the bank regarding utilisation of professional market funding sources, the following key principles apply: › Maintaining adequate market access in both normal and stressed but operable market conditions. › Managing risk by adhering to internally and externally imposed risk limits and balance sheet ratios. › Optimising the cost of funding under the principles above.
In 2014, ING Bank had readily access to a large variety of funding sources, both short term and long term.
The size and composition of the Liquidity buffer depends on ING Bank’s Risk Appetite (risk tolerance) and regulatory liquidity standards.
› The location and size of liquidity buffers reflects the Bank’s or entity’s structure (e.g. legal and geographical) and business activities. › The size and status of the buffers are reported to ALCO on a monthly basis.
In accordance with Dutch Central Bank guidelines, ING Bank’s liquidity positions are stress tested on a monthly basis under a scenario that is a mix between a market event and an ING Bank specific event. The outcome of stress tests is evaluated and provides input to any follow-up and additional contingency measures required.
The non-financial risk department uses a layered functional approach within divisions to ensure systematic and consistent implementation of the framework of policies and minimum standards within ING Bank. To avoid potential conflicts of interests, it is imperative that the staff working in the department is impartial and objective when advising business management on non-financial risk matters in their business unit or business line. To facilitate this, a strong functional reporting line to the next higher level within ORM and Compliance is in place. The functional reporting line has clear accountabilities with regard to objective setting, remuneration, performance management and appointment of new staff as well as obligations to veto and escalate.
The risk appetite (defined as the acceptable and authorised maximum level of risk) is set by the Bank NFRC. Adherence to this risk appetite is monitored quarterly through the Non-Financial Risk Dashboard which reports the key non-financial risk exposures.
Within ING Bank the so-called Sanctions Risk Assessment (SRA) procedure has been developed and implemented within Lending Services. With this procedure all transactions within Lending Services go through a Transaction Due Diligence process in a standardised manner. The outcome of the SRA determines the level of contractual language that is being included in the deal documentation. The SRA takes into consideration the direct and indirect nexus a customer/deal has towards certain countries and sectors. A further roll-out into other business areas of ING is in progress.
Main developments in 2014 Whistleblower Ethics Line ING has an Ethics Line which makes it possible for all ING staff to report suspected cases of wrongdoing on a fully anonymous basis. This Ethics Line is fully independent of ING and operational since Q1 2014.
Learning Global education and awareness training in the form of e-learning modules was provided on topics such as Financial Economic Crime (FEC), Sanctions and Ultra High Risk Countries, Foreign Account Tax Compliance Act (FATCA), Gifts, Entertainment and Anti-Bribery (GEAB) and Competition Law. Furthermore, there were end of year campaigns for GEAB and anti-corruption to strengthen awareness.
A compliance curriculum and learning path was developed and rolled out for all compliance staff worldwide, providing information on compliance-related training available in the ING Learning Centre and recommended external trainings. Also a mandatory Compliance Induction e-module was introduced for new staff in ING Bank in the Netherlands.
Classroom sessions were delivered on other specialist topics. This included training in introduction programmes for new staff and talent programmes. A new training was introduced for staff in ING Bank worldwide who are new to the Operational Risk function. Compliance Risk Management continued its mandatory international Compliance Officer Training programme for all new compliance officers in ING Bank worldwide.
In addition, regular global calls were organised on various topical subjects to provide advice and clarification to NFR staff and provide the opportunity to ask questions.
Developments In 2014, Capital Management’s main focus remained executing the Group restructuring programme while ensuring it has sufficient loss-absorbing capacity to cope with severe unexpected losses without jeopardising our business as usual. In terms of the restructuring programme, ING completed the disentanglement from the Dutch State in 2014 while ensuring an orderly exit from Insurance activities.
In February 2014, ING together with the Dutch State completed the unwinding of the Illiquid Assets Back-Up Facility (IABF). The Dutch State has sold the remaining USD 11.5 billion of securities in the portfolio through three auctions at an average price of 77.3%. The proceeds were used to pay off the remaining loans from ING. Together with the settlement of fees, the unwinding resulted in a cash profit for the Dutch State of EUR 1.4 billion in 2014.
In January 2014 ING has completed, as already announced in 2013, the sale of 37.7 million units in SulAmérica to Swiss Re Group. This transaction further reduced ING’s stake in the Brazilian insurance holding to approximately 10%.
ING Group’s successful IPO of NN Group in July 2014 generated approximately EUR 2 billion proceeds and reduced its shareholding to 68.1%. As of the third quarter of 2014, NN Group is accounted for as an investment in associate held for sale. On 17 February, ING announced the sale of 52 million NN Group shares for total proceeds of EUR 1.2 billion. Following this transaction ING Groups’s stake in NN Group was reduced to 54.6%.
ING executed on other capital transactions as well. Firstly, in February 2014, ING has finalised the agreement in which it is released from all future financial obligations arising out of the closed Defined Benefit (DB) Pension Plan in the Netherlands. The Dutch DB Plan has ceased to be accounted for as a defined benefit plan and the Pension Asset related to this plan has accordingly been removed from ING’s balance sheet as of the first quarter 2014. The after-tax P&L impact of the agreement was approximately EUR -1.1 billion. Of this P&L impact, EUR -0.7 billion has been attributed to ING Bank and EUR -0.4 billion to NN Group. For ING Group, the removal of these financial obligations and the subsequent removal of a cross guarantee between ING Bank and NN Group was an important step towards the IPO of NN Group.
Secondly, ING redeemed EUR 1.5 billion 8% ING Group hybrid capital on the call date of 18 April 2014 which has reduced the level of Tier 1 securities in the capital base. It was replaced in ING Bank’s capital structure by the EUR 1.5 billion 3.625% CRD-IV eligible Tier 2 security that was successfully issued in February 2014 by ING Bank. NN Group redeemed EUR 1.2 billion of ING Group hybrids in the third quarter of 2014, further disentangling NN Group from ING Group. These hybrids were subsequently on-lent to ING Bank as CRR/ CRD IV eligible securities thus improving the Tier 1 capital base.
Processes for managing capital In addition to measuring capital adequacy, Capital Management also ensures that sufficient capital is available through setting targets and limits relevant to the above mentioned metrics for ING Group and ING Bank and ensuring adherence to the set limits and targets through planning and executing capital management transactions. The ongoing assessment and monitoring of capital adequacy is embedded in Capital Management’s capital planning process. Following the annual budgeting process, each year a capital plan is prepared for the Group as a whole and each of its material businesses. This plan is updated on a quarterly basis and it is assessed to what extent additional management actions are required. At all times maintaining sufficient financial flexibility should be preserved to meet important financial objectives. At the foundation of the capital plan are ING’s risk appetite statements that determine target setting. These constraints are being cascaded to the different businesses in line with our risk management strategy.
ING capital position according to CRR/CRD IV (fully loaded) (phased in)
– Deductions of significant investments in financial institutions −14,103 −4,631 – Proposed dividend −470 −470 – Other adjustments −4,339 −4,395 −4,780 -4,808 Regulatory adjustments −18,912 −4,395 −9,881 -4,808 Available common equity Tier 1 capital 31,512 33,668 40,543 33,256
NN Group equity (carrying value) 13,549 13,549 Voya equity (market value) 1,591 1,591 Bank of Beijing (market value) 2,090 2,090 Other significant investments 1,434 1,434 Total significant investments in FIs 18,664 18,664 10% of Group’s common equity Tier 1 −4,561 −4,517 Total deduction 14,103 14,147
Interest expenses on own fund instruments 451 583 Distributable items 36,228 34,693
Shareholders’ equity (parent) 50,424 45,776 Core Tier 1 securities 1,500 Group hybrid capital (2) 6,631 7,493
Adjustments to equity: Revaluation reserve debt securities −7,755 –4,227 Revaluation reserve crediting to life policyholders 3,765 2,914 Revaluation reserve cash flow hedge −3,877 –1,878 Goodwill (4) −1,060 –1,160 Defined benefit remeasurement 504 2,671
Revaluation reserves fixed income & other −8,423 –1,680 Group debt −1,492 –4,910 Total Adjusted Equity for Group 48,632 53,089
Tier 1 ratio Year-end actual Tier 1 ratio 13.5% 12.5% 13.5%
BIS ratio Year-end actual BIS ratio 14.6% 15.5% 16.5% Minimum BIS ratio 8.0% 8.0% 8.0%
The common equity Tier 1 ratio, Tier 1 ratio and BIS ratio are regulatory requirements for ING Group NV and ING Bank NV. It is our understanding that the regulatory guidance level for the Group CET1 will be in excess of 10.5% while we have an ambition for ING Bank to have a CET1 of more than 10%. The actual ratios at the end of 2014 were well in excess of these levels.
In the following table, we show the Group’s FICO ratio on the following basis: › Insurance required capital from applying European Solvency I rules to all NN Group entities globally (regardless of local capital requirements). The total carrying value of the Voya stake is considered as required capital; › Bank required capital based on applying the CRR/CRD IV with the Basel I floor (80% of Basel I Risk Weighted Assets); › Group FICO capital using an approach similar to that used for Bank BIS capital and Insurance IGD capital whereby Group leverage is deducted.
J. (Jeroen) van der Veer, chairman R.A.J.G. (Ralph) Hamers, CEO and chairman
(1) Legal reserves includes Share of associates and joint ventures reserve of EUR 11,853 million (2013: EUR 7,144 million) and Currency translation reserve of EUR 3 million (2013: EUR –1,430 million).
