In order to ensure that the Retail Banking portfolio complies with the ESMA and EBA recommendations mentioned, one of the measures implemented was to mark mortgage clients in the Netherlands with a loan modification as forbearance. Next to that, ING Bank Belgium implemented a method to identify loans with forbearance in their Retail Banking portfolio which is added to the total of Belgium. ING Bank also implemented the minimum of 2 year curing period requirement as of 2013, as mentioned earlier. The increase of the amount of forbearance outstandings and clients in 2013 in the Consumer Lending portfolio was mainly driven by the combined effect of these changes. The decrease in the UK was due to the divestment of ING Direct UK in Q1 2013.
The total of EUR 810 million of Retail Forbearance Exposure represents 0.3% of the total of ING Bank’s Consumer Retail Lending portfolio.
While cover can be an important mitigant of credit risk and an alternative source of repayment, generally it is ING Bank’s practice to lend on the basis of the customer’s creditability rather than exclusively relying on the value of the cover.
Within ING Bank, covers can derive from two distinct forms, assets and third party obligations.
Cover values including guarantees received - Total ING bank – 2013 (1,2)
Total Lending, Investment and Money Market 692,252 595,018 20,586 83,973 83,315 160,365 30.5% 25.0% 44.5%
Dutch mortgages valuation When a mortgage loan is granted, the policy maximum loan to market value (LTMV) for an existing property and for construction property financing is 105%. The cover values are captured in the local systems which then are fed into a central data system (Vortex). All valuations are performed by certified valuators that are registered at one of the ING Bank-accepted organisations. In addition, the valuator must be a member of the NVM (Nederlandse Vereniging van Makelaars – Dutch Association of Real Estate Agents), VBO (Vereniging Bemiddeling Onroerend Goed – Association of Real Estate Brokers), VastgoedPRO (Association of Real Estate Professionals) or NVR (Nederlandse Vereniging van Rentmeesters).
(1) including loans to ING Group and NN Group. (2) excluding intercompany positions. (3) In 2012, the Foreclosure value was used as the mortgage cover value in the Netherlands. In 2013, ING Bank started to use Market value in its mortgage LGD
Cover valuation for REF portfolio The cover valuation policy and governance within ING Bank ensures that the cover values reflect the current fair value on the date of the valuation. All commercial properties financed by ING Bank need to be (re)-valued within three years’ period or more frequently if market conditions or the risk profile deteriorates. Non-performing loans and high risk Watch-list REF files are re-valued at least annually.
(1) Including loans to ING Group and NN Group. (2) Excluding intercompany positions. (3) ’Others‘ comprises industries with outstandings below EUR 10 billion.
Despite the significant increase in outstandings (40.1%), the cover amount of Commercial Banks sector increased by only 4.3%. This is a result of the increased outstandings in products where, in market practice, no covers are provided, such as L/C discounting, L/C confirmation and revolving loans.
Cover values including guarantees received - Investment and Money Market Portfolio (1,2)
The use of Central Clearing Parties (CCPs) is becoming more important for the derivatives business and as a consequence the credit risk is shifting from Counterparties to CCPs. By year-end 2013 the notional Pre-Settlement exposure that was cleared via CCPs increased by 21.9%.
Year-on-year variance analysis In 2013 short-term interest rates remained at low levels in both the Eurozone and the US. The earnings sensitivity for an upward shock has a positive impact. Positive earnings sensitivity implies that when rates increase, the positive impact on interest received on assets is larger than the negative impact of interest paid on liabilities. Earnings are per 2013 year end relatively insensitive to rate changes, if compared to the net interest income. The impact of a -100 bps shock for Retail Banking International changed mainly as the result of a slower tracking of interest rates for savings in Germany.
US Dollar –13 23 69 –75 Pound Sterling 4 –4 –51 12
The NPV-at-Risk is dominated by the interest rate sensitive long-term investments of own funds. The value of these investments is impacted significantly if interest rates move up by 1%. Convexity risk in retail portfolios also contributes to the overall NPV at Risk.
The US Dollar is the main currency in terms of Net Exposure as the risk-weighted assets position in US Dollar is most significant besides Euro. In terms of sensitivities, fluctuations in the US Dollar are the main driver of the core Tier 1 ratio as the US Dollar Net Exposure significantly deviates from the target. The core Tier 1 ratio is less sensitive for fluctuations in the other currencies.
Year-on-year variance analysis During the year ended 31 December 2013 the revaluation reserve relating to equity securities held in the available-for-sale portfolio fluctuated between a month-end low amount of EUR 1,038 million (2012: EUR 1,082 million) and a high amount of EUR 1,483 million (2012: EUR 1,643 million).
Governance Real Estate and other is a run-off business consisting of and all Real Estate Development and Real Estate Investment Management activities which are being wound down by sale of assets, strict execution of contract maturity, internal transfers to the local ING Bank branches or through portfolio sales.
ING Bank has EUR 0.3 billion recognised at fair value through profit and loss and EUR 2.2 billion is recognised at cost or revalued through equity (with impairments going through profit and loss).
Fair values of financial trading assets and liabilities Fair values of financial assets and liabilities that are quoted in active markets are determined by using quoted market prices. Where quoted prices are not available, other pricing sources and valuation techniques are used to determine fair value.
Valuation techniques range from discounting of cash flows to valuation models. Such models are based on relevant factors such as the market price of underlying reference instruments, market parameters (volatilities, correlations and credit ratings) and customer behaviour. Some of these price factors require various assumptions which imply that valuation models are subjective by nature. According to what valuation technique is used and what assumptions are made, the obtained fair value can be different.
To include credit risk in the fair valuation, ING applies both credit and debit valuation adjustments (hereafter referred to as CVA respectively DVA). Own issued debt and structured notes that are valued at fair value are adjusted for credit risk by means of a debit valuation adjustment. Additionally, derivatives valued at fair value are adjusted for credit risk by a credit valuation adjustment. This credit valuation adjustment is of a bilateral nature; both the credit risk on the counterparty as well as the credit risk on ING are included in the adjustment. All market data that is used in the determination of the CVA is based on market implied data. Additionally, wrong-way risk (when exposure to a counterparty is increasing and the credit quality of that counterparty decreases) and right way risk (when exposure to a counterparty is decreasing and the credit quality of that counterparty increases) are included in the adjustment. ING applies CVA also for pricing credit risk into new external trades with counterparties. Risk limits and controls are in place to monitor and anticipate CVA risk on a daily basis. The CVA function operates under a global risk governance, where the risk limits and controls for CVA are managed and monitored on a global level. Our approach on CVA risk management is driven by increased control, cost efficiency and the global scope of CVA.
In this context, global and local parameter committees have been set up. Finance, Market Risk Management Product Control and Front Office are represented in these committees and discuss numerous topics regarding the product valuation and decide on the outcome of price testing as well as valuation adjustments.
Backtesting Backtesting is a technique for the on-going monitoring of the plausibility of the VaR model in use. Although VaR models estimate potential future results, estimates are based on historical market data. In a backtest, the actual daily result is compared with the 1-day VaR. In addition to using actual results for backtesting, ING Bank also uses hypothetical results, which measure results excluding the effect of intraday trading, fees and commissions. When the actual or hypothetical loss exceeds the VaR an ‘outlier’ occurs. Based on ING Bank’s one-sided confidence level of 99% an outlier is expected once in every 100 business days. In 2013, like in 2012, there was no occurrence where a daily trading loss exceeded the daily consolidated VaR of ING Commercial Banking. ING Bank reports the results of this backtesting to DNB on a quarterly basis.
Event risk Event risk is a valuable risk management tool. Event risk evaluates the bank’s financial stability under severe but plausible stress scenarios and assists in decision-making that assures the bank to remain a financially-healthy on-going concern after a severe event occurs. In addition to the bank-wide stress test framework as described in the ING Bank risk profile section, MRM performs separate stressed scenario tests to monitor market risks under extreme market conditions. Since VaR in general does not produce an estimate of the potential losses that can occur as a result of extreme market movements, ING Bank uses structured stressed scenario tests for monitoring 302 ING Group Annual Report 2013
the market risk under these extreme conditions. Event risk is based on historical as well as hypothetical extreme scenarios. The result is an estimate of the profit and loss caused by a potential event and its world-wide impact for ING Commercial Banking. The event risk number for the ING Commercial Banking trading activity is generated on a weekly basis. Like VaR, event risk is limited by ALCO Bank.
ING Bank’s event risk policy is based on a large set of possible stress scenarios per risk type (fixed income, equity, foreign exchange, credit and related derivative markets). For example, for equity products we assume both a crisis scenario (prices decreasing) as well as a bull scenario (prices increasing). Stress parameters are set per country. Scenarios are calculated based on events happening independently, jointly by region, or in all countries simultaneously. This way, for each risk type, a large set of scenarios is calculated. The worst scenarios per market are combined across markets by assessing both independent events per market, and worst events happening in all markets at the same time.
Average VaR was lower than in the previous year due to position changes and more volatile scenarios dropping out of the VaR calculation. The increase in IRC was largely driven by updated LGD model parameters for the Central and Local Government portfolio.
