Within ING Bank, the ultimate authority to set the risk appetite and approve or decline credit proposals resides with the MBB. The MBB has further delegated authorities, based on amounts and tenors to lower levels of the organisation. Transactions are approved via a dual signatory approval system that requires an individual sign off from both front office and credit risk management. For larger and higher risk credits a committee structure exists whereby the credit risk chair takes the final decision with support of the respective committee members, thereby ensuring accountability. Retail business units have delegated authority to decide within policies and mandates approved by CRM and any decisions outside those policies or above the delegated mandate require a specific credit risk approval.
Commercial Banking Commercial Banking manages the credit risk of the commercial banking activity i.e. the corporates, sovereigns and counterparties. There is a functional reporting line from the regional CB risk departments to CB CRM. There is a hierarchical reporting line from the risk departments Corporate & Structured Finance, Real Estate Finance, Counterparty & Investment and Real Estate & Other to CB CRM. Several reports are made regularly for monitoring and managing purposes. These reports are intensively discussed with the (regional) risk managers. RWA developments are monitored on portfolio level and per individual client during the month. Commercial Banking has specific delegated mandates. The approval process for Issuer and Corporate Credit Risk is based on mandates for approval signatories, except for the GCC. Each mandate is further broken down into categories, each representing a different Delegated Authority in amounts. For Counterparties the approval authorities and committees consists of GCC, Counterparty Credit Committee (CPCC) and mandates on (sub) regional or (local) unit level.
Credit risk appetite is present across different levels within ING Bank, at the portfolio level as well as transaction level. The various credit risk appetite components at the portfolio and transaction level together result in the credit risk appetite framework.
Credit risk appetite statements are defined top-down across the credit risk categories (pre-settlement, money market, lending, investment, but excluding settlement), and connected to ING Bank high-level risk appetite across all risk types (credit, market, business and nonfinancial risk). They consist of a set of high-level credit risk metrics; expected loss, economic capital, risk-weighted assets and exposure at default. For each credit risk metric a boundary is set that is cascaded down and monitored on a monthly basis. The adherence to the boundaries and the pro-active approach to manage the portfolio within the risk appetite boundaries are part of the key performance indicators of the business line managers and as such have a direct impact on their remuneration.
Country risk framework Country risk is the risk specifically attributable to events in a specific country (or group of countries). Country risk is the risk of loss that ING Bank faces associated with lending, pre-settlement, money market and investment transactions in any given country or group of countries, as a result of country risk events. A country risk event can be described as any event or crisis, which relates mostly to large domestic economic, financial and political shocks, as well as transfer or exchange restrictions, affecting all counterparties in a specific country in an indiscriminate way. The occurrence of a country risk event may cause all counterparties in a country to be unable to ensure timely payments, despite their willingness to meet their contractual debt obligations. As such, country risk is an additional factor to be taken into account in the credit approval process of individual customers, as the country risk event probability may impact the default probability of individual counterparties.
To manage country risk effectively, ING Bank uses two components, which together form the country risk framework: The first component is to set a maximum economic capital consumption and the second component is to assign country reference benchmarks, which define 264 ING Group Annual Report 2013
ING Bank performs periodical stress tests based on a standardised and pre-determined 1-in-10 year-stress event (i.e. at 90% confidence level and 1 year horizon) which is similar to the one applied in the solvency risk appetite. Based on this confidence level, a through the cycle rating migration for the entire portfolio is simulated. For this simulated portfolio, provisions, RWA and EC are recalculated to assess what the combined impact of such a year would be. The additional Credit RWA that ING should allocate in such an event is named Credit RWA-at-Risk. These stress test results are submitted to CPC on a periodical basis, in which the results are explained and discussed. If needed actions are formulated.
Product approvals Across ING Bank the product approval and review process ensures effective management of risks associated with products. It ensures that sound due diligence is performed by relevant stakeholders to ensure that risks (credit, operational, legal etc.) are mitigated.
Risk programs Within ING we distinguish between risk programs for retail banking and risk programs for commercial banking business.
Credit approval process The credit approval process ensures that individual transactions are assessed on a name-by-name basis. For each type of counterparty (corporate, banks/financial institution, structured products clients) there is a separate process. The line credit risk managers are organised along the business lines of ING Bank and are specialised in the relevant area of expertise. The credit approval process is supported by, amongst others, a credit approval system which ensures consistency and completeness; a risk rating (PD) system which contains all the risk rating models to ensure a proper rating is given to a counterparty and a limit and exposure monitoring system which subsequently feeds into the credit approval system. The rating model is used to indicate a counterparty’s creditworthiness, and to determine the maximum risk appetite that ING Bank may have for a given type of counterparty (reference benchmark). The determination of the delegated authority (the amount that can be approved at various levels of the organisation) also depends on the risk rating. ING Bank has a rating system with in total 22 grades (1=highest rating; 22=lowest rating) and are split in the following categories: • Investment grade (Risk Rating 1-10); • Non-investment grade (Risk Rating 11-17); • Problem Loan grade (Risk Rating 18-22); – Restructuring (Risk Rating 18-19); – Default (Risk Rating 20-22).
RWA comparison Comparison of RWA and risk weights across institutions is inherently challenging. Differences in RWA among banks have been classified by BIS in 3 categories: 1. Risk based drivers that stem from the differences in underlying risk at the exposure/ portfolio level and in business models/strategies including asset class mix.
For further analyses of the ING RWA density compared with the BIS study, we refer to the Pillar 3 section.
The European Banking Authority (EBA) published an analysis in December 2013, containing an RWA breakdown of the investigated 60 banks from 12 different countries in Europe(1). The sample period of this study is 2012. In the below table, we have compared the breakdown of the RWA of the peers with ING Bank for the same period and for 2013.
This table illustrates that ING has a significantly higher percentage of its portfolio covered by Advanced Internal Rating Based (AIRB) models compared to the European peers. DNB requires Dutch banks to have a minimum of 85% of RWA covered by AIRB models before allowing AIRB applicability. In general, capital calculated with AIRB has a lower risk weight than using the Standardised Approach (SA). This Supervisory Practice has an influence on the comparability of RWA across institutions.
Risk based drivers ING Bank portfolio is heavily dominated by secured lending especially in the areas of residential mortgages, structured finance, leasing and commercial real estate. Secured lending tends to have a much lower LGD, given the collateral involved, which is a key driver of RWA. Another key element of the ING business model is the focus on retail exposures collateralised by residential property. ING’s retail portfolio is mainly comprised of residential mortgages. The regulatory formula for this exposure class tends to result in the lowest RWA, all other factors being equal.
An important characteristic of the CCRM infrastructure and framework is that models are built for several purposes, including EC, RC and loan loss provision. These rating models are broadly used throughout the ING Bank organisation which is therefore compliant with the Basel Use Test requirement and ensures active feedback on the risk parameters by business units.
For short tenor exposures, the actual tenor is used and for exposures shorter than 1 year the effective PD (and not the 1 year PD) is used. For lending products to clients rated 11 or worse, 1 year PD is used.
CVA risk is taken into account as calculated under Pillar 1, and already in scope in 2013.
EC is calculated using the economic values of rating models (PD, EAD and LGD). In line with regulatory requirements, so-called ‘significant changes’ to these rating models are communicated to the regulator for approval. Significant changes relate to the impact on Credit RWA (Pillar 1) or to the significance (size) of the model for the ING Bank portfolio.
Securitisations ING Bank has implemented the AIRB approach for credit risk. As a consequence, ING Bank uses the Rating Based Approach (RBA) for investments in tranches of ABS and mortgage-backed securities (MBS) which have been rated by external rating agencies. Rating agencies which are used by ING Bank under the RBA include: Standard & Poor’s, Fitch, Moody’s and DBRS.
• Expert models are based on the knowledge and experience of experts from both risk management and front office staff and literature from rating agencies, supervisors and academics. These models are especially appropriate for ‘low default portfolios’, where limited historical defaults exist; thereby reducing the reliability of a statistical model.
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ING Bank’s PD rating models are based on a 1-22 scale (‘Master Scale’), which roughly corresponds to the same rating grades that are assigned by external rating agencies, such as Standard & Poor’s (S&P) and Fitch. For example, an ING Bank rating of 1 corresponds to an S&P/Fitch rating of AAA and a Moody’s rating of Aaa; an ING Bank rating of 2 corresponds to an S&P/Fitch rating of AA+ and a Moody’s rating of Aa1, and so on. To reflect a more accurate risk measurement of the PD values of the low default portfolios, the Master Scale (which consists of S&P default history) was updated in 2013.