Remeasurement of the net defined benefit asset/liability –905 –905 Unrealised revaluations property in own use –8 –8 Unrealised revaluations available-for-sale and other –5,999 629 –5,370 Realised gains/losses transferred to profit and loss 177 177 Transfer to insurance liabilities/DAC 2,200 2,200 Change in cash flow hedge reserve –812 –812 Unrealised revaluations from net investment hedges 630 630 Exchange rate differences and other –2,031 –467 –4 –2,502 Total amount recognised directly in equity –5,835 –467 –288 –6,590 Net result 3,545 3,545
Basis of presentation The parent company accounts of ING Groep N.V. are prepared in accordance with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code. The accounting policies applicable to presentation and disclosures are in accordance with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code. The principles of valuation and determination of results stated in connection with the consolidated balance sheet and profit and loss account are also applicable to the parent company balance sheet and profit and loss account with the exception of Investments in group companies and investments in associates and joint ventures which are recognised at net asset value with goodwill, if any, recorded under intangible assets.
The profit and loss account is drawn up in accordance with Section 402, Book 2 of the Dutch Civil Code.
A legal reserve is carried at an amount equal to the share in the results of associates and joint ventures since their first inclusion at net asset value less the amount of profit distributions to which rights have accrued in the interim. Profit distributions which can be repatriated to the Netherlands without restriction are likewise deducted from the Share of associates and joint ventures reserve.
Opening balance 52,495 61,063 (Partial) Disposals of group companies –11,163 –1,418 Revaluations 7,714 –8,195 Result of group companies 3,380 3,565 Capital contribution 850 1,330 Dividend –1,541 –3,837
In 2013, Disposal of group companies includes the partial divestments of Voya.
Issue of shares 9,333 2 Issued share capital as at 1 January 2014 3,840,894 921
ING Group 330 Parent company annual accounts Notes to the parent company annual accounts continued
Positive components of the Share of associates and joint ventures reserve, Currency translation reserve and the Net defined benefit asset/liability remeasurement reserve that is included in the Other reserves cannot be freely distributed. The reserve for cash flow hedges is included in the Share of associates and joint ventures reserve on a net basis. Retained earnings can be freely distributed, except for an amount equal to the negative balance in each of the components of the Currency translation reserve, Share of associates and joint ventures reserve and the Net defined benefit asset/liability remeasurement reserve that is included in the Other reserves. Unrealised gains and losses on derivatives, other than those used in cash flow hedges, are presented in the profit and loss account and are therefore part of Retained earnings and are not included in Share of associates and joint ventures reserve.
ING Group 332 Parent company annual accounts Notes to the parent company annual accounts continued
The interest rate on the Amounts owed to group companies as at 31 December 2014 is 0.0% (2013: 0.262%).
We are independent of ING Group within the meaning of the relevant Dutch ethical requirements as included in the ‘Verordening op de gedrags- en beroepsregels accountants’ (VGBA) and the ‘Verordening inzake de onafhankelijkheid van accountants’ (ViO) and have fulfilled our other responsibilities under those ethical requirements.
Materiality Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual accounts. Materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.
Scope of the group audit ING Group is head of a group of entities. The financial information of this group is included in the consolidated annual accounts of ING Group. ING Group is structured along the segments: Retail Netherlands, Retail Belgium, Retail Germany, Retail Rest of the World, Commercial Banking, Corporate Line Banking and Legacy Insurance, each comprising of multiple entities and covering different countries.
We are responsible for directing, supervising and performing the group audit. In this respect we have determined the nature and extent of the audit procedures to be carried out for the reporting units based on their size and / or the risk profile.
Estimates used in calculation of insurance contract liabilities and Reserve Adequacy Test (see page 147) ING Group, through its consolidated stake in NN Group, has material insurance liabilities. The measurement of insurance contract liabilities involves judgement over uncertain future outcomes, mainly the ultimate total settlement value of long-term liabilities, including any guarantees provided to policyholders. Various economic and non-economic assumptions are being used to estimate these long-term liabilities, both in the insurance contract liabilities as reported in the balance sheet and in the reserve adequacy test.
› Concluding on the appropriateness of management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on ING Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the annual accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause ING Group ceasing to continue as a going concern.
Report on other legal and regulatory requirements Report on the report of the Executive Board and other information Pursuant to legal requirements of Part 9 of Book 2 of the Dutch Civil Code (concerning our obligation to report about the Executive Board report and other information): › We have no deficiencies to report as a result of our examination whether the Executive Board report, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of the Dutch Civil Code, and whether the Other information as required by Part 9 of Book 2 of the Dutch Civil Code has been annexed.
Engagement We have been appointed as auditors for the audit of the 2014 annual accounts of ING Group at the annual meeting held on 13 May 2013 and have been the external auditor for a long time. The most recent rotation of the signing external auditor on the audit of the ING Group annual accounts was in 2012. Rotation of the signing external auditor is one of our safeguards to maintain our auditor independece.
Net result 1,251 Addition to reserves pursuant to Article 37 (4) of the Articles of Association 781 At the disposal of the General Meeting of Shareholders pursuant to Article 37 (5) of the Articles of Association 470
Subsequent events Sale of NN Group shares In February 2015, ING sold 52 million ordinary shares of NN Group. As part of the transaction, NN Group repurchased 8.3 million ordinary shares. The gross proceeds to ING Group from the offering, including the repurchase by NN Group, amounted to EUR 1.2 billion. The transaction reduced the ownership of ING in NN Group from 68.1% to 54.6%. The transaction did not impact the profit and loss account of ING Group, and has a negative impact of approximately EUR 1.6 billion on the shareholders’ equity of ING Group, being the difference between the net proceeds of the transaction and the IFRS carrying value as at 31 December 2014 of the equity stake sold. The actual impact on equity may differ from this estimate due to changes in the IFRS carrying value between 31 December 2014 and the close of the transaction.
In the course of 2008 and 2009, governments around the world, including the Dutch government, implemented unprecedented measures to provide assistance to financial institutions, in certain cases requiring (indirect) influence on or changes to governance and remuneration practices. In certain cases, governments nationalised companies or parts thereof. The measures adopted in the Netherlands include both emergency funding and capital reinforcement, and a Dutch Credit Guarantee Scheme. The liquidity and capital reinforcement measures expired on 10 October 2009, and the Credit Guarantee Scheme of the Netherlands expired on 31 December 2010. Our participation in certain of these measures has resulted in certain material restrictions on us, including those required by the European Commission (‘EC’) as part of our Restructuring Plan. See ‘Risks Related to the Restructuring Plan — The implementation of the Restructuring Plan and the divestments in connection with that plan will alter and have already significantly altered the size and structure of the Group and involve significant costs and uncertainties that could materially impact the Group’. The Restructuring Plan, as well as any potential future transactions with the Dutch State or any other government, if any, or actions by such government regarding ING could adversely impact the position or rights of shareholders, bondholders, customers or creditors and our results, operations, solvency, liquidity and governance.
For European banks, the Basel III requirements were implemented through the so-called Capital Requirements Regulation and Capital Requirements Directive IV (‘CRD IV Regulation’ and ‘CRD IV Directive’, respectively), which were adopted by the EC in June 2013 following approval by the European Parliament in April 2013. The CRD IV Regulation entered into force on 28 June 2013 and the CRD IV Directive on 17 July 2013, and all banks and investment firms in the EU (as opposed to the scope of the Basel III requirements, which apply to ‘internationally active banks’) are required to apply the new rules from 1 January 2014 in phases, with full implementation by 1 January 2019. While the full impact of these rules, and any additional requirements for SIFIs or G-SIFIs, if and as applicable to the Group, will depend on how the CRD IV Directive will be transposed into national laws in each Member State, including the extent to which national regulators and supervisors can set more stringent limits and additional capital requirements or surcharges, as well as on the economic and financial environment at the time of implementation and beyond, we expect these rules to have a material impact on ING’s operations and financial condition and they may require the Group to seek additional capital.
Solvency II The EU is adopting a full scale revision of the solvency framework and prudential regime applicable to insurance and reinsurance companies known as “Solvency II”. The EC is currently in the process of preparing implementing technical standards.
On 19 January 2011, the European Commission (the “EC”) presented a draft of a directive to amend the Solvency II Directive, the Omnibus II directive. On 13 November 2013, the EU Council and the European Parliament achieved a provisional political agreement on the Omnibus II Directive. This agreement was confirmed by the European Parliament on 12 March 2014 and was approved by the European Council on 14 April 2014.
Under Pillar 1 of Solvency II, insurers are required to hold own funds equal to or in excess of a solvency capital requirement (“SCR”). Solvency II will categorise own funds into three tiers with differing qualifications as eligible available regulatory capital. Under Solvency II, own funds will use IFRS balance sheet items where these are at fair value and replace other balance sheet items using market consistent valuations. The determination of the technical provisions and the discount rate to be applied in determining the technical provisions is still under debate and the outcome of discussions regarding these matters is uncertain as key parameters will only be established in the implementing technical standards. However, it is certain that the determination of the technical provisions and the discount rate to be applied will have a material impact on the amount of own funds and the volatility of the level of own funds. The SCR is a risk-based capital requirement which will be determined using either the standard formula (set out in level 2 implementing measures), or, where approved by the relevant supervisory authority, an internal model. The internal model can be used in combination with, or as an alternative to, the standard formula as a basis for the calculation of an insurer’s SCR. In the Netherlands, such a model (which would include an internal model of NN) must be approved by DNB.