(1) Standardised model is applied to FX positions in trading and banking books and to securitisations in the trading books. Commodity exposures are treated under the internal model approach. The capital requirement for securitisations, which equals 100% of outstanding exposure amounts to EUR 1 million. The securitisation portfolio in the Trading Book is negligible.
Sensitivities The following tables show the largest trading foreign exchange positions and interest rate and credit spread sensitivities. The credit spread sensitivities are furthermore split in different risk classes and sectors.
Interest Rate (bPV (1)) Interest Rate (bPV (1)) Eurozone –302 United States –124 Taiwan 48 South Korea –122 Russia –48 Russia –84 Romania –27 Taiwan 80 South Korea –25 Eurozone 64
Credit Spread (CSO1 (2)) Credit Spread (CSO1 (2)) Germany –454 Finland –278 France 452 Korea –192 Netherlands –384 Netherlands 126 Austria –86 Russia –119 Russia –79 Norway –100
FUNDING AND LIQUIDITY RISK Introduction Funding and liquidity risk is the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner.
Governance Within ING Bank, next to the Management Board Bank, staff (Risk and Finance) departments, Capital Management and the Bank Treasury function are responsible for managing funding and liquidity risk.
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.
• Liquidity risk transfer and pricing: ALCO Bank sets and maintains a Funds Transfer Pricing (FTP) framework that optimises Bank-wide funding and liquidity risk management, whereby all business units must transfer their structural funding and liquidity risks to Bank Treasury whilst managing their own customer behaviour liquidity risk costs.
• Levels of liquidity: – Compliance with regulatory requirements – Adequate levels related to defined stress scenarios
With respect to funding sources, ING Bank manages its balance sheet prudently, whereby short-term funding is primarily utilised for shortterm assets. The bank aims to fund all longer term assets and investments by stable and longer term liabilities. In the third quarter of 2013, the uncertainty with regard to the US debt ceiling outcome gave rise to increased monitoring of the USD positions. Monitoring and control of this funding is effectuated through a dedicated USD funding and liquidity risk framework which includes limits and measures in case of contingencies. ING Bank reviews its funding plan on at least a quarterly basis, assessing market developments and funding requirements.
Funding type Retail deposits 46% 45% Corporate & other deposits 23% 22% Interbank (incl. central bank) 5% 6% Lending/repurchase agreement 4% 3% Public debt 20% 21% Subordinated debt 2% 3%
The funding mix remained well diversified and according to targets set. Retail deposits accounted for 46% of the total funding mix, improved from 45% per 2012 year end. Ultimo 2013 the Loan-to-Deposit ratio (excluding securities at amortised costs and IABF receivable) equals 1.04 (2012: 1.13).
The liquidity buffer is held as an insurance against a range of stress scenarios, covering the additional need for liquidity that may arise over a defined short period of time under stress conditions. ING’s minimum standards for liquidity buffers are described below: • When local regulatory rules require so, local liquidity buffers can be established. Although locally established, these buffers must be centrally functionally managed by the ALM function. • The buffer must be adequate in relation to the contractual expiry calendars and expected or planned developments • The size of the buffers is supported by estimates of liquidity needs performed under the Bank’s or business entity’s stress testing and be aligned with the liquidity risk appetite. • The liquidity buffer is composed of cash and core assets that are central bank eligible and/or highly marketable, which are not pledged to payment systems or clearing houses. For longer term buffer purposes, a broader set of liquid assets might be appropriate, subject to the Bank’s or entity’s ability to generate liquidity from them under stress, within the specified period of time.
• 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.
As part of the liquidity buffer management, ING Bank also monitors the existing asset encumbrance. More information may be found in Pillar 3.
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. In addition to the bank-wide stress test framework as described in the ING Bank risk profile section, ING Bank produces several stress test reports with respect to the funding and liquidity position on a regular basis. Some of these stress tests are regulatory driven, and others are based on internal stress scenarios: • On a weekly basis ING reports an internal liquidity stress scenario. This report shows the development of the liquidity buffer during a 3-month-stress period, on a consolidated (bank) level and for the main entities, and split in EUR and USD.
On ad-hoc basis ING Bank has performed additional stress tests related to the funding and liquidity position. Overall, stress testing is an integral part of the liquidity and funding risk management framework and also serves as input for the contingency funding plan.
Another important element in 2013 was the establishment of the European Banking Union, paving the road for a Single Supervisory Mechanism (SSM) with supervision from large banks in the near future to be led out of the ECB. As part of this implementation, banks will be reviewed in 2014 (ECB Asset Quality Review) and will be involved in a stress test. All of these developments mirror a changing landscape for banks, also on the funding and liquidity front, as current reporting and regulatory reporting lines migrate to the future settings.
divisional and Bank level with an overview of key risks within the NFR risk areas including compliance risks, information security risks, continuity risks, governance and control risks, fraud and unauthorised activities risks and personal and physical security risks, enabling management to focus and set priorities.
In April 2013 ING Bank obtained accreditation for use of its enhanced AMA model for regulatory supervision purposes. ING Bank is reporting the regulatory capital numbers on a quarterly basis. The AMA capital for the fourth quarter of 2013 amounts to EUR 2,822 million. For the fourth quarter of 2012 the AMA capital amounted to EUR 2,836 million.
Compliance risk Compliance risk is defined as the risk of impairment of ING Bank’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, ING Bank policies and standards and the ING Bank Business Principles. In addition to reputational damage, failure to effectively manage compliance risks could expose ING Bank to fines, civil and criminal penalties, and payment of damages, court orders and suspension or revocation of licenses, which would adversely impact customers, staff, shareholders and other stakeholders of ING Bank.
The compliance risk management function supports management in mitigating the compliance risks and by establishing a compliance control framework derived from laws, regulations and standards. The compliance risk management function actively educates and supports the business in managing compliance risks related, but not limited to, money laundering, terrorist financing, sanction and export control compliance, conflicts of interest, mis-selling, bribery and protection of customer interests.
The ING Bank FEC Policy directly reflects relevant national and international laws, regulations and industry standards. The ING Bank FEC Policy is mandatory and applies to all ING banking entities, majority owned ING business, businesses under management control, staff departments, product lines and to all client engagements and transactions.
The Agreements have expired as of 12 December 2013 and the related proceedings against ING Bank N.V. have been dismissed by the US District Court of Columbia.
• ’Legal but harmful‘ which highlighted the need to look beyond what is strictly legal and think about the wider implications. It challenged staff to think not just ’can I do this?‘, but ’should I do this?‘ and to think about the longer term implications of their actions.
bUSINESS RISK Business Risk for ING Bank has been defined as the exposure to value loss due to fluctuations in volumes, margins and costs, as well as customer behaviour risk. It is the risk inherent to strategy decisions and internal efficiency. The calculation of business risk capital is done by calculation of two components, I Expense risk relates to the (in)flexibility to adjust expenses, when that is needed.
NN’s approach to risk management is based on the following components: • Risk management structure and governance systems. NN’s risk management structure and governance systems follow the ‘three lines of defence’ model, which outlines the decision-making, execution and oversight responsibilities for the implementation of NN’s risk management. These structure and governance systems are embedded in each of NN’s organisational layers, from the holding level to the individual business units.
Chief risk officer The chief risk officer of NN (the CRo) is a member of the Management Board. The CRO bears primary and overall responsibility for NN’s risk management. The CRO must ensure that both the Management Board and the Supervisory Board are at all times informed of, and understand, the material risks to which NN is exposed. Each business unit has its own chief risk officer, who reports (directly or indirectly) to the CRO.
The CRO is primarily responsible for: • setting risk policies; • formulating NN’s risk management strategy and ensuring that it is implemented throughout NN; • monitoring compliance with NN’s overall risk policies; • supervising the operation of NN’s risk management and business control systems; • reporting of NN’s risks and the processes and internal business controls; and • making risk management decisions with regard to matters which may have an impact on the financial results of NN or its reputation, without limiting the responsibility of each individual member of the Management Board in relation to risk management.
• Risk response and control. Once a risk is assessed, NN identifies potential responses to those risks and analyses the mitigating impact of those responses. Taking into account the risk tolerances set out in the risk appetite framework NN designs its response for each assessed risk. Risk and control activities are performed throughout NN, at all organisational levels.
• ensure economic solvency is sufficient following a 1 in 20 annual risk sensitivity; NN quantifies this risk using available financial resources/economic capital and related sensitivities. Available financial resources (AFR) is a before tax market value surplus defined as market value of assets less market value of liabilities.
Recovery planning NN has determined a set of measures for early detection of and potential response to a crisis should it occur. These include monitoring indicators which are expected to provide early-warning of emerging crises, advance preparation of options to raise or release capital, and allocation of roles and responsibilities in case of a crisis, and other practical arrangements that may be required depending on the type of crisis.
economic capital Economic capital is NN’s internal measurement of the amount of capital required for the risks that NN is exposed to through its balance sheet, its business and its daily operations.