Risk ratings assigned to counterparties are regularly, at least annually, reviewed, and the performance of the underlying models regularly monitored. Over 95% of ING Bank’s credit risks have been rated using one of the in-house developed PD rating models. Within the AIRB Portfolio, the level of Basel II ratings exceeds 99% coverage by exposure. Some of these models are universal in nature, such as models for large corporates, commercial banks, insurance companies, central governments, local governments, funds, fund managers, project finance, and leveraged companies. While other models are more regional or country specific, such as PD models for SME companies in Central Europe, the Netherlands, Belgium, Luxembourg, as well as residential mortgage and consumer loan models in the various retail markets.
Under these exposure class definitions, it is possible for a private individual to be included under both residential mortgages and retail other. ING Bank is continuously reviewing its allocation of clients within exposure classes to ensure a best fit to the definition. There is some overlap between Institutions and Corporates which is a matter for interpretation. Several clients have been moved from Corporates to Institutions in 2013. This did not have any impact on capital calculations but provides better comparability across firms.
The portfolio breakdown of ING bank per exposure class and per risk category, based on Exposure at Default is as follows: Exposure classes ING bank portfolio per risk category, as % of total EAD
AIRb SA AIRb SA AIRb SA AIRb SA AIRb SA AIRb + SA
Exposure classes ING bank portfolio per risk category, as % of total EAD
beyond the approved Facility Limit, if any. In addition to product type, EAD is also influenced by the approach to risk management. ING Bank has a pro-active risk management approach with active Watch list management that can influence EAD.
ING distinguishes four types of post default scenarios: – No Loss – Cure: the Borrower pays all overdue amounts (to the extend ING Bank is legally entitled to) and the asset becomes non-defaulted again. ING Bank does not experience any loss in the process. The relationship is not terminated. The borrower returns back to performing.
Changes in 2013 to credit risk models The credit risk models are updated on a regular basis by taking into account more recent data, regulatory requirements and MV recommendations. In 2013 model changes have been implemented to various important AIRB models across all exposure classes leading to an increase in RWA of EUR 9.1 billion of which the major changes are: • Governments: A new EAD model not only applicable to Governments, but also to Institutions and Corporates (excluding small and medium-sized entities) was implemented. Besides that new LGD models were implemented for the Central and Local Government portfolio. These changes lead to a net increase in RWA.
• Residential Mortgages: The PD and LGD models for the Dutch Mortgages portfolio have been updated to better reflect current market circumstances, leading to an increase in RWA.
Credit risk tools Credit risk policies ING credit risk policies provide for generic rules and roles and responsibilities that should always prevail within ING Bank. While allowance is given for discretionary variation to comply with local regulations, such variations must always comply with the content of a global ING Bank wide credit risk policy and approved by (local) credit risk. All credit risk policies are created according to the policy development standards and reviewed on a regular basis. Each policy has a credit risk sponsor and is created in close consultation with the various stakeholders within credit risk, front office and where applicable other corporate departments. All policies require approval by the Credit Risk Committee (CRC) and where applicable (for instance in case of determining delegated authorities) by the Global Credit Committee (GCC).
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ING Bank consolidated risk data warehouse (Vortex) Vortex was built based on the credit risk requirements, which means it thinks, calculates and reports based on this concept. Vortex has three main functions and three main purposes. The three main functions of Vortex; • Credit risk data warehouse covering ING Bank credit risk exposure; • Calculation engine: Vortex calculates country risk, large exposure, exceptions, average limit/outstanding, provisions, economic capital and regulatory capital; • Provide reports at a transactional, organisational, counterparty, department or ING Bank entity level.
Integrated credit process environment (STARpro) STARpro is an integrated suite of applications, which manages various workflow processes related to counterparty on-boarding for most of the commercial and business banking activities. STARpro is actually a series of interrelated functions that are required to seek approval, such as: • Financial statements import and projection analysis; • Establishing and appealing risk ratings; • Customer due diligence (CDD) Risk Level determination; • MiFID classification determination; • Environment and social responsibility reviews • Determining loan pricing; • Seeking credit risk approval (the analysis); • Administration of (standardised) documentation; • Problem loan management and determining the level of ISFA provisions; • Document management (an electronic library); • Research reports from external rating agencies (S&P, Fitch, Moody’s, and Graydon) as well as internal equity research; • STARpro automatically receives organisation data from GRID and exposure information from Vortex.
Reporting principles The Basel Committee published in January 2013 new ‘Principles for Effective Data Aggregation and Risk Reporting’ which outline 11 key principles that global SIBs have to implement by 2016. As a first step of the implementation, ING performed a ‘stocktaking’ selfassessment survey in 2013. Based on this survey Credit Risk Reporting can rate itself satisfactory on all principles, including their key principles: Accuracy, Timelines, Completeness, Adaptability and Auditability. Nonetheless, gaps have been identified in certain subportfolios and actions are being planned to further improve the credit information technology and reporting.
Risk classes ING bank portfolio, as % of total outstandings (1)
Credit risk types Within the Lending portfolio, by nature the largest risk category with 77% share (2012: 78%) of the total ING Bank portfolio, the decrease in rating class BBB, was the main cause of the decrease of ING Banks’ total portfolio. This was the result of transferring Residential Mortgages from WestlandUtrecht Bank to NN Group and moreover, due to the reflection of the economic environment into in our Dutch mortgages models, as described above. The investment portfolio was further wound down, impacted especially by the remainder of the Illiquid Asset Back-up Facility in the CCC & Problem Grade rating class being terminated. This portfolio is transitioning to a largely liquidity portfolio to support liabilities as required under new regulatory regime. Given the short-term nature of Money Market deposits, large changes can occur quickly. Other than local regulatory requirements in certain units, Money Market postings tend to be with central banks and other highly rated financial institutions.
Risk classes ING bank portfolio per credit risk type, as % of total outstandings (1)
Due to reduced demand in many markets where ING is active combined with dis-intermediation in the capital markets, the overall portfolio has reduced. This has had an impact on industry concentrations, as exposures to financial institutions and local and central governments make a larger portion of the portfolio.
Country risk There was very little shift in the geography risk exposures as most markets in Europe continued demonstrating weak economic conditions. Germany, especially its retail organisation, was an exception which also showed growth in the ING portfolio. The Asia/Pacific markets showed healthier growth than Europe both economically and within ING portfolio; however, some of this growth is negatively impacted by exchange movements.
Credit quality In this section the credit quality of the ING Bank portfolio is described. Outstandings carrying a risk that ING will end up with an actual loss or with an opportunity loss, if no specific action is taken, are captured in this section. Since the beginning of the crisis, the quantity and the share of the total ING credit risk portfolio of past due obligations, provisions, non-performing loans in general or any other loan that requires special risk management attention has increased. Noteworthy is the fact that the average turnaround time of problematic files seems to have stabilised in 2013, as opposed to the extension experienced each year since the beginning of the crisis. Obviously, the length and intensity of the crisis require continuous attention for credit quality. In this section the distinction between the Retail and Commercial Banking approach of past due obligations will be explained. Also the watch list and restructuring status will be introduced and an insight in the non-performing portfolio is given. After that, an analysis of the loan loss provisions is made and finally, the concept of forbearance will be discussed. The credit risk management paragraph will be concluded with extended analyses of the strategy of ING Bank to mitigate its credit risk.
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Aging analysis (past due but not impaired): ING bank consumer lending portfolio, outstandings (1)
Commercial Banking: for business loans (governments, institutions, corporates); ING Bank has adopted a policy to classify the obligor as a non-performing loan as quickly as possible upon the occurrence of a payment default or even before. A payment default of 90 days will always lead to a non-performing classification, but there are many more default triggers. The default triggers are: 1. Bankruptcy or financial reorganisation: The Borrower has sought or has been placed (or is likely to seek or be placed) in bankruptcy or similar protection, where this would avoid or delay repayment of the financial asset; 2. The Borrower has failed in the payment of principal or interest/fees and such payment failure has remained unresolved for the following period: • Corporates: more than 90 days; and • Financial Institutions and Governments: from day 1, however, a research period of 14 calendar days will be observed in order for ING
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Loan loss provisions Loan Loss provisions are calculated and accounted for in accordance with IFRS-EU. LLP are reported for financial assets that are measured against amortised costs (Loans and Receivables, Held-to-Maturity Investments). There are three types of LLP: • Individually Significant Financial Asset (ISFA) Provisions: when there is objective evidence that a financial asset is defaulted as result of one or more prescribed events that trigger a default. ING assigns a risk rating 20, 21 or 22. Specific provisions are calculated if the exposure to a Borrower exceeds the threshold amount. The threshold amount varies per business unit, but generally is nil in Commercial Banking, and a maximum of EUR 1 million in the Retail ‘home markets’. A specific provision is calculated based on several scenarios and assumptions. Provisions level is up to date given the quarterly reviews; DCF is measured when this is a significant risk driver which can be calculated. The future cash flow is based on best estimate of when/if recoveries will occur. Recoveries can be from any source, such as the sale of collateral, on-going cash flows, sale of a business/subsidiary, etc.