Dodd-Frank established the Federal Insurance Office (‘FIO’) within the U.S. Department of the Treasury (‘Treasury Department’) to be headed by a director appointed by the Secretary of the Treasury Department. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office would perform various functions with respect to insurance, including participating in the FSOC’s decisions regarding insurers (potentially including the Group and its subsidiaries) to be designated for stricter regulation by the Federal Reserve. The FIO may recommend enhanced regulations to states.
For instance, ING Group’s wholly owned subsidiary, ING Bank, may from time to time consider whether to establish a branch office in the U.S. If ING Bank were to establish a U.S. branch, we would be subject to supervision and regulation by the Federal Reserve under various laws and various restrictions on our activities under those laws, including the Bank Holding Company Act of 1956, as amended, and the International Banking Act of 1978, and, as a consequence, such supervision and regulation, including such restrictions on activities could materially impact our operations. These would include, among others, the Volcker Rule and heightened supervisory requirements and prudential standards.
Although the full impact of Dodd-Frank and its implementing regulations cannot be determined at this time, many of their requirements could have profound and/or adverse consequences for the financial services industry, including for us. Dodd-Frank could make it more expensive for us to conduct business, require us to make changes to our business model or satisfy increased capital requirements, subject us to greater regulatory scrutiny or to potential increases in whistleblower claims in light of the increased awards available to whistleblowers under Dodd-Frank and have a material effect on our results of operations or financial condition.
The Group closely monitors all present and new legislation that is or will be applicable for its organisation, and is currently investigating all implications of FATCA and legislation of countries that have entered into IGAs. While investigating these implications, the Group is and will be in close contact with all of its stakeholders, including its peers and financial industry representative organisations.
Bank Recovery and Resolution Regimes In June 2012, the ‘Intervention Act’ (Wet bijzondere maatregelen financiële ondernemingen) came into force in the Netherlands, with retroactive effect from 20 January 2012. The Intervention Act mainly amends the Dutch Financial Supervision Act and the Dutch Insolvency Act and allows Dutch authorities to take certain actions when banks and insurers fail and cannot be wound up under ordinary insolvency rules due to concerns regarding the stability of the overall financial system. It is composed of two categories of measures. The first category of measures can be applied if a bank or insurer experiences serious financial problems and includes measures related to the timely and efficient liquidation of failing banks and insurers. This set gives the DNB the power to transfer customer deposits (only in the case of banks), assets and/or liabilities other than deposits and issued shares of an entity to third parties or to a bridge bank if the DNB deems that, in respect of the relevant bank or insurance company, there are signs of an adverse development with respect to its funds, solvency, liquidity or technical provisions and it can be reasonably foreseen that such development will not be sufficiently or timely reversed. The DNB was also granted the power to influence the internal decision-making of failing institutions through the appointment of an ‘undisclosed administrator’. The second category of measures can be applied if the stability of the financial system is in serious and immediate danger as a result of the situation of a Dutch financial institution and includes measures intended to safeguard the stability of the financial system as a whole. This set of measures grants the authority to the Minister of Finance to take immediate measures or proceed to expropriation of assets of or shares in the capital of failing financial institutions. For example, on 1 February 2013, the Dutch State nationalised the SNS Reaal bank and insurance group (‘SNS Reaal’) by expropriating shares, Core Tier 1 securities and other subordinated debts issued by SNS Reaal. The Dutch Ministry of Finance has stated that it will impose in 2014 an aggregate EUR 1 billion one-time levy on Dutch banks, including ING Bank, to share the costs of the SNS Reaal nationalisation. This resulted in a charge of EUR 303 million for ING Bank, which was paid in the first three quarters of 2014.
The Intervention Act will need to be amended following the implementation of the ‘Bank Recovery and Resolution Directive’. The Bank Recovery and Resolution Directive was adopted by the European Parliament in April 2014 and by the European Council in June 2014. On 12 June 2014, the Bank Recovery and Resolution Directive was published in the Official Journal of the EU and came into effect on 2 July 2014. The Bank Recovery and Resolution Directive includes, among other things, the obligation for institutions to draw up a recovery plan and the obligation for resolution authorities in the Member States to draw up a resolution plan, the resolution authorities’ power to take early intervention measures and the establishment of a European system of financing arrangements. The Bank Recovery and Resolution Directive confers extensive resolution powers to the resolution authorities, including the power to require the sale of (part of a) business, to establish a bridge institution, to separate assets and to take bail-in measures. The stated aim of the Bank Recovery and Resolution Directive is to provide supervisory authorities, including the relevant Dutch resolution authority, with common tools and powers to address banking crises pre-emptively in order to safeguard financial stability and minimise taxpayers’ exposure to losses.
and recommendations intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated. These proposals address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance, including executive compensation, and a host of related issues associated with responses to the financial crisis. One of the proposals is a common international standard on Total Loss-Absorbing Capacity (‘TLAC’) for global systemically important banks (‘G-SIBs’). The policy proposal consists of a set of principles and a detailed term sheet on the adequacy of loss-absorbing and recapitalisation capacity of G-SIBs. This proposal will be finalised in 2015 taking into account a consultation and impact assessment studies. It is currently expected that the TLAC will not apply until 1 January 2019. The lawmakers and regulatory authorities in a number of jurisdictions in which the Group’s subsidiaries conduct business have already begun introducing legislative and regulatory changes consistent with G20 and FSB recommendations, and the potential impact of such changes on our business, results of operations and financial condition remains unclear.
Sections 382 and 383 of the U.S. Internal Revenue Code, as amended, operate as anti-abuse rules, the general purpose of which is to prevent trafficking in tax losses and credits, but which can apply without regard to whether a ‘loss trafficking’ transaction occurs or is intended. These rules are triggered when an ‘ownership change’ — generally defined as when the ownership of a company, or its parent, changes by more than 50% (measured by value) on a cumulative basis in any three-year period — occurs. If triggered, the amount of the taxable income for any post-change year which may be offset by a pre-change loss is subject to an annual limitation. In March 2014, our U.S. subsidiaries had an ‘ownership change’ for purposes of Sections 382 and 383. Future increases of capital or other changes in ownership may adversely affect our cumulative ownership, and could trigger an ‘ownership change’, which could further limit the ability of our U.S. subsidiaries to use tax attributes, and could correspondingly decrease the value of these attributes. The risk going forward, however, is significantly less.
The aforementioned impacts have arisen primarily as a result of valuation and impairment issues arising in connection with our investments in real estate (both in and outside the U.S.) and private equity, exposures to European sovereign debt and to U.S. mortgage-related structured investment products, including sub-prime and ‘Alt-A’ residential and commercial mortgage-backed securities, collateralised debt obligations and collateralised loan obligations, monoline insurer guarantees, private equity and other investments. In many cases, the markets for investments and instruments have been and remain highly illiquid, and issues relating to counterparty credit ratings and other factors have exacerbated pricing and valuation uncertainties. Valuation of such investments and instruments is a complex process involving the consideration of market transactions, pricing models, management judgment and other factors, and is also impacted by external factors, such as underlying mortgage default rates, interest rates, rating agency actions and property valuations. Although we continue to monitor our exposures, there can be no assurance that we will not experience further negative impacts to our shareholders’ equity, solvency position, liquidity financial condition or profit and loss accounts in future periods.
On 13 January 2012, S&P proceeded to downgrade the credit ratings of France, Austria, Italy, Spain, Portugal and a handful of other EEA states (while reaffirming the credit ratings of Germany, the Netherlands, Ireland and other EEA states and changed the outlook to ‘negative’ for 15 Eurozone countries). Further related downgrades of European sovereign ratings and of corporate ratings have occurred since that date, including the downgrade of the Netherland’s sovereign debt rating from AAA to AA+ by S&P on 29 November 2013. These announcements, as well as any future changes are of high importance to the Group, because they affect our financing costs and, as a result, our profitability.
Because we operate in highly competitive markets, including our home market, we may not be able to increase or maintain our market share, which may have an adverse effect on our results of operations. There is substantial competition in the Netherlands and the other countries in which we do business for the types of insurance, commercial banking, investment banking, asset management and other products and services we provide. Customer loyalty and retention can be influenced by a number of factors, including brand recognition, reputation, relative service levels, investment performance of our products, the prices and attributes of products and services, scope of distribution, perceived financial strength, credit ratings and actions taken by competitors. A decline in our competitive position as to one or more of these factors could adversely impact our ability to maintain or further increase our market share, which would adversely affect our results of operations. Such competition is most pronounced in our more mature markets of the Netherlands, Belgium, the rest of Western Europe and Australia. In recent years, however, competition in emerging markets, such as Latin America, Asia and Central and Eastern Europe, has also increased as large financial services companies from more developed countries have sought to establish themselves in markets which are perceived to offer higher growth potential, and as local institutions have become more sophisticated and competitive and proceeded to form alliances, mergers or strategic relationships with our competitors. The Netherlands is our largest market. Our main competitors in the banking sector in the Netherlands are ABN AMRO Bank and Rabobank. Our main competitors in the insurance sector in the Netherlands are Achmea, ASR, Delta Lloyd and Aegon. Competition could also increase due to new entrants in the markets that may have new operating models that are not burdened by potentially costly legacy operations. Increasing competition in these or any of our other markets may significantly impact our results if we are unable to match the products and services offered by our competitors. Future economic turmoil may accelerate additional consolidation activity. Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms or have declared bankruptcy. These developments could result in our competitors gaining greater access to capital and liquidity, expanding their ranges of products and services, or gaining geographic diversity. We may experience pricing pressures as a result of these factors in the event that some of our competitors seek to increase market share by reducing prices. In addition, under the Restructuring Plan, we were required to agree to certain restrictions imposed by the EC, including with respect to our price leadership in EU banking markets and our ability to make acquisitions of financial institutions. See ‘Risks related to the Restructuring Plan — The limitations required by the EC on our ability to compete and to make acquisitions could materially impact the Group’. Furthermore, if our financial strength and credit ratings are lower than those of our competitors, we may experience increased surrenders and/or a significant decline in sales of insurance and annuities products. Failure to effectively compete within the industry may thus have a material adverse impact on our business, results of operations and financial condition.