NN determines economic capital as the amount of additional assets it must hold above the market value of its liabilities in order to withstand adverse movements in one year, based on a 99.5% level of confidence and before any adjustment for tax impact. A 99.5% level of confidence means that NN would be able to fulfil its obligations to its policyholders without requiring additional capital in 199 out of 200 annual scenarios. NN’s economic capital is calculated in three steps. • In the first step, NN models the market and credit risks to which NN’s balance sheet is exposed using 50,000 stochastic real-world scenarios over a one-year time horizon, which are calibrated to historically observed market data. The model then quantifies the extent to which NN’s assets must exceed its liabilities to ensure it is able to fulfil its policyholder obligations at a 99.5% level of confidence. This constitutes the economic capital for market and credit risk.
Insurance risk 1,697 1,918 Business risk 2,128 2,539 Market and credit risk: General account 3,211 3,214 Market and credit risk: Separate account 964 930 Diversification benefit between risk categories -2,505 -2,783 Total modelled risk insurance operations 5,495 5,818 Operational risk 531 566 Economic capital of other business; NN Bank, IIM units on local required capital levels and other non-modelled 988 2,335
matching adjustment After tax No Yes No Yes Credit risk adjustment No Yes No Yes Contract boundaries (2) Internal model Solvency II regulation Internal model Solvency II regulation Loss absorption of taxes and fungability
Supervisory Action Not applicable Not applicable Not applicable Potential for capital add-on
insuRanCe Risk Insurance risks are the risks related to the events insured by NN and comprise actuarial and underwriting risks such as mortality, longevity, morbidity, and non-life insurance risks, which result from the pricing and acceptance of insurance contracts.
The Netherlands Non-Life portfolio also includes Property & Casualty products covering risks such as fire damage, car accidents, personal and professional liability, windstorms, hail, and third party liabilities.
By expanding insurance liabilities to cover multiple geographies, product benefits, lengths of contract, and both life and non-life risk, NN reduces the likelihood that a single risk event will have a material impact on NN’s financial condition.
Management of the insurance risks is done by ensuring that the terms and conditions of the insurance policies that NN underwrites are correctly aligned with the intended policyholder benefits to mitigate the risk that unintended benefits are covered. This is achieved through NN’s underwriting standards, product design requirements, and product approval and review processes.
A change in policyholder behaviour assumptions would result in an immediate change in the present value of the liabilities used to determine Available Financial Resources, IFRS result before tax for variable annuities, and available regulatory capital in the Netherlands.
As part of its strategy, NN has put several programs in place to own and improve the customer experience. These programs seek to improve the match between customer needs and the benefits and options provided by NN’s products and, over time, to improve NN’s understanding and anticipation of the choices policyholders are likely to make, thereby decreasing the risk of a mismatch between actual and assumed policyholder behaviour.
Expense risk Several initiatives have been put in place to manage expenses, such as the restructuring of Netherlands Life and NN’s head office in the Netherlands. These initiatives also seek to convert fixed expenses into variable expenses so that expenses vary in accordance with the size of the in-force portfolio. This is particularly relevant for the closed blocks of business, the Dutch individual life and the Japan Closed Block VA businesses.
Risk measurement The table below sets out NN’s economic capital for business risk as at 31 December 2013 and 2012, respectively.
The economic capital for the fixed income bonds is calculated within spread risk and the economic capital for the fixed income loans (to the extent applicable) within counterparty default risk. For the non-fixed income assets, equity and real estate, NN uses asset-specific risks to calculate economic capital.
Equity risk 1,406 1,162 Real estate risk 744 807 Interest rate risk 262 194 Credit spread risk net of illiquidity premium offset 2,234 2,521 Foreign exchange risk 213 377 Inflation risk 51 8 Counterparty default risk 519 354 Diversification benefit –2,219 –2,208
equity risk Equity risk in the general account is due to impact of changes in prices of directly held equities and equity derivatives such as futures and options.
Risk mitigation Equity exposures belong to a well-diversified asset portfolio of an insurance company with long term illiquid liabilities. The concentration risk on individual issuers is mitigated under relevant investment mandates.
Real estate risk is the risk of loss of market value of real estate assets due to a change in rental prices, required investor yield, or other factors.
The general account real estate portfolio is held for the long term and is illiquid. Furthermore there are no hedge instruments available in the market to effectively reduce the impact of market volatility.
(1) The ‘minus’ sign in the table mean cash outflow from NN to the policyholders (2) Japan and Other liabilities are presented at constant FX of 31December 2013. Other includes CZK, HUF, PLN, RON, and USD.
Risk profile The nature of long-term insurance liabilities gives insurers the potential to hold fixed income assets even in adverse market conditions, thereby continuing to receive the coupons and the principal amount at maturity. Credit spread risk materialises in different ways depending on the different valuation curves used to discount assets and liabilities in order to determine these metrics. • iFRs result before tax. Market value movements of general account fixed income assets do not impact the IFRS result before tax as the assets are classified as available for sale. Therefore, there is no sensitivity to credit spread risk in IFRS result before tax. However fixed income securities might be subject to impairments under IFRS, affecting the IFRS result before tax.
The table below sets out the market value of NN’s general account fixed-income bonds which are subject to credit spread risk by type of issuer at 31 December 2013 and 2012, respectively.
Market value of government bond 2013 by number of years to maturity
Exposures to Dutch, German and French government bonds are primarily held by Netherlands Life. Of the EUR 15 billion German and Dutch government bonds held by NN, more than half will mature after year 20, and more than 80% of the EUR 5.5 billion French government bonds held by NN will mature after year 20. These long-term government bonds are sensitive to sovereign credit spread movements versus EUR swap rates. With regards to Central and Eastern Europe, government bond exposures in Poland, Czech Republic, Hungary, Slovakia, Romania, and Turkey are mainly domestically held). In 2011 and 2012, NN reduced its Greek, Italian, Spanish and French government bond exposures in response to the deteriorating credit ratings of these countries and to alleviate concentration risk. The remaining Greek government bonds are all held by NN’s Greek business unit, and 65% of the Spanish government bonds are held by NN’s Spanish business unit. During 2013, NN began reducing its German and Dutch government bond positions to invest in higher-yielding asset classes. It also began reducing its holdings of government bonds in Japan where such bonds were held for liquidity reasons.
Market value of non-government bond securities 2013 by number of years to maturity total 2013
Credit spread risk assets 5,617 5,718 Illiquidity premium offset –3,383 –3,197 Total Credit Spread risk net of illiquidity premium offset 2,234 2,521
The Loan-to-Value (LTV) for residential mortgages, which is based on the net average indexed loan to value, at NN Bank and Netherlands Life stands at 92% and 96% respectively. The perceived high LTV is due to the high proportion of interest-only mortgages. With the change in the Dutch tax regime in 2013 with regards to mortgage interest deductibility, a shift from essentially interest-only mortgages to annuity and linear payment type mortgages is being observed. The inherent credit risk is compensated primarily by means of the underlying property, but also through the inclusion of mortgages guaranteed by the Nationale Hypotheek Garantie (NHG) and other secondary covers like savings, investments and life insurance policies. Mortgages with NHG accounted for was 26% and 20% at NN Bank and Netherlands Life respectively at 31 December 2013.
aging analysis (past due but not impaired): nn mortgage portfolio outstanding Netherlands Life NN Bank
Economic capital for counterparty default risk increased from EUR 354 million at year-end 2012 to EUR 519 million at year-end 2013. This increase is mainly due to the increased residential mortgage portfolio at Netherlands Life. As noted, related economic capital for fixed income bonds is included fully in credit spread risk.
MaRket anD CReDit Risk: sepaRate aCCount The separate account businesses are those in which the policyholder bears the majority of the market and credit risk. NN’s earnings from the separate account businesses are primarily driven by fee income. However, in the case of variable annuities and the guaranteed separate account pension business in the Netherlands, NN retains risk associated with the guarantees provided to its policyholders. Businesses in this category are (i) the variable annuities (VA) portfolio, (ii) the group pension business in the Netherlands for which guarantees are provided, and (iii) other separate account business, primarily the unit linked business.
From a risk management perspective, NN distinguishes three blocks of variable annuities: • guaranteed minimum accumulation benefit (gMaB) products of Japan Closed Block Va: Under this type of variable annuity, a minimum guaranteed benefit is paid upon death or at maturity of the policy at the end of the initial investment period. The survival guarantee is only available up until the original policy term, mainly 10 years, and cannot be changed. The minimum guaranteed benefit is either a single premium or an amount which may lock-in at a higher guarantee level depending on the product. The GMAB product was sold from 2005 until 2009 in Japan through banks and security brokers. The guarantees of this product were highly in the money but with the improving stock markets in Japan and the weakening of the JPY, have moved closer to at-the-money. The volatility risks of the options and guarantees increase when the option is at the money and closer to maturity.
separate account guaranteed group pension business in the netherlands Risk profile separate account guaranteed group pension business in the netherlands 2013 2012 ccount value 10,858 12,487 Additional IFRS reserve for guarantee 606 744
In the Dutch separate account pension portfolio, investments are held in separate accounts on behalf of the sponsor employer who concluded the contract with NN. Regardless of actual returns on these investments, NN guarantees pension benefits for the beneficiaries under the contract. Contracts are typically re-negotiated every five years, but the guarantee obligations to the beneficiaries survive termination of the contract with the sponsor employer unless otherwise agreed.