• Incurred but Not Recognised (IbNR) Provisions: are made for the ‘performing’ loan portfolio as an estimate or proxy for the losses/ defaults that may have already occurred in the portfolio, but which ING Bank has not yet determined or recognised. The PD time horizon used in the calculation of IBNR provisions refers to the period during which an asset is impaired (in default), but not yet recognised as such - due to lack of objective evidence – and the moment that objective evidence of impairment occurs and becomes available to ING (‘response time’). The primary modification is that the PD time horizon (12 months) is shortened to periods of 3, 6, or 9 months, depending on the type of customer. The decision to differentiate the time horizon per customer segment was based on an assessment of the average response time for specific customer types.
Commercial Banking Retail Banking Benelux Retail Banking International Total ING Bank
Increase/(decrease) in loan loss provision 867 955 1,060 833 362 337 2,289 2,125 Exchange or other movements –12 –14 –28 –17 –87 14 –127 –17
ING Bank reports forbearance activities in accordance with its forbearance policy. This policy gives guidance to identify: (1) Forbearance with recognition of financial loss, and (2) Forbearance without recognition of financial loss. The policy also pre-scribes how to identify each of these two forbearance situations for watch list and defaulted accounts. For defaulted and watch list files that are currently in the portfolio the curing period for forbearance has been set to a minimum of two years after the date of the modification. The loan will not be reported as forbearance after two years if the contract is considered performing, regular payments are made during the curing period, and the exposure is not past due for more than 30 days. The reporting process of forbearance is embedded in the quarterly loan loss provisioning process.
The Retail Banking forbearance exposure to Private Individuals table shows a breakdown of forbearance exposure of ING Bank’s Consumer Retail Lending Portfolio which includes mortgages and consumer loans.
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Cover values by risk category This section provides insight on the type of cover and to which extent the loan is collateralised. The cover disclosures are presented by risk category: Lending, Investment, Money-Market and Pre-settlement. For each risk category, the cover amounts are presented by the most relevant collateral forms, being mortgages and financial collateral (including cash), and the most relevant third party obligation being guarantees. ING Bank obtains covers which are compliant to CRR/CRD IV, as well as those that are not compliant.
The cover values are presented for the total portfolio of ING Bank. In the last year’s disclosure, only the AIRB portfolio was presented with covers in detail while in this year’s disclosure, the covers of both AIRB and SA portfolios are presented in detail reflecting the complete ING Bank’s portfolio. Next to that, detailed information is provided on the cover coverage for the performing and non-performing portfolio. The non-performing loan definition is explained in detail in the section ‘Credit Restructuring’. To increase the understanding of the reader on the nature of the collateralised loans, insight is given in the industry and geography breakdown of the ING Bank portfolio as well. Another improvement is that in addition to the lending risk category, the cover valuation tables now also give insight in the risk categories of Investment, Money Market and Pre-settlement. For comparability reasons, outstandings is used to show the ING Bank’s portfolio instead of READ. Exposures are categorised into different Value to Loan (VTL) buckets which gives insight in the level of collateralisation of ING Bank’s portfolio. VTL is calculated as the cover value divided by the outstandings at the balance sheet date. The cover values are pre-haircut but indexed values and exclude any cost of liquidation. Covers can either be valid for all limits, sublimits or a particular outstanding of a borrower, the latter being the most common. To prevent erroneously inflating the level of collateralisation, the coverage of all outstandings is capped at 100% if there is over-collateralisation on a certain outstanding. As a result, the coverage levels disclosed are conservative. Each limit is subsequently assigned to one of the six defined VTL buckets: no cover/data not available, >0% - 25%, >25% to 50%, >50% to 75%, >75% to <100%, and ≥ 100%. As the nature of the pre-settlement portfolio determines that collateral is netted, these VTL buckets are not shown for the pre-settlement portfolio.
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Excluding the pre-settlement portfolio, for which the covers are netted to derive the net outstandings at risk, 42% of the total ING Bank’s outstandings is fully collateralised in 2013. Among the five cover groups, mortgages is the largest portion with a value of EUR 551 billion in 2013. Due to the devaluation of the covers, the collateralisation of total ING Bank’s portfolio in general slightly deteriorated in 2013 with lower fully-covered outstandings. The deterioration can be seen in Consumer Lending and Business Lending. Detailed developments will be explained in the following sections per each risk category.
model for the Dutch portfolio instead of the Foreclosure value. To assure the comparability of the figures for two years, the Mortgage cover value of 2012 was adjusted to the Market value for the Dutch Residential Mortgage portfolio.
The collateralisation of the Consumer lending portfolio slightly decreased during 2013, mostly due to the deterioration of the Residential Mortgages portfolio as a result of the current economic environment. This is mainly visible in the Dutch portfolio, where the loan outstandings went down by 7.6% while the mortgages value decreased by 8.6% as a result of the decreased house price in the Netherlands.
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The downward impact of the Dutch portfolio on the coverage quality of the ING Bank’s mortgage portfolio was alleviated by the improvement in the portfolio in Belgium, where the house price experienced an upward trend in 2013. This development was mirrored in the 5.1% increase in the mortgages cover value whilst the outstandings increased by 3.3%. Beside the improved housing market, another element ameliorating the collateralisation quality is the reduced presence of the bullet mortgages in the portfolio.
During this three-year cycle, for properties located in the Netherlands, if the risk profile remains stable or improves, only yearly indexation is performed. The indices used are from ROZ/IPD (Vereniging Raad voor Onroerende Zaken – Association of Real Estate Council/Investment Property Databank). If the risk profile deteriorates, a revaluation is required.
The assessment of risk profile is performed based on certain defined factors, such as external drivers including macro developments (GDP, unemployment rate, Consumer confidence rate, Interest rate) and meso indicators (Real Estate quarterly data from Real Estate institution) and internal drivers including micro deteriorations (such as vacancy, weighted average lease expiry or WALE, and EBITDA) and individual deteriorations (being Watch listed, Credit event, suspension of payments, bankruptcy of a major tenant, actual or expected increase in vacancy level).
For financing properties outside the Netherlands, the revaluation cycle is also set to three years. In case the agreed LTV covenants are not met, an annual or bi-annual revaluation will take place. The outcome of the re-valuation or indexed value is updated accordingly in the cover REF database.
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In contrast to the general deteriorating trend, the non-performing Real Estate portfolio improved, expressed by the increase in the highly-collateralised buckets (VTL > 75%) from 50.5% to 63.6%. This is mainly attributable to the reduction of EUR 528 million (or 18.5%) in the outstandings of the existing non-performing portfolio in 2012.
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The two tables above provide the collateralisation of the ING Bank’s Business Lending portfolio with a breakdown per geographical region or main market, which are defined based on the residence of the borrowers. The deterioration of collateralisation is observed in most regions and main countries, such as America, Asia, Germany, Australia and the Netherlands. This is partially due to the de-risking in Real Estate portfolio, which has impacted the collateralisation level in portfolios in America (mainly in the United States), Australia and the Netherlands. The business lending portfolio in the Netherlands has been offset by the outstandings increase in Commercial Banks where generally minimal cover is provided. The portfolio in Asia experienced a leap in Commercial Banks, which explains its lower fully covered portion. The exposure in Germany ended the year with a higher no-cover portion due to the increased outstandings in Central Bank, where typically no cover is received.
The reduction in the gross MtM was mainly driven by interest rate derivatives (IRD), which represent 66.1% of the total pre-settlement gross MtM. Although the notional amount of IRD slightly decreased by 2.2% in 2013, the gross MtM of IRD reduced significantly by 26.0%. This is due to more stabilised interest rates in 2013 and the maturing of earlier deals, as a result of which, more extreme (both positive and negative) MtMs moved out of the portfolio, thus reducing gross MtM. The IRD portfolio at ING Bank is well-diversified therefore the level of interest rates has less impact on the netted exposure, as positive and negative MtMs offset each other. This results in a stable netted exposure over time.