General Third parties that owe us money, securities or other assets may not pay or perform under their obligations. These parties include the issuers and guarantors (including sovereigns) of securities we hold, borrowers under loans originated, reinsurers, customers, trading counterparties, securities lending and repurchase counterparties, counterparties under swaps, credit default and other derivative contracts, clearing agents, exchanges, clearing houses and other financial intermediaries. Defaults by one or more of these parties on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other factors, or even rumours about potential defaults by one or more of these parties or regarding a severe distress of the financial services industry generally, could have a material adverse effect on our results of operations, financial condition and liquidity. In light of experiences with significant constraints on liquidity and the high cost of funds in the interbank lending market, and given the high level of interdependence between financial institutions, we are and will continue to be subject to the risk of deterioration of the commercial and financial soundness, or perceived soundness, of sovereigns and other financial services institutions. This is particularly relevant to our franchise as an important and large counterparty in equity, fixed income and foreign exchange markets, including related derivatives, which would be then exposed to concentration risk.
We routinely execute a high volume of transactions, such as unsecured debt instruments, derivative transactions and equity investments with counterparties and customers in the financial services industry, including brokers and dealers, commercial and investment banks, mutual and hedge funds, insurance companies, institutional clients, futures clearing merchants, swap dealers, and other institutions, resulting in large periodic settlement amounts, which may result in our having significant credit exposure to one or more of such counterparties or customers. As a result, we face concentration risk with respect to liabilities or amounts we expect to collect from specific counterparties and customers. We are exposed to increased counterparty risk as a result of recent financial institution failures and weakness and will continue to be exposed to the risk of loss if counterparty financial institutions fail or are otherwise unable to meet their obligations. A default by, or even concerns about the creditworthiness of, one or more of these counterparties or customers or other financial services institutions could therefore have an adverse effect on our results of operations or liquidity.
With respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realised, or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. We also have exposure to a
In addition, we are subject to the risk that our rights against third parties may not be enforceable in all circumstances. The deterioration or perceived deterioration in the credit quality of third parties whose securities or obligations we hold could result in losses and/ or adversely affect our ability to rehypothecate or otherwise use those securities or obligations for liquidity purposes. A significant downgrade in the credit ratings of our counterparties could also have a negative impact on our income and risk weighting, leading to increased capital requirements. While in many cases we are permitted to require additional collateral from counterparties that experience financial difficulty, disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. Our credit risk may also be exacerbated when the collateral we hold cannot be realised or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due to us, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those experienced during the recent financial crisis of 2008. The termination of contracts and the foreclosure on collateral may subject us to claims for the improper exercise of our rights under such contracts. Bankruptcies, downgrades and disputes with counterparties as to the valuation of collateral tend to increase in times of market stress and illiquidity. Any of these developments or losses could materially and adversely affect our business, financial condition, results of operations, liquidity and/or prospects.
› higher interest rates can lead to lower investments prices reduce the revaluation reserves, thereby lowering IFRS equity and the capital ratios. Also the lower securities value leads to a loss of liquidity generating capacity which needs to be compensated by attracting new liquidity generating capacity which reduces our results of operations; › prepayment losses if prepayment rates are lower than expected or if interest rates increase too rapidly to adjust the accompanying hedges; › (depending on the position) a significant collateral posting requirement associated with our interest rate hedge programs, which could materially and adversely affect liquidity; and/or › decreased fee income associated with balances invested in fixed income funds.
We may incur losses due to failures of banks falling under the scope of state compensation schemes. In the Netherlands and other jurisdictions, deposit guarantee schemes and similar funds (‘Compensation Schemes’) have been implemented from which compensation may become payable to customers of financial services firms in the event the financial service firm is unable to pay, or unlikely to pay, claims against it. In many jurisdictions in which we operate, these Compensation Schemes are funded, directly or indirectly, by financial services firms which operate and/or are licensed in the relevant jurisdiction. ING Bank is a participant in the Dutch Deposit Guarantee Scheme, which guarantees an amount of EUR 100,000 per person per bank (regardless of the number of accounts held). The costs involved with making compensation payments under the Dutch Deposit Guarantee Scheme are allocated among the participating banks by the DNB, based on an allocation key related to their market shares with respect to the deposits protected by the Dutch Deposit Guarantee Scheme. Given our size, we may incur significant compensation payments to be made under the Dutch Deposit Guarantee Scheme, which we may be unable to recover from the bankrupt estate. Such costs and the associated costs to be borne by us may have a material adverse effect on our results of operations and financial condition. As of 1 July 2015, the Dutch Deposit Guarantee Scheme is to change from an ex-post scheme, where we would have contributed after the failure of a firm, to an ex-ante scheme where we will pay quarterly risk-weighted contributions into a fund for the Dutch Deposit Guarantee Scheme. The fund is to grow to a target size of 1% of all deposits guaranteed under the Dutch Deposit Guarantee Scheme. The target size would have to be reached in 15 years. However, in December 2013, EU Member States and the European Parliament agreed on reforms to the EU Directive on Deposit Guarantee Scheme, which were adopted by the European parliament in April 2014 and published in the Official Journal of the EU in June 2014. Main characteristics include an ex-ante funding of up to 0.8% of the banking
› actual claims payments significantly exceeding associated insurance reserves, 5) require us, as an issuer of securities, to pay higher interest rates on debt securities that we issue in the financial markets from time to time to finance our operations, which would increase our interest expenses and reduce our results of operations, and/or 6) result in decreased fee income associated with a decline in the variable annuity balances invested in fixed income funds.
Risks related to the group’s business, operations and regulatory environment We may be unable to manage our risks successfully through derivatives. We employ various economic hedging strategies with the objective of mitigating the market risks that are inherent in our business and operations. These risks include currency fluctuations, changes in the fair value of our investments, the impact of interest rates, equity markets and credit spread changes, the occurrence of credit defaults, changes in client behaviour and changes in mortality and longevity. We seek to control these risks by, among other things, entering into a number of derivative instruments, such as swaps, options, futures and forward contracts, including, from time to time, macro hedges for parts of our business, either directly as a counterparty or as a credit support provider to affiliate counterparties.
as transaction fees or breakage costs. There have been periods in the past, and it is likely that there will be periods in the future, during which we have incurred or may incur losses on transactions, possibly significant, after taking into account our hedging strategies. Further, the nature and timing of our hedging transactions could actually increase our risk and losses. Hedging instruments we use to manage product and other risks might not perform as intended or expected, which could result in higher (un)realised losses, such as credit value adjustment risks or unexpected P&L effects, and unanticipated cash needs to collateralise or settle such transactions. Adverse market conditions can limit the availability and increase the costs of hedging instruments, and such costs may not be recovered in the pricing of the underlying products being hedged. In addition, hedging counterparties may fail to perform their obligations, resulting in unhedged exposures and losses on positions that are not collateralised. As such, our hedging strategies and the derivatives that we use or may use may not adequately mitigate or offset the risk of interest rate volatility, and our hedging transactions may result in losses.
As a part of their responses to the financial crisis of 2008, the EC and national governments throughout Europe have introduced and are expected to continue introducing various legislative initiatives that aim to ensure that financial institutions’ remuneration policies and practices are consistent with and promote sound and effective risk management, and that impose restrictions on the remuneration of personnel, with a focus on risk alignment of performance-related remuneration. Such initiatives include, among others, measures set out in Directive 2010/76/EU (CRD III) and Directive 2013/36/EU (CRD IV), the Guidelines on Remuneration Policies and Practices published by (the predecessor of) the European Banking Authority, the Regulation of the DNB on Sound Remuneration Policies (Regeling beheerst beloningsbeleid Wft 2014), the Dutch law with respect to the limitation of liability of the DNB and AFM and the prohibition of the payment of variable remuneration to board members and day-to-day policy makers of financial institutions that receive state aid (Wet aansprakelijkheidsbeperking DNB en AFM en bonusverbod staatsgesteunde ondernemingen) and the Dutch Law on Remuneration Policies of Financial Undertakings (Wet beloningsbeleid financiële ondernemingen, Wbfo) effective as of 7 February 2015. The Wbfo introduces a variable remuneration cap at 20% of base salary for all persons working in the financial sector in the Netherlands. Persons fully covered by a collective labour agreement in the Netherlands are subject to an individual cap of 20%. Persons that are not (solely) remunerated on the basis of a CLA in the Netherlands are subject to the 20% cap based on an aggregate level. For this group, as well as for persons working outside the Netherlands, exceptions are possible, in line with CRD IV, but only under strict conditions. In addition, the proposal limits exit compensation and retention compensation and prohibits guaranteed variable remuneration. The introduction of the Wbfo will result in a unlevel playing field in the Netherlands for ING due to the fact that branch offices (in the Netherlands) of financial institutions that fall under CRD IV (EER countries) are not limited to the 20% cap but are limited to the CRD IV caps.
from utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licences. Alternatively, we could be required to enter into costly licensing arrangements with third parties or to implement a costly workaround. Any of these scenarios could have a material adverse effect on our business and results of operations.