Risk measurement NN determines economic capital for the market and credit risks of the separate account business in aggregate through direct modelling or applying a hedge effectiveness ratio.
The table below sets out the economic capital for the market and credit risk of the separate account businesses as at 31 December 2013 and 2012, respectively.
Variable annuity 591 812 Separate account guaranteed group pension business in the Netherlands 264 101 Other separate account business (unit linked) 217 187 Diversification benefit –108 –170
Risk mitigation NN Liquidity Management Principles include the following: • Interbank funding markets should be used to provide liquidity for day-to-day cash management purposes; • A portion of assets must be invested in unencumbered marketable securities that can be used for collateralised borrowing or asset sales; • Strategic asset allocation should reflect the expected and contingent liquidity needs of liabilities; and • Adequate and up-to-date contingency liquidity plans should be in place to enable management to act effectively and efficiently in times of crisis.
Risk mitigation For operational risk NN has developed a framework governing the process of identifying, assessing, mitigating, monitoring and reporting operational risks.
The business process owners are responsible for the actual execution of the controls and for assessing the adequacy of their internal controls. Operational risk management, as part of the second line of defence, is responsible for providing management with an objective assessment of the effectiveness and efficiency of NN risks and controls.
Risk mitigation NN’s compliance function has developed a framework governing the process of identifying, assessing, mitigating, monitoring and reporting compliance risks. The compliance function works with a scorecard process to annually evaluate the level to which the compliance risk management framework is embedded in each business. NN continuously enhances its compliance risk management program to ensure that NN complies with international standards and laws.
The compliance function and the business work closely together to optimise both products and services to meet the customers’ needs. NN’s compliance function has developed a framework governing the process of identifying, assessing, mitigating, monitoring and reporting compliance risks.
Not shown. In general, similar to the IFRS sensitivity other than longevity risk in the Netherlands, for which changes to assumptions can impact available capital on a present value basis.
Market risk and credit risk Interest Rate +30% in 10y rate (2) –148 –50 Interest Rate –30% in 10y rate (2) 224 75 Equity –25% –747 –595
Real estate –10% –170 –192 FX –10% –106 –90 Credit spread –1,894 –1,902 Counterparty default –27 –7 Variable Annuity (Europe and Japan) –260 –357
The variable annuity risk is dominated by Japan Closed Block VA and decreased significantly over 2013 due to depreciation of the JPY versus EUR.
Market risk and credit risk Interest Rate +30% in 10y rate –3 –56 Interest Rate -30% in 10y rate 7 99 Equity -25% –362 –437
Real estate -10% –485 –508 FX -10% –58 –53 Counterparty default –96 –85 Variable annuity (Europe and Japan) –260 –357 insurance risk Mortality (including longevity) –26 –29 Morbidity –100 –100 P&C –92 –82
ING has reached an agreement with the Dutch State on the unwinding of the Illiquid Assets Back-Up Facility (IABF). The unwinding of the IABF added approximately 10 basis points to ING Bank’s core Tier 1 ratio. ING Bank called its USD 2 billion 8.5% Tier 1 hybrid per call date 15 December 2013 and launched an exchange offer on EUR 4.7 billion existing Tier 2 securities for new CRD IV compliant Tier 2 securities. This transaction was successfully completed on 15 November 2013 at an average participation of 55% (take-up rate). Through the offers, ING Bank issued EUR 2.6 billion of new CRD-IV eligible Tier 2 securities.
NN Group reduced its financial leverage substantially, from 31% by the end of 2012 to 26% ultimo 2013. This was mainly driven by the proceeds from the sale of its Asian Insurance business o.w. Hong Kong, Korea, Thailand and India, a capital injection from ING Group, the transfer of the US business from NN Group to ING Group and dividends from operating companies, offset by capital injections into operating companies, including a cash capital requirement for IPO purposes and holding company interest costs and expenses. In September NN Group N.V. redeemed senior debt of EUR 1.3 billon and an intercompany loan from ING Group of EUR 0.7 billion. The redemptions were funded by a new short-term intercompany loan of EUR 2 billion from ING Group, which was reduced to EUR 1 billion in December following a capital injection from ING Group.
In order to comply with the obligations toward the European Commission, ING Group largely finalised the divestment of its Asian business, US business and Brazilian business; the total proceeds from divestments in 2013 were EUR 4.1 billon.
In 2013 ING Bank issued EUR 25.7 billion of debt. This amount is split in EUR 1.9 billion with an original tenor up to two years and EUR 23.8 billion with an original tenor of more than two years. This includes a USD 2 billion Lower Tier 2 that was executed by ING Bank (including subsidiaries). Furthermore, ING reduced the amount outstanding by executing Government Guaranteed Bond buy-backs, leading to a total net issuance in 2013 of EUR 19.7 billion.
Revaluation reserves fixed income & other –1,680 –7,103 1,557 114 –2,990 –3,899 5 Revaluation reserves excluded from Tier 1 (5) –1,236 –1,691 Insurance hybrid capital (6) 476
Deductions Tier 1 –1,082 –991 Tier 1 capital for Bank 38,232 40,128
(6) Qualifying dated subordinated debt issued by NN Group at nominal value. (7) Consists of EUR 9,345 million (2012: EUR 8,132 million) Tier 2 capital and no Tier 3 (2012: nil), offset by EUR 1,082 million (2012: EUR 991million) of regulatory deductions.
Basel ii As of 2008 ING Bank publishes risk-weighted assets (RWA), Tier 1 and BIS capital and the accompanying capital ratios based on Basel II data only. In addition, ING publishes the minimum required capital level according to Basel II and according to the Basel I floor. As of 2009 the Basel I floor is based on 80% of Basel I RWA. The minimum requirements according to Basel II and Basel I are both compared to total BIS available capital according to Basel II.
Subordinated loans qualifying as Tier 1 capital (2) 5,123 6,774 Goodwill and intangibles deductible from Tier 1 (1) –1,057 –1,242 Deductions Tier 1 (3) –1,082 –991 Defined benefit remeasurement (4) 2,671 1,860 Revaluation reserve (5) –1,293 –2,195 Available capital – Tier 1 38,232 40,129
Available Tier 3 funds Deductions (3) –1,082 –991 BIS capital 46,496 47,270
(6) Includes eligible lower Tier 2 loans and revaluation reserves equity and real estate revaluations removed from Tier 1 capital. (7) Using 80% of Basel I Risk-Weighted Assets.
iCaap/sRep process On a yearly basis ING Bank N.V. submits extensive documentation on the Internal Capital Adequacy Assessment Process (ICAAP) to its regulator (DNB) as prescribed in the Basel II framework. This documentation includes a description of ING’s internal capital models, its risk appetite framework, an asset quality analysis and a capital planning, both under normal circumstances and in certain stressed scenarios. This documentation is an important input for DNB’s Supervisory Review and Evaluation Process (SREP) resulting in a letter to ING Management. The 2013 letter indicated that the minimum capital ratios DNB considers adequate for ING Bank consolidated are sufficiently covered by ING’s own capital standards. In addition the regulator examines on a regular basis ING’s internal models and processes, which resulted in several add-ons on ING’s economic capital requirements. Nevertheless ING capital position is more than sufficient to meet these requirements and as such these add-ons do not lead to incremental capital requirements compared to what results from ING’s own assessment.
For NN Group, Available Financial Resources (AFR) continues to be important, especially as an evolving proxy for the Own Funds derivation from our internal model under Solvency II. The SII regulations are not final and material deviations from our proxy could materialise; see the risk management section for more details. AFR in the 2012 Annual Report of ING Verzekeringen N.V. was derived for ING Insurance EurAsia excluding Asian Insurance and Investment Management businesses and the reinsured Japan VA guarantees to ING Re (Netherlands) N.V. that were classified as held-for-sale operations. ING announced in 2013 that NN Group N.V. will be divested instead of ING Insurance Eurasia N.V., and after carefully exploring and evaluating the options available for the divestment of ING Life Japan, it was concluded that ING Life Japan will be included with NN Group’s insurance and investment management businesses in the base case IPO of NN Group in 2014, subject to market and other conditions. As a result, ING Life Japan and the Japanese Closed Block VA guarantees reinsured to ING Re (‘NN Group’s business in Japan’) are no longer classified as held-for-sale operations. All references to Asia in this disclosure therefore, refer to the insurance and investment management businesses in Asia other than NN Group’s business in Japan.
Change of scope of aFR 2012 amounts in billions of euros AFR
The Tier 1 ratio and the BIS ratio are regulatory requirements. Internally ING manages on the Core Tier 1 ratio. The actual ratios were 11.97% at the end of 2012 and 11.72% at the end of 2013.
Main credit ratings of ing at 31 December 2013 standard & poor’s Moody’s Fitch rating outlook rating outlook rating outlook ing groep n.V.
Other reserves 20,036 18,877 Unappropriated result 3,232 4,161 Total equity 47,441 54,027
Parent company balance sheet of ING Groep N.V. as at 31 December before appropriation of result 345ING Group Annual Report 2013 1 W h o w e are 2 R
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 –2,498 Total amount recognised directly in equity –5,835 –467 –284 –6,586
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 which are recognised at net asset value with goodwill, if any, recorded under intangible assets.