ING Bank recognises the importance of sound market risk management and follows the approach to know, control and manage market risks. The approach consists of a cycle of five recurrent activities: risk identification, risk assessment, risk control, monitoring and reporting. • Risk identification is a joint effort of the 1st and 2nd line of defence (the ‘three lines of defence governance’ model is explained in the risk governance paragraph of the general risk management section). Its goal is to detect potential new risks and changes in known risks.
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This market risk paragraph elaborates on the various elements of the risk management approach for: • Market risk economic capital for trading and banking books • Market risks in the banking books • Market risks in the trading books
Embedded options, e.g. the prepayment option and offered rate option in mortgages in the banking books, result in non-linear interest rate risk in the banking books. The embedded options are hedged using a delta-hedging methodology, leaving the mortgage portfolio exposed to convexity and volatility risk. For the calculation of economic capital for this non-linear interest rate risk and volatility risk ING Bank performs a Monte Carlo simulation.
Economic and Regulatory Capital (bank diversified only) by risk type Economic Capital Regulatory Capital
August of 2013) and the lower volatility in equity markets, as the 2008 volatile period started dropping out of the historical period taken into account in Q3 2013.
Interest rate risk in banking book Interest rate risk in the banking books is defined as the exposure of a bank’s financial condition to adverse movements in interest rates originated from positions in the banking books.
ING Bank distinguishes three types of activities that generate interest rate risk in the banking books: • Investment of own capital (by Capital Management); • Commercial business (e.g. retail business); and • The strategic interest rate position (Bank Treasury).
Below the three activities are described in more detail: Capital Management is responsible for managing the investment of own funds (core capital), more information can be found in the Capital Management section. Capital is invested for longer periods, targeting to maximise return, while keeping earnings stable at the same time.
Risk measurement and the risk transfer process take place on a monthly basis, but more often if deemed necessary, for instance in volatile markets. The customer behaviour in relation to mortgages, loans, savings and demand deposits is modelled by MRM, based on extensive research. Model parameters are determined from historical data and expert opinion. Models and parameters are backtested at least semi-annually and updated when deemed necessary. In the modelling of savings and current accounts different elements play a role: pricing strategies, outstanding and expected volumes and the level and shape of the yield curve. The analyses result in an investment rule for the various portfolios. With respect to mortgages and loans, interest rate dependent prepayment behaviour is modelled, as well as the interest sensitivity of embedded offered rate options.
Customer behaviour risk is defined as the potential future value loss due to uncertainty in the behaviour of clients towards embedded options in commercial products. Customer behaviour risk is reported as part of business risk Economic Capital. General sources of customer behaviour risk include the state of the economy, competition, changes in regulation, legislation and tax regime, and developments in the housing market. Since these risk factors cannot be (fully) mitigated, ING holds capital to be able to absorb possible losses as a result of changed customer behaviour.
Basis Point Value (BPV) BPV measures the impact of a one basis point increase in interest rates on value. To a large extent the BPV and NPV at Risk reflect the same risk – the difference being that BPV does not reflect convexity risk, given the small shift in interest rates.
bPV banking books per currency amounts in thousands of euros 2013 2012 by currency Euro –13,900 –18,824 US Dollar 214 –656 Pound Sterling 13 382 Other –352 1 Total –14,025 –19,097 bPV banking books per business amounts in thousands of euros 2013 2012 by business Commercial Banking –626 –2,446 Retail Banking Benelux –100 329 Retail Banking International 2,757 1,898 Corporate Line –16,056 –18,878 Total –14,025 –19,097 bPV banking books per accounting category amounts in thousands of euros 2013 2012 by accounting category Amortised Cost 11,482 –4,622 Fair value through equity –24,318 –14,148 Fair value through profit and loss –1,189 –327 Total –14,025 –19,097
Year-on-year variance analysis In line with the decrease in NPV-at-Risk, the overall BPV decreased in 2013 with EUR 5.1 million. As for NPV-at-Risk this mainly results from the decrease in the duration of the investment of capital and the increased duration of savings in the low interest rate environment of the Eurozone. Furthermore the overall BPV exposure has changed as a result of a change in the strategic position. Besides the variance of the overall BPV exposure there is a variance in the exposure per accounting category. This is mainly the result of increased volume and duration of savings and at the same time a decreased duration of mortgages. As a result the BPV exposure at amortised cost showed an upward move. This move was mitigated by cash flow hedges, which revaluate through equity. The increased sensitivity of other currencies results from an enhancement in the modelling of savings in Australia in Australian dollars.
Governance – FX translation result ING Bank’s strategy is to protect the target core Tier 1 ratio against FX rate fluctuations, whilst limiting the volatility in the profit and loss account. Therefore, hedges are only done to the extent that they can be hedge accounted for against equity. Taking this into account, the core Tier 1 ratio is achieved by deliberately taking foreign currency positions equal to certain target positions, such that the target core Tier 1 capital and risk-weighted assets are equally sensitive in relative terms to changing FX rates.
In order to measure the remaining sensitivity of the target core Tier 1 ratio against FX rate fluctuations, the core Tier 1 ratio at Risk (cTaR) measure is used. It measures the drop in the core Tier 1 ratio from the target when stressing a certain FX rate. The stress scenario for a currency corresponds with that scenario that causes a drop in the core Tier 1 ratio, so a negative sign means that a depreciation of that corresponding currency will result in a drop of the core Tier 1 ratio.
Year-on-year variance analysis In total, real estate market risk exposure in the banking books decreased by EUR 0.7 billion mainly as a result of divestments (EUR 0.54 billion). The rest is due to impairments and negative fair value changes.
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Reference is made to Note 46 ‘Fair value of assets and liabilities’ for the basis of the determination of the fair values of the financial instruments and related sensitivities.
Incremental Risk Charge With the Incremental Risk Charge (IRC) ING Bank calculates an estimate of default and migration risk for unsecuritised credit products in the trading book over a one-year capital horizon at a 99.9% confidence level. For the calculation of IRC ING Bank performs a Monte Carlo simulation based on a Gaussian copula model. For all issuers the rating is simulated over the different liquidity horizons (time required to liquidate the position or hedge all significant risks) within one year. The financial impact is then determined based on the migration to default (based on LGD), or migration to a different rating category (based on credit spread changes).
Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Dec 13
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Movement in risk levels is mainly due to changes in trading positions and less volatile markets.
Bank Treasury (BT) is a 1st line function. Its main funding and liquidity responsibilities are to manage ING’s funding gap and ING’s regulatory liquidity position. Bank Treasury is ING’s primary contact to the market for long and short term funding, with exception of capital and securitisation transactions which are under the responsibility of the Capital Management function and the execution of some specific structured funding products which are executed by Financial Markets under a mandate that provides strict guidance around pricing, volumes, optionalities and tenors.
• Liquidity buffers: ALCO Bank ensures that sufficient liquidity is maintained, in accordance with Bank- and regulatory rules and standards, including a buffer of unencumbered, high quality liquid assets, to withstand stress events, such as those involving the loss or impairment of both unsecured and secured funding sources.
Implementation of the framework Liquidity risk appetite ING’s liquidity risk appetite is expressed in a set of limits to manage the level of liquidity risk ING is willing to take in the pursuit of its strategic objectives. These limits are embedded in risk appetite statements (RAS) which reflect three pillars of addressing risk: • Structural sources of risk: – Limits on liquidity mismatches – Limits on exposures to short term professional money markets – Defining target Loan-to-Deposit ratios
Funding In detailing the activities of the bank regarding utilisation of professional market funding sources, the following key principles apply: • Maintaining adequate market access in both normal and stressed but operable market conditions. • Managing risk by adhering to internally and externally imposed risk limits and balance sheet ratios. • Optimising the cost of funding under the principles above.
In 2013, ING Bank had readily access to a large variety of funding sources, both short term and long term.
Intraday liquidity management The objective of managing intraday liquidity and its risks at ING is twofold: it is focused on preventing damage to the institution’s own liquidity position, and, in light of its role in global financial markets, ING also takes into account the potential damage to other parties which can arise through chain effects in payment and securities transactions.