Because we use assumptions about factors to calculate the amount of certain items, the use of different assumptions about these factors may have an adverse impact on our results of operations as well as solvency position. The establishment of insurance provisions, including the impact of minimum guarantees which are contained within certain variable annuity products, the adequacy test performed on the provisions for life policies and the establishment of DAC and value of business acquired are inherently uncertain processes involving assumptions about factors such as court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour (e.g., lapses, persistency, etc.) and other factors, and, in the insurance business, assumptions concerning mortality, longevity and morbidity trends. The use of different assumptions about these factors could have a material effect on insurance provisions and underwriting expense as well as on our solvency position more generally. Changes in assumptions may lead to changes in the insurance provisions over time. Furthermore, some of these assumptions can be volatile.
In addition, as a result of our operations in certain countries, we are subject to risks of possible nationalisation, expropriation, price controls, exchange controls and other restrictive government actions, as well as the outbreak of hostilities, in these markets. In addition, the current economic environment in certain countries in which we operate may increase the likelihood for regulatory initiatives to enhance consumer protection or to protect homeowners from foreclosures. Any such regulatory initiative could have an adverse impact on our ability to protect our economic interest, for instance in the event of defaults on residential mortgages.
Rulings or announcements made by courts, including the European Court of Justice and advisory opinions issued by the Attorney General to such Court on questions being considered by such Court, or decision-making bodies or actions taken by regulators or governmental authorities against NN Group or other Dutch insurance companies in respect of unit-linked products, or settlements or any other actions to the benefit of customers (including product improvements or repairs) by other Dutch insurance companies towards consumers, consumer protection organisations, regulatory or governmental authorities or other decision making bodies in
respect of the unit-linked products may affect the (legal) position of NN Group and may force NN Group to take (financial) measures that could have a substantial impact on the financial condition, results of operations, solvency or reputation of NN Group and ING. As a result of the public and political attention the unit-linked issue has received, it is also possible that sector-wide measures may be imposed by governmental authorities or regulators in relation to unit-linked products in the Netherlands. The impact on NN Group of rulings made by courts or decision-making bodies, actions taken by regulators or governmental bodies against other Dutch insurance companies in respect of unit-linked products, or settlements or any other actions to the benefit of customers (including product improvements or repairs) may be determined not only by market share but also by product features, portfolio composition and other factors. Adverse decisions or the occurrence of any of the developments as described above could result in outcomes materially different than if NN Group or its products had been judged or negotiated solely on their own merits.
NN Group’s book of policies dates back many years, and in some cases several decades. Over time, the regulatory requirements and expectations of various stakeholders, including customers, regulators and the public at large, as well as standards and market practice, have developed and changed, increasing customer protection. As a result policyholders and consumer protection organisations have initiated and may in the future initiate proceedings against NN Group alleging that products sold in the past fail to meet current requirements and expectations. In any such proceedings, it cannot be excluded that the relevant court, regulator, governmental authority or other decision-making body will apply current norms, requirements, expectations, standards and market practices on laws and regulations to products sold, issued or advised on by NN Group.
Any of the developments described above could be substantial for NN Group and ING and as a result may have a material adverse effect on ING’s business, reputation, revenues, results of operations, solvency, financial condition and prospects.
Furthermore, ING Bank’s assets are risk-weighted. Downgrades of these assets could result in a higher risk-weighting, which may result in higher capital requirements. This may impact net earnings and the return on capital, and may have an adverse impact on our competitive position. For ING’s insurance businesses in a number of jurisdictions, downgrades of assets will similarly affect the capital requirements for NN Group in those jurisdictions.
As rating agencies continue to evaluate the financial services industry, it is possible that rating agencies will heighten the level of scrutiny that they apply to financial institutions, increase the frequency and scope of their credit reviews, request additional information from the companies that they rate and potentially adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels. It is possible that the outcome of any such review of us would have additional adverse ratings consequences, which could have a material adverse effect on our results of operations, financial condition and liquidity. We may need to take actions in response to changing standards or capital requirements set by any of the rating agencies, which could cause our business and operations to suffer. We cannot predict what additional actions rating agencies may take, or what actions we may take in response to the actions of rating agencies.
Adverse publicity, claims and allegations, litigation and regulatory investigations and sanctions may have a material adverse effect on our business, revenues, results of operations, financial condition and/or prospects. We are subject to litigation, arbitration and other claims and allegations in the ordinary course of business, including in connection with our activities as financial services provider, insurer, employer, investor and taxpayer. Adverse publicity and damage to our reputation arising from our failure or perceived failure to comply with legal and regulatory requirements, financial reporting irregularities involving other large and well-known companies, possible findings of government authorities in various jurisdictions which are investigating several rate-setting processes, notifications made by whistleblowers, increasing regulatory and law enforcement scrutiny of ‘know your customer’ anti-money laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures and anti-terrorist-financing procedures and their effectiveness, regulatory investigations of the mutual fund, banking and insurance industries, and litigation that arises from the failure or perceived failure by us to comply with legal, regulatory and compliance requirements could result in adverse publicity and reputational harm, lead to increased regulatory supervision, affect our ability to attract and retain customers and maintain access to the capital markets, result in cease and desist orders, claims, enforcement actions, fines and civil and criminal penalties, other disciplinary action or have other material adverse effects on us in ways that are not predictable. Some claims and allegations may be brought by or on behalf of a class and claimants may seek large or indeterminate amounts of damages, including compensatory, liquidated, treble and punitive damages. See ‘— Holders of NN Group’s products where the customer bears all or part of the investment risk, or consumer protection organisations on their behalf, have filed claims or proceedings against NN Group and may continue to do so. A negative outcome of such claims and proceedings brought by customers or organisations acting on their behalf, actions taken by regulators and/or governmental authorities against NN Group or other insurers in respect of unit-linked products, settlements or any other actions for the benefit of customers by other insurers and sector-wide measures could substantially affect NN Group’s insurance business and, as a result, may have a material adverse effect on NN Group’s and ING’s reputation, results of operations, solvency and financial condition. In addition, claims and proceedings may be brought against NN Group in respect of other products with one or more similar product characteristics sold, issued or advised on by NN Group in and outside the Netherlands. In this risk factor NN Group means NN Group N.V. and its subsidiaries’ and ‘— ING is exposed to the risk of claims from customers who feel misled or treated unfairly because of advice or information received’. Our reserves for litigation liabilities may prove to be inadequate. Claims and allegations, should they become public, need not be well founded, true or successful to have a negative impact on our reputation. In addition, press reports and other public statements that assert some form of wrongdoing could result in inquiries or investigations by regulators, legislators and law enforcement officials, and responding to these inquiries and investigations, regardless of their ultimate outcome, is time-consuming and expensive. Adverse publicity, claims and allegations, litigation and regulatory investigations and sanctions may have a material adverse effect on our business, revenues, results of operations, financial condition and/or prospects in any given period. For additional information with respect to specific proceedings, see Note 51 ‘Legal proceedings’ to the consolidated financial statements of ING Group.
Risks related to the restructuring plan The implementation of the Restructuring Plan and the divestments in connection with that plan will alter and have already significantly altered the size and structure of the Group and involve significant costs and uncertainties that could materially impact the Group. As described further under Note 56 ‘Transactions with the Dutch State and the European Commission Restructuring Plan’ to the consolidated financial statements of ING Group, as a result of having received state aid through the Dutch State Transactions, we were required to submit a restructuring plan to the EC in connection with obtaining final approval for the Dutch State Transactions under the EC state aid rules (as amended, the ‘Restructuring Plan’). While the IABF was terminated in December 2013, and on 7 November 2014, ING Group made the final repayment on the Core Tier 1 securities, the continuing restrictions imposed by the Restructuring Plan could adversely affect our ability to maintain or grow market share in key markets as well as our results of operations. See Note 56 to the consolidated financial statements of ING Group for more information on the implications of and the remaining obligations arising from the Restructuring Plan and ‘—The limitations required by the EC on our ability to compete and to make acquisitions or call certain debt instruments could materially impact the Group’.
There can be no assurance that we will be able to implement complete the remaining elements of the Restructuring Plan successfully or complete the remaining planned divestments on favourable terms or at all, particularly in light of market developments in general as well as the fact that other financial institutions may place similar assets for sale during the same time period and may seek to dispose of assets in the same manner. Any failure to successfully implement. Not completing the remaining elements of the Restructuring Plan may result in EC enforcement actions or EC procedures and may have a material adverse impact on the assets, profitability, capital adequacy and business operations of the Group. Moreover, in connection with the implementation completion of the remaining elements of the Restructuring Plan, including any proposed divestments, we or potential buyers may need to obtain various approvals, including of shareholders, works councils and regulatory and competition authorities, and we and potential buyers may face difficulties in obtaining these approvals in a timely manner or at all. In addition, the implementation of the remaining elements of the Restructuring Plan may strain relations with our employees, and specific proposals in connection with the implementation may be opposed by labour unions or works councils.