Opening balance 61,537 54,994 Disposals of group companies –1,418 Revaluations –8,191 4,298 Result of group companies 3,252 4,365 Capital contribution 1,330 Dividend –3,837 –2,125
As at 31 December 2013 an amount of EUR 8,378 million (2012: EUR 11,093 million) is expected to be settled after more than one year from the balance sheet date.
Notes to the parent company annual accounts of ING Groep N.V. amounts in millions of euros, unless stated otherwise 349ING Group Annual Report 2013 1 W h o w e are 2 R
In 2013, ING Groep N.V. issued 9.3 million (depositary receipts for) ordinary shares at par value in order to fund obligations arising from share-based employee incentive programmes.
Fiscal unity ING Groep N.V. forms a fiscal unity with several Dutch banking entities for corporation tax purposes. ING Groep N.V. and its banking subsidiaries that form part of the fiscal unity are jointly and severally liable for taxation payable by the fiscal unity.
THE SUPERVISORY BOARD THE EXECUTIVE BOARD J. (Jeroen) van der Veer, chairman R.A.J.G. (Ralph) Hamers, CEO and chairman P.A.F.W. (Peter) Elverding, vice-chairman P.G. (Patrick) Flynn, CFO J.P. (Tineke) Bahlmann W.F. (Wilfred) Nagel, CRO H.W.(Henk) Breukink I. (Isabel) Martín Castellá C.W. (Carin) Gorter J.H. (Jan) Holsboer J.Ch.L. (Joost) Kuiper H.J. (Hermann-Josef) Lamberti R.W.P. (Robert) Reibestein Y.C.M.T. (Yvonne) van Rooy L.A.C.P. (Luc) Vandewalle
Notes to the parent company annual accounts of ING Groep N.V. continued 353ING Group Annual Report 2013 1 W h o w e are 2 R
These measures have eliminated the DAC balance and improve the reserve adequacy on the Japan Closed Block VA. The accounting for the Japan Closed Block VA guarantees is consistent and more in line with the related hedges.
RISKS RELATED TO FINANCIAL CONDITIONS, MARKET ENVIRONMENT AND GENERAL ECONOMIC TRENDS Because we are a financial services company conducting business on a global basis, our revenues and earnings are affected by the volatility and strength of the economic, business and capital markets environments specific to the geographic regions in which we conduct business. The ongoing turbulence and volatility of such factors have adversely affected, and may continue to adversely affect, the profitability and solvency of our insurance, banking and asset management business. Factors such as interest rates, securities prices, credit spreads, liquidity spreads, exchange rates, consumer spending, changes in client behaviour, business investment, real estate values and private equity valuations, government spending, inflation, the volatility and strength of the capital markets, political events and trends, and terrorism all impact the business and economic environment and, ultimately, our solvency, liquidity and the amount and profitability of business we conduct in a specific geographic region. In an economic downturn characterised by higher unemployment, lower family income, lower corporate earnings, higher corporate and private debt defaults, lower business investments and lower consumer spending, the demand for banking and insurance products is usually adversely affected and ING’s reserves and provisions typically would increase, resulting in overall lower earnings. Securities prices, real estate values and private equity valuations may also be adversely impacted, and any such losses would be realised through profit and loss and shareholders’ equity. Some insurance products contain minimum return or accumulation guarantees. If returns do not meet or exceed the guarantee levels, we may need to set up additional reserves to fund these future guaranteed benefits. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Similarly, a downturn in the equity markets causes a reduction in commission income we earn from managing portfolios for third parties, income generated from our own proprietary portfolios, asset-based fee income on certain insurance products, and our capital base. We also offer a number of insurance and financial products that expose us to risks associated with fluctuations in interest rates, securities prices, corporate and private default rates, the value of real estate assets, exchange rates and credit spreads. See also ‘—Interest rate volatility and other interest rate changes may adversely affect our profitability’, ‘—Continued risk of resurgence of turbulence and ongoing volatility in the financial markets and the economy generally have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations’, and ‘—Market conditions observed over the past few years may increase the risk of loans being impaired. We are exposed to declining property values on the collateral supporting residential and commercial real estate lending’ below.
We need liquidity to pay our operating expenses, insurance claims, interest on our debt and dividends on our capital stock, maintain our securities lending activities and replace certain maturing liabilities. Without sufficient liquidity, we will be forced to curtail our operations and our business will suffer. The principal sources of our funding are deposit funds, insurance premiums, annuity considerations and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of funding in normal markets may also include a variety of short- and long-term instruments, including repurchase agreements, commercial paper, medium- and long-term debt, subordinated debt securities, capital securities and stockholders’ equity.
We operate in highly regulated industries. Changes in laws and/or regulations governing financial services or financial institutions or the application of such laws and/or regulations governing our business may reduce our profitability. We are subject to detailed banking, insurance, asset management and other financial services laws and government regulation in the jurisdictions in which we conduct business. Regulatory agencies have broad administrative power over many aspects of our business, which may include liquidity, capital adequacy, permitted investments, ethical issues, money laundering, anti-terrorism measures, privacy, recordkeeping, product and sale suitability, marketing and sales practices, remuneration policies and our own internal governance practices. Also, regulators and other supervisory authorities in the European Union (‘EU’), the United States (‘U.S.’) and elsewhere continue to scrutinise payment processing and other transactions and activities of the financial services industry through laws and regulations governing such matters as money laundering, prohibited transactions with countries subject to sanctions, and bribery or other anticorruption measures.
Despite our efforts to maintain effective compliance procedures and to comply with applicable laws and regulations, there are a number of risks in areas where applicable regulations may be unclear, subject to multiple interpretations or under development, or where
Single Supervisory Mechanism In October 2013, the European Council adopted a single supervisory mechanism (‘SSM’), to be composed of national competent authorities and the European Central Bank (‘ECB’), as part of the prospective EU banking union. In the SSM, a significant part of the prudential regulatory powers will be transferred from national authorities of the participating Member States to the ECB and that the ECB will assume direct responsibility for a significant part of the prudential supervision of ING Bank and its holding company, ING Group. On 23 October 2013, the ECB announced details of a comprehensive assessment of large banks to be conducted in cooperation with national supervisory authorities of Member States participating in the SSM. The assessment, which consists of a risk assessment, an asset quality review and a stress test, started in November 2013 and is expected to be conducted over a twelve-month period in preparation of the ECB assuming full responsibility for supervision as part of the SSM in November 2014. ING Bank is among the seven Dutch institutions to be covered by the assessment (out of more than 120 institutions overall). The SSM will create a new system of financial supervision for countries within the Eurozone, with the possibility of non-Eurozone Member States participating by means of close cooperation. While it is at this stage difficult to identify what exact impact the SSM will have on ING Bank and ING Group, it is expected that the SSM will have a significant impact on the way ING’s banking operations are supervised in Europe.
• Pursuant to requirements of the Dodd-Frank Act, the SEC and CFTC are currently considering whether stable value contracts should be regulated as ‘swap’ derivative contracts. In the event that stable value contracts become subject to such regulation, certain aspects of our business could be adversely impacted, including issuance of stable value contracts and management of assets pursuant to stable value mandates.
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 304 million for ING Bank, to be paid in the first three quarters of 2014.
Further, the CRD IV Regulation states that if the Recovery and Resolution Directive is not adopted by 31 December 2015, the EC should review and report whether the CRD IV Regulation should be amended so as to include write-down and conversion powers in order to ensure that relevant capital instruments fully absorb losses at the point of non-viability of the issuing institution and before any other resolution action is taken. There is a risk that such an amendment would result in any securities issued or to be issued by ING that constitute relevant capital instruments being used to absorb losses on the occurrence of a non-viability event.
As of 1 October 2012, banks that are active in the Netherlands are subject to bank tax pursuant to a tax regulation that also includes measures to moderate bonuses awarded to executives at such banks. This tax results in increased taxes on ING’s Banking operations, which could negatively impact our operations, financial condition and liquidity.
Continued risk of resurgence of turbulence and ongoing volatility in the financial markets and the economy generally have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations. General Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Concerns over the slow economic recovery, the European sovereign debt crisis, the ability of certain countries to remain in the Eurozone, unemployment, the availability and cost of credit, credit spreads, the recent shutdown of the U.S. government and its plan to phase out
While certain of such conditions have improved during the period between 2011 and 2013, these conditions have generally resulted in greater volatility, widening of credit spreads and overall shortage of liquidity and tightening of financial markets throughout the world. In addition, prices for many types of asset-backed securities and other structured products have significantly deteriorated. These concerns have since expanded to include a broad range of fixed income securities, including those rated investment grade and especially the sovereign debt of some EEA countries and the U.S., the international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes, such as public and private equity, and real estate sectors. As a result of these and other factors, sovereign governments across the globe, including in regions where the Group operates, have also experienced budgetary and other financial difficulties, which have resulted in austerity measures, downgrades in credit rating by credit agencies, planned or implemented bail-out measures and, on occasion, civil unrest (for further details regarding sovereign debt concerns, see ‘ —U.S. Sovereign Credit Rating’ and ‘ —European Sovereign Debt Crisis’ below). As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. In addition, the confluence of these and other factors has resulted in volatile foreign exchange markets. Securities that are less liquid are more difficult to value and may be hard to dispose of. International equity markets have also continued to experience heightened volatility and turmoil, with issuers, including ourselves, that have exposure to the real estate, mortgage, private equity and credit markets particularly affected. These events and market upheavals, including high levels of volatility, have had and may continue to have an adverse effect on our revenues and results of operations, in part because we have a large investment portfolio and extensive real estate activities around the world.