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The Chief Compliance Officer (CCO) is the general manager of the compliance risk management department and the Head of the Compliance function within the Bank. This is an independent function responsible for developing and establishing the Bank-wide compliance risk management charter & framework which establishes the minimum standards for managing compliance risks. The CCO assists and supports the Management Board Bank in managing ING Bank’s compliance risks and control framework.
The non-financial risk department uses a layered functional approach within divisions to ensure systematic and consistent implementation of the Bank framework, policies and minimum standards. To avoid potential conflicts of interests, it is imperative that the staff working in the department is impartial and objective when advising business management on non-financial risk matters in their business unit or business line. To facilitate this, a strong functional reporting line to the next higher level within NFR is in place. The functional reporting line has clear accountabilities with regard to objective setting, remuneration, performance management and appointment of new staff as well as obligations to veto and escalate.
Business units and departments perform regular Business Environment Assessments (BEAs) and Risk & Control Self-Assessments (RCSAs) to identify and assess risks. These are conducted with involvement of the business and their Operational Risk, Compliance and Legal departments. Based on the results of the risk assessment, response measures must be determined for the identified risks beyond the risk appetite. Risk response actions balance the expected cost for implementing these measures with the expected benefits regarding the risk reduction. Risk response can be achieved through several combinations of mitigation strategies, for example reducing likelihood of occurrence, reducing impact, risk avoidance, risk acceptance or through the transfer of risk. Tracking takes place through ING Bank’s central risk management system.
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Advanced Measurement Approach (AMA) ING Bank has an Operational Risk Capital model in place in which the risk profile is closely tailored to the internal profile of ING Bank and its divisions by using scenario data for capturing severe risks and internal loss and Risk & Control Self-Assessment data for capturing day-to-day risks. The business has a strong role in assessing scenario severities and the Operational Risk Management function in validating the results. In 2013 workshops were held at the regional level and the scenario coverage has been expanded by introducing more relevant scenario topics. The internal data based calculation is combined with an external loss data (ORX) based calculation. The better scenario coverage is demonstrated for a unit of measure, the more weighting is given to scenarios in the calculation.
Financial Economic Crime (’FEC‘) policy The ING Bank FEC Policy provides a clear statement of what is required by all ING Bank entities in order to guard against any involvement in criminal activity, and to participate in international efforts to combat money laundering and the funding of terrorist and criminal activities. The requirements in the ING Bank FEC Policy cover minimum standards and controls related to: money laundering, terrorist financing, export trade controls, proliferation financing, sanctions (economic, financial and trade) and countries designated by ING Bank as Ultra High Risk Countries (UHRC).
Management of ING Bank entities introduce appropriate local procedures that enable them to comply with local laws, regulations and the relevant ING Bank FEC Policy. Where local laws and regulations are more stringent, the local laws and regulations are applied. Likewise the FEC Policy prevails when the standards therein are stricter than local laws and regulations.
Regulator relationships Bank Compliance Risk Management continued its policy of investing in pro-active relationship building with regulators in the jurisdictions where ING Bank operates, by striving for an open two-way approach to communication and cooperation in identifying and mitigating compliance risks for ING Bank as well as seeking to contribute to the regulatory debate going forwards.
Learning Global education and awareness training was provided on topics such as sanctions and competition law and on other specialist topics in face to face sessions and e-learning modules. This included training in introduction programmes for new staff and talent programmes. Compliance Risk Management also continued its mandatory global Compliance Officer Training programme for all new compliance officers in ING Bank.
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• Risk management framework. NN’s risk management framework takes into account the relevant elements of risk management, including its integration into NN’s strategic planning cycle, the management information generated, and a granular risk assessment.
While the Management Board retains ultimate responsibility for NN’s risk management, it has delegated certain responsibilities to a committee of the Management Board, the Risk and Finance Committee, which is responsible for day-to-day risk and finance related risk management decision-making, processes and controls. The Risk and Finance Committee has further delegated certain tasks to subcommittees, which advise the Risk and Finance Committee on risk and finance-related topics. These sub-committees are the Asset and Liability Committee, the Non-Financial Risk Committee, the Product Risk Committee, the Model Committee, the Finance Committee, the Investment Committee, and the Crisis Committee.
supervisory Board and its committees The Supervisory Board is responsible for supervising the Management Board and the general affairs of the Company and its business. For risk management purposes the Supervisory Board is assisted by two committees: • Risk Committee. The Risk Committee assists the Supervisory Board in supervising and advising the Management Board with respect to NN’s risk management strategy and policies.
• audit Committee. The Audit Committee reviews and assesses the applicable accounting standards and the Company’s compliance therewith, the going concern assumption, significant financial risk exposures, significant adjustments resulting from audit, compliance with statutory and legal requirements and regulations, tax and tax planning matters with a material impact on the financial statements, and detection of fraud and other illegal acts.
Risk ManageMent FRaMeWoRk NN’s risk management framework comprises a series of sequential steps, through which NN seeks to identify, measure and manage the risks to which it is exposed. The diagram below sets out these steps.
• event identification. NN identifies events that may potentially impact its risk position, recognising that uncertainties exist, and that NN cannot know with certainty which events will occur and when,, or what the outcome or impact would be if it did occur. As part of event identification, NN considers both external and internal factors that affect event occurrence. External factors include economic, business, natural environment, political, demographic, social and technological factors. Internal factors reflect NN’s choices and concern such matters as infrastructure, personnel, process and technology.
• Risk assessment. NN, centrally at the executive level and at the business unit level, considers how events identified in the previous step might affect the achievement of NN’s strategic objectives. Key risks are assessed on a regular basis and, where appropriate, this analysis is supported by models (such as for NN’s economic capital calculation; see also ‘NN’s Risk Profile—Economic capital’). NN conducts regular top-down assessments of its key risks, both at the holding level and at the level of the individual business units.
In addition to the key quantitative measures, qualitative statements form part of the risk appetite framework that serve to guide risk taking for conduct in the areas of underwriting, Asset and Liability management (aLM), investing and operations. These statements support NN’s strategy, contribute to avoiding unwanted or excessive risk taking, and aim to further optimise the use of capital. The qualitative risk appetite statements are organised under the following categories: • Managing underwriting. Underwriting and product development is paramount to the insurance business. NN strives for appealing, easy to understand and transparent value-for-money products that can be effectively risk-managed over the expected life of the contract. • aLM. NN aims to match its asset portfolio to its liabilities with optimal strategic asset allocation and by limiting any mis-matches to an acceptable degree. The ALM process is integral in ensuring adequate liquidity for policyholder obligations.
Risk policy framework NN’s risk policy framework ensures that all risks are managed consistently and that NN as a whole operates within its risk tolerances. The policies/minimum standards focus on risk measurement, risk management and risk governance. To ensure that policies are efficient and effective they are governed by the risk committee structure. Potential waivers to the policies have to be approved through the respective risk committees.
Risk limits The quantitative risk appetite statement is translated into quantitative risk limits for the business units. The business units report regularly on their risk profile compared to applicable risk appetite and risk limits.
product approval and review process The product approval and review process (paRp) has been developed to enable effective design, underwriting, and pricing of all products as well as to ensure that they can be managed throughout their lifetime. This process establishes requirements as to the product risk profile features to ensure that products are aligned with NN’s strategy. The PARP takes into account customer benefits and product suitability, expected sales volumes, value-oriented pricing metrics and relevant policies. It includes requirements and standards to assess risks as per the risk categories, as well as the assessment of the administration and accounting aspects of the product.
asset list that is a subset of the global asset list. The local asset list includes asset allocation parameters, which prescribe the relative proportions in which the relevant business unit may invest in different asset classes, as well as asset, industry, regional, and credit concentration limits.
non-financial risk dashboard Non-financial risks are monitored through the non-financial risk dashboard (nFRD) process at all levels in the organisation. The NFRD is one tool which provides management at all organisational levels with information about key operational, compliance and legal risks and incidents. The exposure of NN to non-financial risks is regularly assessed through risk assessments and monitoring. After identification of the risks, each risk is assessed as to its likelihood of occurrence as well its potential impact should it occur. Actions required to mitigate the risks are identified and tracked until the risk is either reduced, if such a reduction is possible, or accepted as a residual risk if the risk cannot be mitigated.
• Liquidity risk. Liquidity risk is the risk that one of NN’s entities does not have sufficient liquid assets to meet its financial obligations when they become due and payable, at reasonable cost and in a timely manner.