The limitations required by the EC on our ability to compete and to make acquisitions could materially impact the Group. As part of our Restructuring Plan, we have undertaken with the EC to accept certain limitations on our ability to compete in certain retail, private and direct banking markets in the EU and on our ability to acquire financial institutions. These restrictions in principle apply until the earlier of (1) 18 November 2015, and (2) the date upon which more than 50% of ING’s interest in its insurance and investment management businesses has been divested. ING is furthermore restricted to a maximum ratio for mortgage production at ING Retail Banking Netherlands in relation to the mortgage production of Nationale-Nederlanden Bank until ING has divested more than 50% of its interest in NN Group c.q. Nationale-Nederlanden Bank or until year-end 2015. A divestment of more than 50% of ING’s interest as mentioned in this paragraph also means that ING Group (a) no longer has a majority of representatives on the boards of these businesses and (b) has deconsolidated these businesses from ING Group’s financial statements in line with IFRS accounting rules. The limitations described above will impose significant restrictions on our banking business operations and on our ability to take advantage of market conditions and growth opportunities. Such restrictions could adversely affect our ability to maintain or grow market share in key markets, as well as our results of operations.
Upon the implementation of the Restructuring Plan, we will be less diversified and may experience competitive and other disadvantages. As a result of divestments effected to date and following completion of the planned divestments under the Restructuring Plan, we expect to become a significantly smaller, regional financial institution focused on retail, direct and commercial banking in the Benelux region and certain other parts of Europe, as well as selected markets outside Europe. Although we will remain focused on banking operations, we may become a smaller bank than that represented by our current banking operations. In the highly competitive Benelux market and the other markets in which we operate, our competitors may be larger, more diversified and better capitalised and have greater geographical reach than us, which could have a material adverse effect on our ability to compete, as well as on our profitability. The divested businesses may also compete with the retained businesses, on their own or as part of the purchasers’ enlarged businesses. For example, Nationale-Nederlanden Bank is already competing before its planned divestment with our retail banking business in the Netherlands, as Nationale-Nederlanden Bank has been ring-fenced from ING Bank’s operations for this purpose. In addition, the restrictions on our ability to be a price leader and make certain acquisitions could further hinder our capacity to compete with competitors not burdened with such restrictions, which could have a material adverse effect on our results of operations. There can be no assurance that the implementation of the Restructuring Plan will not have a material adverse effect on the market share, business and growth opportunities and results of operations for our remaining core banking businesses.
The share price of ING shares has been, and may continue to be, volatile. The share price of our bearer depositary receipts has experienced periods of volatility in the past, and the share price and trading volume of our bearer depositary receipts may be subject to significant fluctuations in the future, due, in part, to changes in our actual or forecast operating results and the inability to fulfil the profit expectations of securities analysts, as well as to the high volatility in the securities markets generally and more particularly in shares of financial institutions. Other factors, besides our financial results, that may impact our share price include, but are not limited to: › market expectations of the performance and capital adequacy of financial institutions in general; › investor perception of the success and impact of our strategies; › investor perception of our positions and risks; › a downgrade or review of our credit ratings; › the implementation and outcome of our Restructuring Plan; › potential litigation or regulatory action involving ING or sectors that we have exposure to through our insurance and banking activities; › announcements concerning financial problems or any investigations into the accounting practices of other financial institutions; and › general market circumstances.
The ING Group’s Pillar III report contains Regulatory Capital requirements, Credit Risk, including securitisations and Other Non-Credit Obligation Assets (ONCOA), Market Risk and Liquidity Risk disclosures. The regulatory requirements provided in the first section of the report for credit risk, market risk and operational risk relates primarily to the first pillar, the minimum capital requirement. The second pillar concerns Economic Capital (EC) and the underlying models used internally by banks and reviewed by supervisors. Economic Capital, and consequently Pillar II, is disclosed extensively in the Risk Management section. Further in the report you will find additional information on regulatory exposures and risk weighted assets which are not in the risk management section. As such, the text of this Pillar III section should be read in conjunction with statements made in the Risk Management section and Capital Management section of the annual accounts, where there is a comprehensive discussion of Risk Management and Capital Management.
Leverage Ratio, LCR and NSFR will be disclosed when applicable standards are finalised.
Market risk 22 Link balance sheet items with positions in traded and non-traded market risk 301 – 305; 309 – 310 Link with balance sheet items will be addressed in future disclosures 23 Provide breakdowns of significant trading and non-trading market risk factors 298 - 310 24 Qualitative and quantitative disclosures on market risk model limitations 299; 308 25 Describe other market risk techniques applied 298 – 310; 397
Operational risk Advanced measurement approach 2,700 33,749 Total Basel III required Regulatory Capital 24,052 300,647
Prudential filters: Own credit risk 212 212 212 Defined benefit remeasurement (IAS19R) 422 338 – Net defined benefit pension fund assets –118 –236 –589 Deferred tax assets –54 –108 –271 Own credit risk adjustments to derivatives (DVA) –9 –19 –47 Foreseeable dividend –470 –470 –470 Other (rounding) – – – Available capital - Common equity Tier 1 40,543 40,273 31,512
Minority interests, counting as Additional Tier 1 capital – – –
Supplementary capital - Tier 2 (3) 9,371 9,371 9,371 Provision shortfall (2) –525 –394 – Investments >10 FIs, exceeding 10% threshold –5,659 –4,222 – Minority interests, counting as Tier 2 capital 103 103 103 Available Tier 3 funds 0 0 0 BIS capital 43,834 45,233 46,713
Main differences are: (a) Goodwill, intangibles and provision shortfall start being deducted from Additional Tier 1 capital and only gradually phase in to a Common Equity Tier 1 deduction, (b) revaluation reserves equity and real estate as well as the deduction of the Bank of Beijing participation do not phase out of Tier 2 capital gradually, but immediately, and (c) The CRR/CRD IV calculation of the minority interests phases in immediately instead of gradually.
The amounts presented in this section relate to amounts used for Credit Risk Management purposes, which follow ING Bank’s interpretation of the definitions as prescribed under the CRR/CRD IV accords. Therefore, the numbers can be different from the accounting numbers as reported in the annual accounts under IFRS-EU. An example is the treatment of ONCOA items – while the accounting numbers include ONCOA, they are excluded from Pillar III overviews.
Figures for Derivatives and Securities Financing are based on ‘risk weighted amounts’, which generally is equal to the marked-to-market value of the underlying trades plus a (regulatory defined) ‘add-on’ which represents estimated potential future exposure. The amounts are then further modified by an adjustment that is related to the underlying collateral (market) values (after a haircut is applied) and any legal netting or compensation that may be permitted under various master agreement arrangements such as ISDA master agreements and Credit Support Annexes (CSAs).
Approaches applied by ING Bank On 1 January 2008, ING Bank adopted the Advanced Internal Ratings Based (AIRB) approach for the majority of its significant portfolios that contain credit risk in accordance with the approvals granted by DNB (Dutch Central Bank), and various local regulators, as required. However, there remains a small portion of the portfolio that is subject to the Standardised Approach (SA). Unlike many regulators, DNB requires institutions to aim for at least 85% (RWA weighted) of their portfolio on AIRB to qualify for the AIRB status. The majority of SA portfolios at ING Bank relate to subsidiaries where the home regulator does not have a robust AIRB framework or requirement. Depending on the regulatory landscape, ING will continue to explore opportunities to transition additional portfolios from SA to AIRB. ING Bank does not have any portfolios that use the Foundation Internal Ratings Based (FIRB) Approach.
Flow statement for RWA amounts in billions of euros 2014 2013
Key changes Over the year, RWA increased by EUR 4.5 billion to EUR 226.7 billion. A part of the increase in RWA resulted in a shift from ONCOA which does not impact capital ratio. In order to quickly implement complex, material capital changes, occasionally a top of the house adjustment is made via ONCOA before allocation to businesses and facilities. At a later stage, the ONCOA positions are incorporated into capital calculations done by credit risk systems (Vortex).
› Divestments / De-consolidations: Following a request of the Indian regulator and because ING Bank no longer has a controlling stake, ING Vysya Bank was deconsolidated. The deconsolidation decreased ING Bank’s portfolio by EUR 7.0 billion in RWA.
› The remaining RWA decrease of EUR 1.6 billion was the result of multiple smaller changes. Towards the end of 2013, the Retail portfolio showed a modest increase in the past due portfolio, mainly driven by the troublesome implementation of the SEPA payment system in Belgium and the Netherlands. This was repaired in 2014, resulting in an RWA decrease. Furthermore, DNB requires ING to impose a penalty on the PDs of customers which have not been rated using a Basel approved model, were unrated or were not reviewed in time. Compared to last year, the impact of the penalties on RWA decreased, resulting in an RWA reduction of EUR 0.7 billion.
In the tables below, the official Basel subcategories for the AIRB and SA approach are given, together with their mappings to the ING Bank exposure classes.