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 recent 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, the U.S. 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 and the U.S. are our largest markets. 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 and other businesses. See ‘Risks related to the Restructuring Plan — 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’. 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.
Reinsurers Our insurance operations have bought protection for risks that exceed certain risk tolerance levels set for both our life and non-life businesses. This protection is bought through reinsurance arrangements in order to reduce possible losses. However, we remain liable to the underlying policyholders, even if the reinsurer defaults on its obligations. Because in most cases we must pay policyholders first before collecting the amount from the reinsurer, we are subject to credit risk with respect to each reinsurer for all such amounts. The inability or unwillingness of any one of these reinsurers to meet its financial obligations to us, or the insolvency of our reinsurers, could have a material adverse effect on our financial condition and results of operations.
Interest rate volatility and other interest rate changes may adversely affect our profitability. Changes in prevailing interest rates may negatively affect our business, including the level of net interest revenue we earn, and for our banking business, the levels of deposits and the demand for loans. In a period of changing interest rates, interest expense may increase and interest credited to policyholders may change at different rates than the interest earned on assets. Accordingly, changes in interest rates could decrease net interest revenue. Changes in the interest rates may negatively affect the value of our assets and our ability to realise gains or avoid losses from the sale of those assets, all of which also ultimately affect earnings and capital. In addition, our insurance and annuity products and certain of our retirement and investment products are sensitive to inflation rate fluctuations. A sustained increase in the inflation rate in our principal markets may also negatively affect our business, financial condition and results of operations. For example, a sustained increase in the inflation rate may result in an increase in nominal market interest rates. A failure to accurately anticipate higher inflation and factor it into our product pricing assumptions may result in mispricing of our products, which could materially and adversely impact our results of operations.
Accordingly, during periods of declining interest rates or a prolonged period of low interest rates, our profitability may suffer as the result of a decrease in the spread between interest rates credited to insurance policyholders and annuity contract owners. An extended period of declining interest rates or a prolonged period of low interest rates may also cause us to change our long-term view of the interest rates that we can earn on our investments. In addition, certain statutory capital and reserve requirements are based on formulas and models that consider interest rates, and an extended period of low interest rates may increase the statutory capital we are required to hold and the amount of assets we must maintain to support statutory reserves.
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. Main characteristics include an ex-ante funding of up to 0.8% of the banking sector’s insured deposits for payouts, to be built up in 10 years, but ultimate contributions will be risk-based. It is yet unclear what this proposal will mean for the proposed Dutch changes.
(4) 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
ING Group may be unable to retain key personnel. As a financial services enterprise with a decentralised management structure, ING Group relies to a considerable extent on the quality of local management in the various countries in which it operates. The success of ING Group’s operations is dependent, among other things, on its ability to attract and retain highly qualified professional personnel. Competition for key personnel in most countries in which ING Group operates is intense. ING Group’s ability to attract and retain key personnel, in particular senior officers, experienced portfolio managers, mutual fund managers and sales executives, is dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent.
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, in particular, senior management, 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 370 ING Group Annual Report 2013
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. 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 deferred acquisition costs (DAC) and value of business acquired (VOBA) 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. Changes in assumptions may lead to changes in the insurance provisions over time. Furthermore, some of these assumptions can be volatile.
Rulings or announcements made by courts, including the European Court of Justice and advisory opinions to be 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 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 and may force NN to take (financial) measures that could have a substantial impact on the financial condition, results of operations, solvency or reputation of NN 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 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 or its products had been judged or negotiated solely on their own merits.
NN has in the past sold, issued or advised on unit-linked products in and outside the Netherlands, and in certain jurisdictions continues to do so. Moreover, NN has in the past, in the Netherlands and other countries, sold, issued or advised on large numbers of insurance or investment products of its own or of third parties (and in some jurisdictions continues to do so) that have one or more product characteristics similar to those unit-linked products that have been the subject of the scrutiny, adverse publicity and claims in the Netherlands. Given the continuous political, regulatory and public attention on the unit-linked issue in the Netherlands, the increase in legal proceedings and claim initiatives in the Netherlands or the legislative and regulatory developments in Europe to further increase and strengthen consumer protection in general, there is a risk that unit-linked products and other insurance and investment products sold, issued or advised on by NN, may become subject to the same or similar levels of regulatory or political scrutiny, publicity and claims or actions by consumers, consumer protection organisations, regulators or governmental authorities.
production of appropriate marketing and communication materials. Notwithstanding these processes, customers may make mis-selling claims against ING if the products do not generate the expected profit, or result in a loss, or otherwise do not meet expectations. Customer protection regulations, as well as changes in interpretation and perception by both the public at large and governmental authorities of acceptable market practices, influence customer expectations.
The negative publicity associated with any sales practices, any compensation payable in respect of any such issues and regulatory changes resulting from such issues, has had and could have a material adverse effect on our business, revenues, results of operations, financial condition and prospects.
(‘General Court’) against specific elements of the EC’s decision regarding the Initial Restructuring Plan. On 2 March 2012, the General Court partially annulled the EC’s decision of 18 November 2009. Subsequently, the EC filed an appeal against the General Court’s judgment before the Court of Justice of the European Union. In parallel, the EC adopted a decision on 11 May 2012 that re-approved the state aid granted to ING Group as compatible with the internal market on the basis of the Initial Restructuring Plan. On the same date, the EC adopted an interim decision which opened an investigation concerning certain amendments and elements of the Initial Restructuring Plan. On 24 July 2012, ING announced that the Dutch State and ING were in dialogue with the EC on an amended and updated Restructuring Plan to be submitted to the EC. However, in order to safeguard its legal rights, ING filed an appeal with the General Court against the EC’s decision of 11 May 2012, which re-approved the Initial Restructuring Plan.
The remaining Core Tier 1 Securities issued to the Dutch State may be converted into Ordinary Shares or bearer depositary receipts and dilute existing shareholders. The terms of the Core Tier 1 Securities permit us, on or after 12 November 2011, to convert any or all of the remaining Core Tier 1 Securities (EUR 1.5 billion per 6 November 2013) into Ordinary Shares or bearer depositary receipts on the basis of one Core Tier 1 Security for 1,335 Ordinary Shares on a one-for-one basis (subject to customary adjustments as may be necessary to preserve economic equivalence) or bearer depositary receipts. Any such conversion would dilute existing shareholders. If we exercise our conversion right, the Dutch State may opt to require us to redeem the Core Tier 1 Securities on the conversion date at the original issue price of EUR 10 per Core Tier 1 Security, together with the pro rata coupon, if due, accrued to such date.
Certain holders of ING shares may not be able to participate in future equity offerings with subscription rights. We may undertake future equity offerings with or without subscription rights. In case of equity offerings with subscription rights, holders of ING shares in certain jurisdictions, however, may not be entitled to exercise such rights unless the rights and the related shares are registered or qualified for sale under the relevant legislation or regulatory framework. Holders of ING shares in these jurisdictions may suffer dilution of their shareholding should they not be permitted to participate in future equity offerings with subscription rights.
Risk governance, risk management and business model 5 Summarise the bank’s risk management organisation, processes and key functions 247 - 250 6 Bank's risk culture, related procedures and strategies 251 7 Key risks arising from business model, risk appetite and how risks are managed 250, 252 - 254 8 Use of stress testing within the bank’s risk governance and capital frameworks 254 - 258
The Pillar 3 information mostly relates to Credit Risk, but also to securitisations and Other Non-Credit Obligation Assets (ONCOA). The requirements are mainly for underlying exposure, risk weighted assets and regulatory capital. As such it relates primarily to the first Basel II pillar, the minimum capital requirement. These regulatory requirements are provided in the next section, including those for market risk and operational risk. The second pillar concerns Economic Capital (EC) and the underlying models used internally by banks and reviewed by supervisors. Economic Capital, and consequently Pillar 2, is disclosed extensively in the Risk Management section. As such, the text of this Pillar 3 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.
During 2013 ING Bank’s SA portfolio decreased in terms of Regulatory Exposure at Default (READ) by 20.5% as a result of mainly the sale of ING Direct UK. At December 2013, the largest portfolios under SA are the Turkey, India (ING Vysya Bank) and part of the Poland (ING Bank Slaski) portfolios. ING Bank continues to work with local regulators especially in Poland to bring more portfolios to AIRB.
Tier 2 capital Opening amount 7,142 8,502 Change in Tier 2 capital instruments 1,212 –1,384 Change in deductions –91 24 Closing amount 8,263 7,142
Capital adequacy assessment The Basel II capital adequacy is based on the guidelines developed by the Basel Committee on Banking Supervision and the European Union Directives, as implemented by the Dutch Central Bank (DNB) for supervisory purposes. The minimum Tier 1 ratio is 4% and the minimum total capital ratio (known as the BIS ratio) is 8% of all risk-weighted assets.