• Compliance risk. Compliance risk is the risk of impairment of NN’s integrity. It is a failure (or perceived failure) to comply with NN’s Business Principles and the Compliance Risk-related laws, regulations and standards that are relevant to the specific financial services offered by a business or its ensuing activities, which could damage NN’s reputation and lead to legal or regulatory sanctions and financial loss.
• In the second step, NN models insurance and business risk by defining stress scenarios at a 99.5% confidence interval using empirical data, when available, and expert judgement on the characteristics of NN’s portfolio. With regards to longevity and expense risk, these stress scenarios are measured over a multi-year horizon. Mortality, morbidity, and property and casualty (P&C) risks are measured over a one-year horizon. These measurements are made at the individual business unit level and are modelled to capture the offsetting of certain risks, which occurs where certain risk events preclude the possibility of others. For example, if risk capital is based on the risk event that people will live longer (longevity risk), then the risk event that the same people will die earlier (mortality risk) is precluded. These risks are also aggregated with each other, as well as with the market and credit risk calculated in step one, using correlations based on expert judgement. As a result of this aggregation, the economic capital for the aggregate risk is less than the sum of the economic capital for the individual risks because the probability of all of the various risks materialising concurrently is less than 0.5%. This difference is the diversification benefit, reflecting the benefits of NN’s risk pooling.
The following sections will explain the risk profile, risk mitigation and risk measurement of all the categories above except for the diversification benefits between the different risk categories. Diversification benefits are recognised both on the risk category level (reflecting, for instance, diversification benefits between different countries, and diversification benefits between different risks within a particular risk category), as well as diversification benefits between risk categories. The diversification benefit between insurance risk, business risk, and market and credit risk of both the separate and general account decreased from 2012 to 2013. Insurance and business risks diversify well with each other and also with the market and credit risks, and in 2013 the reduced exposure to insurance and business risk resulted in an overall lower diversification benefit for NN.
As reported for ING Insurance EurAsia (excluding discontinued operations) in 2012 5,868 Changes in model and methodology 438 Include Japan Life and Japan Closed Block VA as modelled business after diversification 689 Include the other Asian held-for-sale business units as unmodelled business 1,504 Include legacy units and holding as unmodelled business 220 Economic capital for 2012 for NN Group 8,719
In 2013, NN continued to refine and update the internal model to prepare for the Solvency II Directive, increasing economic capital by EUR 438 million. Modelling changes included updates to the correlation matrix and a more granular modelling of asset risk.
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Last liquid point (1) 20 years 20 years 30 years 20 years Illiquidity adjustment Illiquidity premium Volatility balancer /
Risk profile Mortality risk occurs when claims are higher due to higher mortality experience (for instance in relation to term insurance). Longevity risk is the risk that insured persons live longer than expected due to mortality improvements. While NN is exposed to both longevity and mortality risks, these risks do not fully offset one another as the impact of the longevity risks in the pension business in the Netherlands is significantly larger than the mortality risk in the other businesses, not only due to the size of the business but also due to the current low interest rate environment. Changes in mortality tables impact the future expected benefits to be paid and the present value of these future impacts is reflected directly in measures like available financial resources and available regulatory capital in the Netherlands. Longevity risk exposes NN primarily to mortality improvements and the present value impact is larger when interest rates are low.
Insurance risks are diversified between business units. Risk not mitigated by diversification is managed through concentration and exposure limits and through reinsurance: • tolerance limits for non-life insurance risks are set by line of business for catastrophic events and individual risk; for instance, every year
The P&C risk is primarily underwritten by Netherlands Non-Life and partially reinsured by ING Re. The higher windstorm catastrophe risk retention level for 2014 resulted in an overall increase in economic capital for P&C risk.
Expense risk Total administrative expenses for NN in 2013 amounted to EUR 1,842 million. Part of these expenses is variable, depending on the size of the business and sales volumes, and part are fixed and cannot immediately be adjusted to reflect changes in the size of the business. Expense risk relates primarily to the fixed part of NN’s expenses, and is the risk that actual per policy expenses in the future exceed the assumed per policy expenses. A significant portion of the fixed expenses is incurred in the closed block operations of Netherlands Life, where NN is exposed to the risk that the overheads relating to IT administration systems will remain constant, or even increase, while the number of policies in the in-force book gradually decreases, leading to a per policy expense increase.
The diversification in business risk is driven by the fact that policyholder behaviour and expense risk are largely uncorrelated and therefore receive a benefit given the low likelihood that they will both occur concurrently.
MaRket anD CReDit Risk: geneRaL aCCount Market and credit risks are the risks related to the impact of financial markets on NN’s balance sheet. In relation to market and credit risk, NN distinguishes between its general account and its separate account. The table below sets out NN’s asset class market values for the general account as at 31 December 2013 and 2012 (in this table derivatives are excluded and specific risk management asset classifications and valuations are applied). 2012 figures are on a comparable basis to 2013.
general account assets Market Value % of total Market Value % of total
The table below sets out NN’s economic capital for the general account as at 31 December 2013 and 2012, respectively.
Risk profile The table below sets out NN’s general account equity assets as at 31 December 2013 and 2012, respectively.
Overall equity exposure increased due to positive revaluations and net purchases of equities in line with strategic asset allocation.
The equity investments held in the Netherlands are part of the so-called ‘5% holdings’, in which investors who hold 5% or more of the outstanding shares of a stock receive favourable tax treatment in the Netherlands. About EUR 2.3 billion is invested in these 5% holdings. For these equity investments, NN may not be able to liquidate its position quickly because of the size of these holdings.
The table below sets out NN’s real estate exposure by sector type excluding leverage as at 31 December 2013 and 2012, respectively. Real estate is valued at fair value in the economic capital model and the available regulatory capital calculations in the Netherlands. Fair value revaluations of 53% of the real estate portfolio directly affect the IFRS result before tax.
interest rate risk Interest rate risk is the impact of interest rate changes on available capital as a result of the associated change in the value of the assets and liabilities. NN generally uses swap curves as benchmark interest rate curves when assessing interest rate risk.
To effectively match its assets to liabilities, NN looks at the undiscounted liability cash flows and then determines which assets to purchase to reduce interest rate risk. As can be seen in the table, the EUR denominated liabilities have a significant amount of long-term liability cash flows, which relate primarily to the pension business in the Netherlands.
• available regulatory capital (outside the netherlands). For the purposes of available regulatory capital in all jurisdictions outside the Netherlands in which NN operates, general account policyholder liabilities are valued at a single discount rate set when the policies are sold. General account fixed income assets are typically held at the same value as is reported on the IFRS balance sheet, although in several jurisdictions such as Japan, Spain and Greece, certain assets can be held at amortised cost on the regulatory balance sheet. Changes in interest rates affect available regulatory capital in these jurisdictions when fixed income assets are valued at market value, and the liability valuations are insensitive to interest rate movements
• available regulatory capital (netherlands). For the purposes of available regulatory capital in the Netherlands, general account policyholder liabilities are measured at fair market value based on the DNB swap curve. In 2013 NN moved from the discount curve based on the ECB AAA yield curve to the DNB swap curve, which, amongst other things, is more liquid and less subject to dislocations. Since mid-2012, the DNB curve has been adjusted to include an ultimate forward rate (uFR), extrapolating the curves beginning in year 20 to an ultimate forward rate of 4.2% at year 60. General account fixed income assets are held at market value, thereby creating interest rate sensitivities in the available regulatory capital, which are the same as the liability sensitivities for matching cash flows up to 20 years. However, mismatches occur for longer-term cash flows due to the application of the UFR.
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Credit spread risk Credit spread risk reflects the impact of credit spreads widening due to increased default expectation, illiquidity and any other risk premiums priced into the market value of bonds. Credit spread risk takes into account both the impact on the asset side as well as the corresponding interaction with the general account liabilities.
• available regulatory capital (outside the netherlands). For the purposes of available regulatory capital in all jurisdictions outside the Netherlands in which NN operates, general account fixed income assets are typically held at the same value as is reported on the IFRS balance sheet, although in several jurisdictions such as Japan, Belgium, Spain and Greece, certain assets can be held at amortised cost on the regulatory balance sheet. In those cases where assets are held at fair, value credit spreads affect available regulatory capital through fixed income asset valuations, whereas the liability valuations are insensitive to credit spread movements.
The table below sets out the general account market value of non-government fixed-income securities (excluding mortgages and derivatives) by rating and maturity. The AAA securities are primarily asset-backed securities.
general account asset-backed securities Market Value % of total Market Value % of total
Risk profile Counterparty default risk emanating from residential mortgages and policy loans (retail credit risk) represent the majority of the portfolio of economic capital for counterparty default risk.