Central governments and central banks Sovereigns Institutions Institutions Corporates – Specialised lending Corporates Corporates – SME Corporates Corporates – Other Corporates Retail – Secured by immovable property SME Retail (Other) Retail – Secured by immovable property non-SME Retail (Residential mortgages) Retail – Qualifying revolving Retail (Other) Retail – Other SME Retail (Other) Retail – Other non-SME Retail (Other) Securitisations Securitisations
Central governments or central banks Sovereigns Regional governments or local authorities Sovereigns Public sector entities Sovereigns Multilateral development banks Sovereigns International organisations Sovereigns Institutions Institutions Corporates Corporates Retail Retail (Other) Secured by mortgages on immovable property Retail (Residential mortgages) Exposures in default All High risk items Not applicable Covered bonds Not applicable Claims to institutions and corporates with a short-term credit assessment Not applicable Claims in collective investment undertaking Not applicable Equity exposures Not applicable Other items Not applicable
Due to the CRR/CRD IV liquidity requirements, increased customer deposits require additional high quality liquid assets. The primary source of high quality liquid assets is sovereign bonds which showed the most significant increase.
As a result of constant review of customer types, certain institutions have been reclassified from exposure class Institutions to Sovereigns, resulting in an increase in READ, mainly in the Bond Investments in Germany.
The growth in the Corporates portfolio was supported by higher limits granted in Structured Finance and Corporate and FI Lending leading to increased READ. The appreciation of the USD versus the Euro contributed to the increase in READ as well. Next to that, the reduction in the Real Estate Finance portfolio continued, mostly in the Netherlands.
Includes both AIRB and SA portfolios. CRR/CRDIV introduced a new IRB exposure class “Retail secured by immovable property SME” as of 2014. From 2014, this exposure class is not included under residential mortgages anymore, while it was included in the 2013 figures. (1) Netherlands includes Domestic Bank NL and WestlandUtrecht Bank.
› Securitisation: The LGD estimates depend on the type of securitisation. ING Bank does not use internally developed models for securitisation PD’s. They are based on external ratings.
O n ba la nc e sh ee t (p re -C
Note that the Bank of International Settlements (BIS) requires an exposure class breakdown in this table which differs from the ING Bank exposure classes shown in previous tables. * Counterparties consists of Securities Financing and Derivative exposures ** CCF – Credit Conversion Factor
Exposures (READ) per internal rating grade and corresponding RPD, RLGD and RWA 2014
Includes the AIRB portfolio only and non-performing loans; excludes securitisations, equities and ONCOA.
Over the course of 2014, average PD and average LGD decreased with 10% and 5% respectively.
The PD decrease observed in the Sovereigns, Institutions and Corporates exposure classes and was mainly caused by the redevelopment of the Masterscale. Furthermore, a refinement was made to the classification of German government guaranteed entities to better reflect their risk weight, which caused a shift of several entities from Institutions to Sovereigns. This improved the average Sovereign PD. Additionally, the sale and write-offs of large defaulted real estate clients resulted in an average PD decrease for Corporates. The PD increase in Residential Mortgages is explained by a shift of forborne assets from performing to non-performing and the 1-year probation period put in place as a result of the implementation of the updated forbearance policy in 2014.
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). Because the underlying obligors are relatively small, the underlying obligors tend not to have external ratings. As such, 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.
CRM CRM and CCF effects on exposures RWA and RWA density
Overall, the table shows a decrease of the total SA portfolio from EUR 34.0 billion to EUR 28.0 billion. Due to new regulations in India, ING Vysya Bank is no longer part of ING Bank. The de-consolidation resulted in an exposure decrease of EUR 7.8 billion. This decrease was offset throughout the year mainly due to growth in the Turkey and Poland retail portfolios which enlarged the SA portfolio with EUR 1.3 billion and EUR 0.7 billion, respectively.
Impairment allowances - movements Impairment allowances at 1 January 2014 (1) 2,459 2,264 1,431 6,154 Changes in the composition of the Bank 0 0 –170 –170 Amounts written off –715 –716 –298 –1,729 Recoveries of amounts written off in previous years 49 48 8 105 Addition to loan loss provisions (from income statement) 500 857 237 1,594 Exchange rate and other movements –34 76 –1 41
Non-performing exposure increased mainly in Private Individuals. This was the result of the implementation of the updated ING Bank forbearance policy based on the EBA recommendations issued in July 2014. More stringent definitions issued by EBA, inclusion of the required history and implementation of the probation periods increased the amount of forborne assets. Also the implementation of the stricter default triggers on forborn assets led to a shift from the performing to non-performing book. Increases were also seen in Natural Resources and Other and were driven by Ukrainian and Russian corporates. These increases were offset by sales of large distressed real estate exposures resulting in several write offs.
Past due but not non-performing consumer loans by geographic area (based on outstandings) Residential mortgages Other retail Total Total
The decrease in past due loans is driven by the movements in the Dutch Residential Mortgages portfolio and the deconsolidation of ING Vysya Bank. In the Netherlands, past due outstandings decreased over the year mainly due to new forbearance policy resulting in a shift from performing loans to non-performing loans, due to better collection of arrears and due to an overall improvement seen in the economic conditions.
If all of the unused commitments were called upon at the same time, ING Bank’s credit risks (in terms of outstandings) would increase by 13.6%. As part of its Regulatory EAD models, ING Bank makes an estimate of how much of these unused commitments would be drawn under normal circumstances. The effect is included in the calculation of RWA, together with a similar effect applied to uncommitted facilities, albeit at a lower rate.
The derivative portfolio of ING Bank primarily facilitates client related business including hedging of mortgage portfolios. Majority of the counterparties in this derivative portfolio are based in the UK, Netherlands, Belgium, Germany and France. Exposure (READ) for the derivatives portfolio showed a significant jump in the first quarter of 2014 due to the introduction of CRR/CRD IV regulations. READ for derivatives grew by EUR 12.0 billion due to the introduction of an increased holding period and a ‘haircut’ (reduction of the collateral value to reflect potential adverse price changes) in risk-weighted assets calculations for OTC Derivatives. Excluding from this regulatory requirement, the portfolio showed an increase mainly driven by the interest rates business. Increased fluctuations seen in the FX and commodity markets have caused a rise in FX and Commodity derivatives.
OTC derivatives CCP 1,824,940 –3,608 1,728,308 –5,444 Non-CCP 1,723,101 –2,555 1,717,477 –1,446
The remaining 15% of the total notional value of OTC derivatives transactions that are not cleared by a CCP is not supported by a CSA agreement or a Clearing Agreement and mainly relates to Corporates with small credit limits and mainly consists of Interest Rate Derivatives (51%) and FX Derivatives (44%).
Maximum exposure to credit risk The following table present our maximum exposure to Credit Risk in the AIRB and SA portfolios and associated collateral held and other credit enhancements (netting and collateral) that do not qualify for offsetting in our financial statements for the periods specified. The netting credit enhancement component includes the effects of legally enforceable netting agreement as well as the offset of negative mark-to-markets from derivatives against pledged cash collateral. The collateral credit enhancement component which is referred to as Cover Values mainly includes real estate, guarantees and collateral in the form of cash. ING records collateral value per facility. Those figures are based on original cover values although some business units attempt to update to current market values. This is inherently difficult in volatile markets. Some facilities will have multiple levels of collateral while others have no collateral. The total figures may not reflect the collateral value per facility.
These figures exclude any guarantees which are received from a party related to the obligor, such as a parent or sister company. The figures also exclude any guarantees that may be implied as a result of credit default swap activities. The figures below do include amounts that are guaranteed through an unfunded risk participation construction.
Valuation and accounting policies ING Bank’s activities regarding securitisations are described in Note 54 ’Structured entities’ in the annual accounts. The applicable accounting policies are included in the section ‘Accounting policies for the consolidated annual accounts of ING Bank’ in the annual accounts. The most relevant accounting policies for ING Bank’s own originated securitisation programmes are ‘Derecognition of financial assets’ and ‘Consolidation’. Where ING Bank acts as investor in securitisation positions, the most relevant accounting policy is ‘Classification of financial instruments’.
In the table above an overview of Investor Securitization exposures and their respective capital requirements are shown. In line with ING’s policy and Risk Appetite the vast majority of positions are rated AA- and above, and almost the entire portfolio remains within the investment grade. Positions that have deteriorated in credit quality have been adequately provisioned and have been reduced significantly. Capital consumption remains relatively low given the risk profile of this asset class, with an average risk weight of 29%.
Economic and regulatory capital Seven synthetic securitisations of mortgages, small and medium enterprise (SME) and corporate exposures have been issued since ING Bank began actively undertaking the securitisation of its own assets in 2003. Upon the closer alignment of transfer and regulatory capital solvency rules at year end 2007, the most senior tranches of ING Bank’s own securitisations have been called and are now retained by ING Bank. Except for Memphis 2005, ING Bank has also hedged the first loss tranches in 2009 (Flipper transaction). The mezzanine tranches are still transferred to third parties.
Market risk Introduction After the turmoil in the financial markets and the consequent need for governments to provide aid to financial institutions, financial institutions have been under more scrutiny from the public, supervisors and regulators. This has resulted in more stringent regulations intended to avoid future crises in the financial system and taxpayers’ aid in the future. Reference is made to the section ‘Ongoing changes in the regulatory environment’ in the Risk Management Paragraph.