ING Bank continues to maintain strong and high quality capital levels. ING Bank is already meeting the Basel III solvency requirements with a fully-loaded core Tier 1 ratio of 10.0%. This percentage is calculated on the basis of immediate and full implementation and disregarding the possible impact of future management actions.
Regulatory adjustments Minority interests, counting as Core Tier 1 capital 1,065 959 949 857 485 449 Goodwill and intangibles deductible from Tier 1 –1,057 –1,242 –1,167 –1,349 –1,606 –1,778 Tier 1 deductions (1) –1,082 –991 –1,174 –1,059 –1,543 –1,335 Revaluation reserve debt securities –833 –1,265 –833 –1,265 Revaluation reserve equity securities –1,038 –1,385 –1,038 –1,385 Revaluation reserve real estate –325 –338 –325 –338 Revaluation reserve cash flow hedge 776 761 776 761 776 761
Net defined benefit pension fund assets –110 –117 –551 –587 Deferred tax assets –57 –154 –286 –771 Own credit risk adjustments to derivatives (DVA) –12 –14 –60 –70
RWA movement by key driver amounts in billions of euros 2013 2012
• De-risking in 2013 includes the sale of securitisations and the sale of ING’s Real Estate Finance (US) assets to Wells Fargo, which is in line with ING’s strategic objective of ensuring efficient use of capital across portfolios.
• There were several model updates through the year with a focus on mainly the Corporates portfolio and in particular the Commercial Property Finance portfolio. The key change relates to the determination of the LGD for this portfolio. The loss rate and the discount period taken into account now better reflect the current economic environment. The before mentioned change and multiple smaller changes resulted in an increase of EUR 9.7 billion.
• Over year, FX movements decreased RWA by EUR 4.1 billion which was mainly due to the depreciation of the US Dollar (–4.57%), the Turkish Lira (–20.53%) and the Australian Dollar (–17.52%) against the Euro
recognized Local / Regional Authorities as well as Supranational Organisations; • Institutions include all Commercial Banks, non-Bank Financial Institutions, such as Leasing Companies, Funds and Fund Managers, and Insurance Companies, as well as local and regional government entities not classified as governments; • Corporates include all legal entities, that are not considered to be Governments, Institutions or Retail; • Retail includes the following classes: – Residential Mortgages include all mortgage loans for residential properties that are not part of a securitisation; and – Retail Other includes all other credit obligations related to Retail SMEs, such as partnerships, one-man businesses and private individuals, such as consumer loans, car loans and credit cards.
Sovereign credit risk disclosure The table below presents the READ, segmented by relevant factors, and the analysis for the exposure class ‘Sovereigns’.
Retail credit risk disclosure This table presents the READ, segmented by relevant factors, and the analysis for the exposure class ‘Retail’.
Includes both AIRB and SA portfolios; excludes equities and ONCOA. * Securitisations are shown for completeness purposes.
The sale of ING Direct UK was the main reason for the reduction of the SA portfolio. An insignificant part of the Dutch mortgage portfolio was moved from SA to AIRB, while the only portfolio that shifted from AIRB to SA was the UK Lease portfolio which is in run-off mode.
Government Central 44,154 45,463 Government Implied 24,884 26,525 Government Local 16,430 9,802
Bank Commercial 46,189 54,784 Bank Implied 17,173 16,344 Government Local 11,472 12,186
Mortgages (Residential) Holland 137,396 148,879 Mortgages (Residential) Germany 63,821 61,654 Mortgages (Residential) Australia 28,516 34,507
(2) For comparison reasons, intercompany loans to ING Group and NN Group were included in the 2012 figures in this table. (3) For comparison purposes, the 2012 exposure class structure have been aligned for corporate and institutions with 2013.
AIRB credit exposures by internal rating grade The table below shows the AIRB portfolio per internal rating grade. Under Basel II rules, the nominal exposures are weighted to determine the RWA (and regulatory capital) of a portfolio, under a ‘risk-based approach’. This approach dictates that less capital is required for credit exposures which are well-rated, while progressively more capital is required as an obligor’s risk (rating) deteriorates. This effect can cause RWA to increase or decrease together with risk rating migration without a significant change in the size of the underlying financial assets, in terms of financial accounting. As such, rating migrations are closely monitored within ING Bank.
Changes in risk parameters since last reporting date The table below shows the changes in risk parameters since last reporting date in percentages. This should be read in conjunction with the table ‘disclosure of model outcomes’, above.
Over the course of 2013, both average PD and average LGD increased significantly as a result of a general decrease in credit quality. The PD increase was driven by Corporates and was mainly part of the Commercial Property Finance and Dutch SME portfolios. The PD models were refined to better reflect the current economic environment. The LGD increase was mainly driven by the Sovereigns and Residential Mortgages portfolios. For Sovereigns the unsecured LGD percentage was partially changed to 45% for all jurisdictions. The Residential Mortgages LGD increase was the result of a refinement of the Dutch LGD model to accurately reflect the current down-turn. These changes resulted in an increase in the RWA density, specifically seen in the exposure classes Sovereigns, Corporates and Residential Mortgages.
Disclosure of estimated and actual loss parameters ING has dedicated AIRB credit risk models per business unit, segment and country. An independent Model Validation department periodically reviews all AIRB models for compliance including back testing when possible. If a model is considered not to be robust or the backtesting indicates insufficient performance, than the model is either re-calibrated or re-developed. All model recommendations from Model Validation department are tracked via iRisk, the same internal database that management uses to track issues detected by the Internal Audit department, incidents and non-financial risk issues. All significant model changes are submitted to the Home Regulator (DNB) and implemented after regulatory approval. On average, 91% of the AIRB credit risk models in the validation cycle have had ‘No to Remote’ (58%) and ‘Minor’ (33%) model deficiencies.
The table below gives insight in the Expected Loss rate and the Observed Loss rate per exposure class. The expected loss of 31 December 2012 for the performing portfolio is split per Basel II exposure class. The 31 December 2012 portfolio is followed through 2013 to determine the defaulted exposures. The models are based on long series of historical data. In the comparison, the expected loss rate is calculated by dividing the expected loss of the performing portfolio of December 2012 by the READ of the performing portfolio of the same period. The Observed Loss rate is a result of multiplying the observed defaulted exposures by its LGD. This back-test is only representative of the year end 2012 portfolio and can be influenced by small sample sizes or incidents. Nonetheless, the back-test gives a comparison of the Expected Loss rate PD versus the observed Loss rate.
(1) Unadjusted for exchange rate fluctuations. (2) Based on start and end date of the outstanding positions, unadjusted for inflow and outflow.
Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. Excludes revaluations made directly through the equity account. (1) Sectors with cumulative provisions of less than EUR 50 million are grouped under ‘Other’. (2) At the end of 2013, the stock of provisions included provisions for amounts due from banks: EUR 19 million (2012: EUR 28 million)
The increase in past due loans is mainly driven by Belgium where arrears increased due to a one-off impact as a result of the SEPA implementation. The provisions in Belgium remained relatively stable during the year. The past due loans in the Dutch Residential Mortgages portfolio remained on the same level. Although the past due loans in the Netherlands did not increase, the non-performing loans and provisions increased by 26% and 65% respectively. The declined level of past due loans in Asia / Pacific is seen in Australia. This decline is partly due to foreign exchange movements and partly due to an improved risk profile of the Residential Mortgages portfolio which is also seen in improved LTVs in this region.
Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. (1) At the end of 2013, the stock of provisions included provisions for amounts due from banks: EUR 19 million (2012: EUR 19 million)
Sovereigns Institutions Corporate Residential mortgages Other retail Total Total 1250% risk weight
The derivative portfolio of ING Bank is almost exclusively based on client related business including hedging of mortgage portfolios. This partially explains the difference between derivative amounts to Institutions and Corporates. These institutions are mainly spread across the UK, Netherlands, Germany and France portfolios. Exchange traded derivatives picked up this year mainly in the Eurozone market. The READ decrease in the Derivatives portfolio is mainly a result of a noticeable shift from bilateral OTC derivatives for which READ is calculated, to OTC derivatives cleared via a Central Counterparties (CCP) which carry zero READ as a result of regulations. If the regulatory calculation of READ for unilateral and bilateral derivatives would be similar, then the derivatives portfolio trend would be stable. The above table does not include the trading portfolio which is accounted for under Market Risk section of the Risk Management Paragraph.
OTC derivatives CCP 1,728,308 –5,444 1,417,454 –4,430 Non-CCP 1,717,477 –1,446 2,020,068 –3,154
Securities financing by product type The table below is based on the marked-to-market plus (regulatory) add-on methodology used for calculating Basel II RWA for determining the gross exposures. The methodology to calculate the READ is called the Current Exposure Method (CEM) and together with the other building blocks (PD, LGD and Maturity) it allows ING Bank to classify virtually all of its Securities Financing exposures under the AIRB approach.