Loans form a relatively small source of credit risk for NN Group (as compared to bonds). Other sources of credit risk include the claims on counterparties from over-the-counter derivatives, money market exposures and reinsurance.
Past due for 1–30 days 125 96 64 2 Past due for 31–60 days 42 23 22 Past due for 61–90 days 19 10 8
Risk measurement The economic capital backing NN Bank’s portion of the mortgage exposure is accounted for in non-modelled business because NN Bank applies Basel II for capital purposes (see ‘-Economic capital for entities outside NN’s internal model’). The economic capital backing the Netherlands Life’s portion of the mortgages is calculated in the counterparty default risk. The total mortgage exposure is managed at company level and included in the tables above.
Foreign exchange risk Foreign exchange (FX) risk measures the impact of losses related to changes in currency exchange rates.
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(1) The Account value is the value of the underlying funds which belong to the policyholder. (2) The net amount at risk is the difference between the guaranteed minimum value and the account value, for those policies where the guaranteed value exceeds the account value.
• guaranteed minimum death benefit (gMDB) products of Japan Closed Block Va: Under this type of variable annuity, a minimum guaranteed benefit is paid upon the death of the policyholder. The GMDB product has a generally predefined term of 10 years and provides the option to extend the guarantee of the policy during the investment phase up to age 90, and in the case of some policies, also allow further extension to whole of life. At death, the product pays a maximum of the guaranteed value and the account value. During the insured period, the client can receive the maximum of the minimum guaranteed benefit and the account value at death or at survival after the term of the product. There are different funds underlying the policyholder account value, including Japanese equity, Japanese bond, global equity and global bond funds. The value of the minimum guarantee depends on the level and volatility of equity, bond and foreign exchange markets.
• Va products of insurance europe: NN has been selling VA products in Europe since 2008, including in Belgium, Italy, Luxembourg, Poland, Spain and Hungary. The products mostly have minimum guaranteed living benefits such as survival benefit or withdrawal benefits.
NN defines three levels of Liquidity Management. Short-term liquidity, or cash management covers the day-to-day cash requirements under normal business conditions and targets funding liquidity risk. Long-term liquidity management considers business conditions, in which market liquidity risk materialises. Stress liquidity management looks at the company’s ability to respond to a potential crisis situation. Two types of liquidity crisis events can be distinguished: a market event and an NN specific event. These events can be short-term or long-term and can both occur on a local, regional or global scale.
Operational risk assessments are done not only based on historic data but also on a forward looking basis in order to capture future risks. Once mitigating measures have been implemented and proven to be effective through monitoring and testing, the residual risk becomes the managed risk.
NN conducts regular risk and control monitoring to measure and evaluate the effectiveness of the key risks and key controls. It determines whether the risks are within the norms for risk appetite and in line with the ambition levels and policies and standards.
Risk measurement NN’s economic capital for operational risk was EUR 531 million and EUR 566 million as at 31 December 2013 and 2012, respectively. The economic capital is calculated based on the standard formula for Solvency II. As it is additive to the total economic capital, then it should be considered as net of diversification with other NN Group risks.
CoMpLianCe Risk Risk profile Compliance risk is the risk of impairment of NN’s integrity. It is a failure (or perceived failure) to comply with NN’s Business Principles and the Compliance Risk-related laws, regulations and standards that are relevant to the specific financial services offered by a business or its ensuing activities, which could damage NN’s reputation and lead to legal or regulatory sanctions and financial loss.
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NN is fully committed to complying with all applicable sanction legislation and with all obligations and requirements under those applicable laws, including freezing and reporting obligations with regard to transactions involving a U.S., EU or UN sanction target. Furthermore, NN designates specific countries as ultra high risk and prohibits client engagements and transactions (including payments or facilitation) involving those countries. Certain exceptions on this policy are allowed after express and case-specific consent, and provided that the applicable sanctions laws and regulations are met. At present, the specified countries are Myanmar, North Korea, Sudan (North Sudan and South Sudan), Syria, Iran and Cuba. Each of these countries is subject to a variety of EU, U.S. and other sanctions regimes. NN has had a sanctions policy in place since 2007 and has a mandate to run down any existing commitments. As such, remaining exposure and contacts arise solely in the context of NN’s on-going efforts to run down the legacy portfolio of commitments.
sensitivity Descriptions Regulatory Capital IFRS Result Before Tax interest rate risk Measured by the impact of a 30% upward and downward movement in interest rates (parallel shift based on 30% of the 10 year rate)
– AAA and AA-rated government bonds and home government bonds in local currency excluded, exception only applicable to Greek bonds
– Shocks for structured credit are 50% higher than for similarly rated corporate and government bonds.
Real estate price risk This is measured by the impact of a 10% drop in real estate prices only for the minority holdings and direct for all real estate re-valued through P&L. Other holdings will be included in case of possible impairments caused by the drop in prices however as rental income is not assumed under the regulatory capital base case, the -10% shock applied is off-set by +5% rental income resulting in an effective shock of -5%.
(2) A high level estimate has been used to calculate the impact of interest rate stresses on the risk margin which is used to determine the regulatory available and required capital in Netherlands Life.
The reported market risk sensitivities for 2013 reflect the refinement of the accounting for the separate account pension business in the Netherlands. This change significantly reduced the sensitivity of NN’s result before tax to interest rates as both the interest rate hedges and the technical provisions for this book move the same way with interest rates.
The variable annuity risk for 2012 and 2013 primarily relates to Japan Closed Block VA and decreased due to FX movements. Both the 2012 and 2013 figures are adjusted to reflect the implementation of the move towards fair value accounting on the reserves for the guaranteed minimum death benefits of the Japan Closed Block VA, as of 1 January 2014.
• EC (NN Group excluding US Insurance business) – This is the pre-tax required capital for the insurance operations in scope of the IPO, based on a 99.5% confidence interval on a one-year horizon. This is considered an interim step to the Solvency II capital framework. The EC for other businesses is based on a proxy, i.e. sectoral rules for third party pension funds and NN Bank, 150% EU required capital for Asian divestments, and (adjusted) IFRS Equity (adjusted for Goodwill) for Investment Management companies.
• Financial Leverage (NN Group). Financial Leverage is the sum of hybrid capital, sub-debt and net financial debt.
DeVeLopMents In 2013 Capital Management’s main focus remained the strengthening of the capital position of ING Group, ING Bank and NN Group. ING’s capital is well prepared to withstand financial market challenges, new regulations and the ambition to repay the remaining outstanding Core Tier 1 securities. ING aims to ensure that it has sufficient loss-absorbing capacity to cope with severe unexpected losses without jeopardising its business-as-usual franchise.
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The proceeds from the Initial Public Offering of the US Insurance business and from the partial divestment of Sul América S.A. in Brazil to GrupoSura and to the Larragoiti family were fully paid up to ING Group and used to reduce core debt at the Group.
Nationale Nederlanden Bank N.V. (part of NN Group) acquired parts of Westland-Utrecht Bank (owned by ING Bank) per July 1st, 2013. This acquisition was funded by a capital injection from ING Group and therefore not increasing financial leverage of NN Group. ING Bank paid a dividend to ING Group to finance the capital injection into National Nederlanden Bank.
Additionally, ING Group is in process of preparing NN Group for a separate listing in 2014. As part of those preparations to become a stand-alone company, ING Group injected EUR 1 billion of capital to further strengthen capitalisation.
In 2012 ING Bank issued EUR 33 billion of debt with an original tenor of more than one year, compared with EUR 18 billion of long-term debt maturing in the whole of 2012, successfully covering its 2012 funding needs and prefunding its 2013 requirements. ING Bank (including subsidiaries) has EUR 21 billion of debt with an original tenor of more than one year maturing in 2013.
ing group’s Capital base Group Bank NN Group Insurance ING U.S.
(1) Tier 1 instruments issued by ING Group (e.g. perpetual debt securities and preference shares) at nominal value. Group hybrid Tier 1 instruments other than preference shares are provided as hybrid capital to ING Bank or NN Group. Hybrid capital securities are perpetual fixed income securities with an embedded call and coupon deferral feature. All hybrids capital securities rank senior to core tier 1 securities and ordinary shares of ING Group and they are structurally subordinated to the senior debt instruments issued by ING Groep N.V. More details on terms and conditions can be found on www.ing.com, investor relations, fixed income information, ING Debt securities, Debt securities ING Groep N.V.