Market Risk Sensitivity (before tax), excluding pension fund Interest Rate Credit
Fair value of unencumbered assets 10 Assets of the reporting institution (1) 99,648 – 745,199 – 30 Equity instruments 8,666 8,666 11,254 11,254 40 Debt securities 7,620 7,511 123,172 123,380 120 Other assets 2,200 – 91,642 –
Information on importance of encumbrance ING Group ING Group manages it balance sheet prudently whereby a variety of funding sources is readily available. Given this situation, the level of encumbrance of ING Group’s balance sheet is relatively low.
Asset Liability Committee (ALCO) ALCO manages the balance sheet of ING, especially with regard to the strategic non-trading risk. These are interest rate risk, equity risk, real estate risk, liquidity, solvency and foreign exchange risk and fluctuations.
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.
Associate An entity over which the Group has significant influence but not control. Significant influence generally results from a shareholding of between 20% and 50% of the voting rights, but also is the ability to participate in the financial and operating policies through situations including, but not limited to one or more of the following: › Representation on the board of directors › Participation in the policymaking process › Interchange of managerial personnel.
Basel III Regulatory requirements issued by the Basel Committee on Banking Supervision for the solvency calculation and liquidity requirements, which superseded Basel II. Basel III was adopted in 2010 and consequently translated by the EU into the Capital Requirement Regulation (CRR) and the Capital Requirement
Capital Requirements Directive (CRD IV) For European banks, the Basel III requirements are implemented through the Capital Requirement Regulation (CRR) and the Capital Requirement Directive IV (CRD IV). The CRD IV directs all EU Member States to implement certain components of Basel III in their own law, taking into account transitional arrangements, in the Netherlands through amendments to the Wet Financieel Toezicht (Act on Financial Supervision).
Capital Requirements Regulation (CRR) For European banks, the Basel III requirements are implemented through the Capital Requirement Regulation (CRR) and the Capital Requirement Directive IV (CRD IV). The CRR is binding for all EU Member States and came into effect on 1 January 2014, taking into account transitional arrangements, with the full requirements to take effect on 1 January 2018.
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.
› The amount of the obligation cannot be measured with sufficient reliability.
Cost of capital The costs related to owning capital. These can be split into the cost of equity, hybrids and debt, taking a target leverage into account.
Debit Valuation Adjustment (DVA) An adjustment made by ING to the valuation of OTC derivative liabilities to reflect within fair value ING’s own credit risk.
Discontinued operations When a group of assets that is classified as held for sale represents a major line of business or geographical area, which the disposal group classifies as discontinued operations.
Discount rate A rate used to place a current value on future cash flows. It is needed to reflect the fact that money has a time value. In the embedded value calculated for ING’s insurance operations, the discount rate is equal to the weighted cost of capital after taxation of the insurance operations.
Discretionary participation feature A contractual right to receive, as a supplement to guaranteed benefits, additional benefits that: are likely to be a significant portion of the total contractual benefits, whose amount or timing is contractually at the discretion of the insurer, that are contractually based on the performance of a specified pool or type of contract, unrealised/realised investment returns on a specified pool of assets held by the insurer, or the profit of the company, fund, or other entity that issues the contract.
Expected Loss (EL) The expected loss provides a measure of the value of the credit losses that ING Bank may reasonably expect to incur on its portfolio. ING Bank must hold a reserve (as part of its capital base) to cover the expected losses in its credit portfolio. EL is calculated as Probability of Defaultax Loss Given Default_x Exposure at Default. Collective provisions are taken to cover for Expected Losses.
Financial liability Any liability that is a contractual obligation: › To deliver cash or another financial asset to another company. › To exchange financial instruments with another company under conditions that are potentially unfavourable.
First call date Perpetual subordinated loans have no set maturity. The first call date is the date on which ING has the option to repay and cancel the particular subordinated loan.
Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity that ING Group has the positive intention and ability to hold to maturity other than: a. Those that ING Group upon initial recognition designates as at fair value through profit and loss.
Historical simulation A model to calculate Value at Risk, assuming that future changes in risk factors will have the same distribution as they had in the past, taking into account the non-linear behaviour of financial products.
Hybrid capital Tier 1 instruments issued by ING Group (e.g. perpetual debt securities and preference shares) . Hybrid capital securities are perpetual fixed income securities with an embedded call and coupon deferral feature. All hybrids capital securities rank senior to core tier 1 securities and ordinary shares of ING Group and they are structurally subordinated to the senior debt instruments issued by ING Groep N.V.
ING Continuity Foundation The role of the ING Continuity Foundation is to ensure ING’s continuity. Should a hostile takeover attempt be made, this foundation can exercise its call option right for as many cumulative preference shares as are necessary in order to hold up to one-third of the issued share capital.
Integrated reporting A process founded on integrated thinking that results in a periodic integrated report by an organisation about value creation over time and related communications regarding aspects of value creation. An integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term. The report should tell the overall story of an organisation in a manner that allows all stakeholders to assess its ability to create value.
Internal Assessment Approach (IAA) Method used to calculate credit risk capital requirements for securitisation exposures (including liquidity lines provided to asset-backed commercial paper programmes and sponsored securitisations).
Investment risk Investment risk is the credit default and risk rating migration risk that is associated with ING Bank’s investments in bonds, commercial paper, securitisations, and other similar publicly traded securities. This can be viewed as the worst-case loss that ING Bank may incur as a result of holding a position in underlying securities whose Issuer’s credit quality deteriorates or defaults.
Issued share capital The share capital that is issued by a public limited company or a private limited company.
Joint venture A joint venture is an entity over which the Group has joint control. Joint control is the contractually agreed sharing of control over an arrangement or entity, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Joint control means that no party to the agreement is able to act unilaterally to control the activity of the entity. The parties to the agreement must act together to control the entity and therefore exercise the joint control.
Net Present Value at Risk (NPV-at-Risk) NPV-at-Risk measures the impact of changing interest rates on value. As a full valuation approach is applied, the risk figures include convexity risk that results from embedded optionalities like mortgage prepayment options.
Net Promoter Score Net Promoter Score (NPS) is a way of measuring customer loyalty and satisfaction. NPS is based on a direct question: ‘How likely is it that you would recommend our company/product/service to a friend or colleague?’ Promoters are those who respond with a score of 9 or 10 (out of 10) and are thus considered loyal enthusiasts. Detractors are those who respond with a score of 0 to 6 (unhappy customers). Scores of 7 and 8 are passives, and they will only count towards the total number of respondents, but not directly affect the formula.
Operating result Operating result is a measure to analyse the Insurance underlying result. It is the underlying result before tax, excluding realised gains/losses and impairments on debt and equity securities, revaluations and market and other impacts.
Operating result ongoing business Operating result (before tax) is used by NN to evaluate the core financial performance of the business segments of the ongoing operations.
Plan assets Comprise assets held by a long-term employee benefit fund and qualifying insurance policies. Assets held by a long-term employee benefit fund are assets (other than non-transferable financial instruments issued by the reporting enterprise) that: › Are held by an entity (a fund) that is legally separate from the reporting enterprise and exists solely to pay or fund employee benefits.
› Are available to be used only to pay or fund employee benefits, are not available to the reporting enterprise’s own creditors (even in bankruptcy), and cannot be returned to the reporting enterprise, unless either the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting enterprise, or the assets are returned to the reporting enterprise to reimburse it for employee benefits already paid.
› 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.
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 outstanding amount is generally based on the replacement value (mark-tomarket ) plus potential future volatility concept, using an historical seven-year time horizon and a 99% confidence level.
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.
Recoverable amount The higher of an asset’s net selling price and its value in use.
Return on Equity (ROE) The return on equity is the net result as percentage of the average equity.
Risk-Weighted Assets (‘RWA’ under Basel II) Assets that are weighted for credit and market risk in accordance with the Basel II methodology. The risk-weighted assets are calculated using internal models approved by the Dutch central bank (De Nederlandsche Bank). Regulatory capital requirements for operational risk are calculated without the use of riskweighted assets, but are included in the total risk-weighted assets reported. In the CRR/CRD IV, the term RWA is replaced by “Total Risk Exposure Amount”, but for now we follow common usance.
Solvency II Solvency II is a fundamental review of the prudential regime for insurance and reinsurance undertakings in the European Union. Solvency II must lead to a new solvability framework based on a market-consistent valuation in which the capital requirements adequately reflect the risks run by the insurer. It is still under discussion and is not expected to come into force before 1 January 2016.
Stakeholder A stakeholder is somebody who has an interest in ING. ING distinguishes the following stakeholder groups: customers
Sustainable transitions financed Sustainable transitions financed consist of loans to renewable projects, loans to other sustainable projects, loans to environmental outperformers and the portfolio of ING Groenbank.
(b) The share premium accounts related to instruments referred to in point (a.)
(d) For institutions calculating risk-weighted exposure amounts under Chapter 3 of Title II of Part Three, positive amounts, gross of tax effects, resulting from the calculation laid down in Articles 158 and 159 up to 0,6 % of risk-weighted exposure amounts calculated under Chapter 3 of Title II of Part Three of the CRR.
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.
Value at Risk (VaR) The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, equity prices, foreign exchange rates, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. Note that risk due to DVA and CVA sensitivities is not covered in this trading risk measure. Next to general market movements in these risk factors, VaR also takes into account market data movements for specific moves in e.g. the underlying issuer of securities. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and backtesting, and VaR with a 10day horizon for determining regulatory capital.
ING publications › ING Group Annual Report, in English › Sustainability Annex to the ING Group Annual Report, in English › Annual Review, online in Dutch and English.