Maximum Exposure to Credit Risk per 31 December 2013 Cover Values* Cover Values Cover Values Cover Values
At ING, the investment policies define eligible product types, minimum ratings, maximum tenors and exposure caps, both at issuer level as well as for portfolios. Under Basel III most Securitisations no longer qualify as high quality liquid assets for the liquidity buffer and are hence no longer eligible assets under the investment policies. The ING Direct units no longer invest in Securitisations and have not been investing in Securitisations during 2013. The dominant product classes in the existing investment portfolio are RMBS and ABS. Prior to purchase, each investment proposal is analysed by Credit Risk Management and decided upon by authorised mandate holders pursuant to the signatory approval process in place at ING Bank. In 2013 ING Direct did not purchase any new securitisations.
ING has a strict policy on securitisations and no new investments in securitisations are allowed for ING’s Investment portfolio. ING’s goal is to maintain a portfolio of high quality liquid assets that meets the regulatory requirements of Basel III liquidity framework. In line with ING’s internal rating policy, securitisation exposures are rated using the worst external rating (Fitch, Moody’s and S&P). ING keeps close track of the securitisation investment positions via monthly monitoring reports.
The first transactions (Moon and Memphis 2003) were repaid in 2008 with no loss for the investors. The following transactions were also repaid, still with no loss for the investors: Mars 2004 in 2009, Memphis 2005 and Mars 2006 in 2012, Flipper in January 2013 and Memphis 2006 in May 2013. As of 31 December 2013, only one transaction totalling approximately EUR 0.5 billion (BEL SME 2006 on SME exposures) remain outstanding, as further detailed below. Retained exposures on securitisation of ING Bank’s own assets include the most senior tranches. Economically, on a total of about EUR 0.5 billion underlying exposures in the transaction mentioned above, ING Bank has transferred approximately EUR 251 million of mezzanine tranches to third parties. This transaction runs-off in March 2014.
Credit Events Aggregate outstandings of assets subject to a credit event reported in the 12 months period ending on the Cut-off date.
Capital at Risk Capital at Risk measures the impact of predefined instant shocks of market risk factors such as interest rates, credit spreads, foreign exchange, equity prices and real estate prices on the volatility of IFRS-EU and core Tier 1 equity.
Impact on Capital IFRS-EU Equity –2,927 –1,558 –243 –298 –963 Core Tier 1 Equity (Basel II) –290 –160 –98 –187 –840 Core Tier 1 Equity (Basel III, full spot) –1,564 –1,358 –243 –298 –957 * Basel III on a fully loaded basis, no phase in assumed. • Indicates the item has an impact on the capital as indicated in that column.
Collateral type Source of funding Residential mortgages Covered bonds 48,330 44,447 Residential mortgages External securitisations 7,966 3,652 Cash/deposits Derivatives 12,559 14,944 Total encumbered assets 68,855 63,043
AMORTISED COST The amount at which the financial asset or liability is measured at initial recognition less principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction for impairment or uncollectability.
AVAILABLE FINANCIAL RESOURCES (AFR) The available financial resources equal the market value of assets minus market value of liabilities, excluding hybrids issued by ING
Group which is counted as capital. ING’s policy is that the available financial resources should exceed economic capital for Bank, Insurance and Group.
BANK FOR INTERNATIONAL SETTLEMENTS (BIS) An international organisation which fosters international monetary and financial co-operation and serves as a bank for central banks. BIS has set a minimum for the solvency ratio reflecting the relationship between capital and risk weighted assets. The ratio should be at least 8%.
BASEL III Regulatory requirements issued by the Basel Committee on Banking Supervision for the solvency calculation and liquidity requirements, which will supersede Basel II. Basel III was adopted in 2010 and consequently translated by the EU in the Capital Requirement Regulation (CRR) and the Capital Requirement Directive IV (CRD IV). The CRR is binding for all EU member states and became effective per 1 January 2014, with the full requirements being effective as of 1 January 2018. The CRD IV directs all EU member states to implement certain components of Basel III in their own law, in the Netherlands in the Wet Financieel Toezicht (WFT).
CAPITAL REQUIREMENT DIRECTIVE (CRD IV) For European banks the Basel III requirements will be implemented through 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 (WFT). Although the amended WFT is expected to be ready in the second half of 2014, banks are expected to behave according to the CRD IV already.
COUNTRY OF RESIDENCE From the perspective of a given country, a resident is an individual or legal entity that has its major operations in the given country. All of ING’s customers and entities are said to be residents in only one country.
CREDIT DEFAULT SWAP (CDS) A CDS is a financial derivative instrument which synthetically transfers the credit risk of a specific reference entity between two Counterparties. The protection buyer pays a fixed periodic fee, usually expressed in basis points per annum on the notional amount. The protection seller makes no payment unless some specified credit event relating to the reference entity occurs, in which case he is obligated to make a payment to compensate the loss incurred by the protection buyer.
CREDIT SUPPORT ANNEX (CSA) Supporting documentation for a collateral arrangement that accompanies a master agreement used in the execution of an over-the-counter derivative swap. The document clearly delineates the rules and procedures for the use of the collateral in the backing of the traded securities. A CSA may be executed as a separate document or can be part of the master agreement.
DEFERRED ACQUISITION COSTS (DAC) The costs an insurer spends to acquire a customer when it issues a policy, costs such as commissions paid to sales agents. Those costs are put on the balance sheet as an asset (‘capitalised’) and then paid off (‘amortised’) over the life of the policy as the premium is earned. The amount that is set to be paid off each year is predetermined by the company based on estimated future returns.
ECONOMIC CAPITAL (EC) The minimum amount of capital that is required to absorb unexpected losses in times of severe stress. ING Bank calculates economic capital requirements at a 99.95% level of confidence. This confidence level is derived from the historical default frequency of AA-rated companies (probability of default of 1 in 2000 years or 0.05%). For NN Group the economic capital is calculated based on a confidence level of 99.5%, which is aligned with the Solvency II.
ECONOMIC EXPOSURE Total of outstandings plus undrawn committed portions calculated on the basis of economic risk principles.
GROSS PREMIUMS WRITTEN Total premiums (whether or not earned) for insurance contracts written or assumed during a specific period, without deduction for premiums ceded.
HELD FOR SALE A business or group of assets for which the carrying amount will be recovered principally through a sale transaction rather than through continuing use. When a business or a group of assets are to be sold together in a single transaction, and the sale is considered to be highly probable, these are classified separately in the balance sheet as Assets held for sale. A sale is highly probable when management is demonstrably committed to the sale, which is expected to occur within one year from the date of classification as held for sale. Liabilities directly associated with those assets, and that are included in the transaction are included in the balance sheet as ‘liabilities held for sale’.
LOAN TO DEPOSIT RATIO (LTD RATIO) Measure for the liquidity of banks. The LtD ratio is defined as: own originated loans / own originated deposits.
MASTER AGREEMENT Contract between parties in which agreements are reached for most of the terms and conditions of future transactions such that negotiations only focus on deal-specific terms. Well known master agreements are for example ISDA (for over-the-counter derivative transactions), GMRA (for repo or repurchase transactions) and GMSLA (for securities lending transactions).
MINIMUM CAPITAL REQUIREMENT (MCR) Is defined in the Solvency II legislation and represents the absolute minimum regulatory required capital for insurance companies.
MONTE CARLO SIMULATION A model to calculate Value at Risk, assuming that changes in risk factors are (jointly) normally distributed taking into account non-linear behaviour of financial products.
MORTGAGE BACKED SECURITIES (MBS) A security whose cash flows are backed by typically the principal and/ or interest payments of a pool of mortgages.
NET PRESENT VALUE AT RISK (NPV-AT-RISK) Establishes what the value of future cash flows is in terms of today’s monetary value. NPV-at-Risk establishes the change in value of future cash flows as a result of interest rate changes in terms of today’s monetary value.
NON-VOTING EQUITY SECURITIES Core Tier 1 securities issued to the Dutch State in November 2008 for a total consideration of EUR 10 billion. In December 2009 EUR 5 billion, in May 2011 EUR 2 billion, in November 2012 EUR 750 million and in November 2013 EUR 750 million was repaid to the Dutch State. This capital injection qualifies as core Tier 1 capital for regulatory purposes.
PERFORMING LOANS Loans for which clients currently meet and are expected to meet their financial obligations in full and on time.
RECOVERY PLAN As a consequence of the global financial crisis ING Bank has set up an all-encompassing recovery planning process to enhance the bank’s readiness and decisiveness to tackle financial crises on its own strength.
Financial glossary continued 417ING Group Annual Report 2013 1 W h o w e are 2 R
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.
VALUE AT RISK (VAR) Quantifies, with a one-sided confidence level of at least 99%, the maximum overnight loss in Net Present Value that could occur due to changes in risk factors (e.g. interest rates, foreign exchange rates, equity prices, credit spreads, implied volatilities) if positions remain unchanged for a time interval of one day. Statistically, a loss larger than the VaR figure can only occur once in every 100 days.
This Annual Report contains the Reports of the Executive Board and Supervisory Board as well as the Annual Accounts and Other information for the financial year 2013 in their original language (English).