Required capital based on Basel I floor (7) 26,913 28,767 BIS ratio based on Basel I floor (7) 13.82% 13.15%
(1) According to the regulatory definition. (2) Subordinated loans qualifying as Tier 1 capital have been placed by ING Groep N.V. with ING Bank N.V. (3) For further details, see the table below. (4) As result of the revision of IAS 19, this number is EUR 154 million higher than was presented in the 2012 annual report, resulting in slightly higher capital ratios.
Basel iii In 2010 the Basel Committee on Banking Supervision issued new solvency and liquidity requirements, which will supersede Basel II. In Europe these requirements start to apply gradually as of 1 January 2014, with the full requirements being effective as of 1 January 2018. How the table above would be impacted by the Basel III rules is shown in the Pillar 3 disclosure section.
Shareholder’s equity (parent) 14,227 26,423 Hybrids issued by ING Group (1) 2,394 2,438 Hybrids issued by NN Group (2) 476 Required regulatory adjustments –5,368 –6,891 IGD capital 11,253 22,446
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For NN Group in total, the capital base for financial leverage purposes is fully based on IFRS accounting, whereas the IGD capital is corrected for some regulatory adjustments. The table below provides a reconciliation.
IGD capital 11,253 22,446 Hybrids issued by ING Group –2,394 –2,438 Hybrids issued by NN Group –476 Revaluation reserve debt securities –2,804 –9,282 Revaluation reserve crediting to life policyholders 2,579 5,673 Revaluation reserve adjustments 2,446 3,209 Capital base for financial leverage 11,080 19,132
NN Life 222% 191% ING Re Netherlands 1,314% 320% ING Life Japan 1,366% 989%
The table below provides AFR and EC on comparable basis for NN Group (excluding US operations).
The AFR-EC ratio for NN Group excluding US Insurance business increased in 2013 as a result of higher AFR and lower EC. AFR increased from EUR 11.4 billion at the end 2012 to EUR 13.6 billion at the end of 2013. AFR increased mainly due to a capital injection from ING of EUR 1.3 billion (EUR 1.0 billion to redeem ING Group loan and EUR 0.3 billion to acquire parts of WestlandUtrecht Bank) and the inclusion of the ‘Ultimate Forward Rate’ (UFR) in the valuation curve of EUR 1.6 billion. This increase was partially offset by the change of treatment of the pension asset (included in 2012 figures but excluded in 2013) of EUR 0.7 billion and the change in treatment of the external hybrid of EUR 0.5 billion, which is not considered AFR as from January 1st, 2013 (consistent with IGD ratio). The change in EC during 2013 is explained in detail in the Risk paragraph.
Capital management continued 341ING Group Annual Report 2013 1 W h o w e are 2 R
ing gRoup The debt/equity ratio of ING Group as at 31 December 2013 was 8.4% (2012: 11.2%).
ING Group reports to the Dutch Central Bank as required under the Dutch implementation of the financial conglomerates directive (FICO). The directive mainly covers risk concentrations in the group, intra-group transactions and an assessment of the capital adequacy of the Group.
BIS capital 46,496 47,270 IGD capital Insurance operations 20,903 22,447 Group leverage (core debt) –4,910 –7,100 Regulatory capital 62,490 62,619
Required capital banking operations 26,913 28,767 Required capital insurance operations 8,153 9,523 Total required capital 35,066 38,290
insurance groups Directive Year-end actual Capital coverage ratio 257% 236% Required capital 100% 100% Target ratio 150% 150%
– long-term a– stable a3 negative a negative ing Bank n.V.
– short-term a–1 p–1 F1+ – long-term a stable a2 negative a+ negative – financial strength C–
Equity 3 Share capital 921 919 Share premium 16,038 16,034 Non-voting equity securities 1,500 2,250
References relate to the notes starting on page 349. These form an integral part of the parent company annual accounts.
Result of group companies after taxation 3,252 4,365 Other results after taxation –20 –204 Net result 3,232 4,161
Balance as at 1 January 2012 (restated) 919 16,034 3,000 8,100 –942 22,927 50,038
Changes in ING Groep N.V. shares held by group companies –13 5 Closing balance 52,660 61,537
In 2013, Disposal of group companies includes the partial divestments of ING U.S.
Receivables from group companies 9,417 12,228 Other receivables, prepayments and accruals 220 395
Changes in issued share capital Ordinary shares (par value EUR 0.24)
Issued share capital as at 1 January 2013 3,831,561 919 Issue of shares 9,333 2 Issued share capital as at 31 December 2013 3,840,894 921
Result for the year 3,232 3,232 Unrealised revaluations 629 –913 –284 –284 Changes in treasury shares 378 378 378 Repurchase premium –375 –375 –375 Transfer to share of associates reserve –119 –119 –119 Transfer to retained earnings 4,161 4,161 –4,161 Employee stock option and share plans –195 –195 –195 Impact of ING U.S. –2,526 –2,526 –2,526 Changes in the composition of the group 119 119 119
Purchased/sold 14 –86 976,907 –14,554,460 Share-based payments –100 –67 –6,698,947 –4,638,786 4 SUBORDINATED LOANS
The number of debentures held by group companies as at 31 December 2013 is 84,320 with a balance sheet value of EUR 9 million (2012: 57,860 with a balance sheet value of EUR 8 million).
Notes to the parent company annual accounts of ING Groep N.V. continued 352 ING Group Annual Report 2013
REPORT ON THE ANNUAL ACCOUNTS We have audited the accompanying annual accounts 2013 of ING Groep N.V., Amsterdam (as set out on pages 90 to 353). The annual accounts include the consolidated annual accounts and the parent company annual accounts. The consolidated annual accounts comprise the consolidated balance sheet as at 31 December 2013, the profit and loss account, statement of comprehensive income, statement of cash flows and statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes. The parent company annual accounts comprise the parent company balance sheet as at 31 December 2013, the parent company profit and loss account for the year then ended and the notes, comprising a summary of significant accounting policies and other explanatory notes.
Opinion with respect to the consolidated annual accounts In our opinion, the consolidated annual accounts give a true and fair view of the financial position of ING Groep N.V. as at 31 December 2013 and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
SUBSEQUENT EVENTS Defined Benefits Pension Fund in The Netherlands In February 2014 ING reached final agreement with the trade unions, the ING Pension Fund, the Central Works Council and the Association of Retired ING Employees (VSI) to transfer all future funding and indexation obligations under ING’s current closed defined benefit plan in the Netherlands to the Dutch ING Pension Fund. The agreement makes the ING Pension Fund financially independent from ING.
operations and financial condition. Claims resulting from catastrophic events could also materially harm the financial condition of our reinsurers, which would increase the probability of default on reinsurance recoveries. Our ability to write new business could also be adversely affected.
Furthermore, we are subject to different tax regulations in each of the jurisdictions where we conduct business. Changes in tax laws could increase our taxes and our effective tax rates. Legislative changes could materially impact our tax receivables and liabilities as well as deferred tax assets and deferred tax liabilities, which could have a material adverse effect on our business, results of operations and financial condition. One such change relates to the current debate in the U.S. over corporate tax reform for multinational corporations and corporate tax rates. Changes in tax laws could also make certain ING products less attractive which could have adverse consequences for our businesses and results.
regulations may conflict with one another, or where regulators revise their previous guidance or courts overturn previous rulings, which could result in our failure to meet applicable standards. Regulators and other authorities have the power to bring administrative or judicial proceedings against us, which could result, among other things, in suspension or revocation of our licenses, cease and desist orders, fines, civil penalties, criminal penalties or other disciplinary action, which could materially harm our results of operations and financial condition. If we fail to address, or appear to fail to address, any of these matters appropriately, our reputation could be harmed and we could be subject to additional legal risk, which could, in turn, increase the size and number of claims and damages brought against us or subject us to enforcement actions, fines and penalties.
For European banks, the Basel III requirements will be implemented through the so-called Capital Requirements Regulation and Capital Requirements Directive IV (‘CRD IV Regulation’ and ‘CRD IV Directive’, respectively), which were adopted by the EC in June 2013 following approval by the European Parliament in April 2013. The CRD IV Regulation entered into force on 28 June 2013 and the CRD IV Directive on 17 July 2013, and all banks and investment firms in the EU (as opposed to the scope of the Basel III requirements, which apply to ‘internationally active banks’) are required to apply the new rules from 1 January 2014 in phases, with full implementation by 1 January 2019. While the full impact of these rules, and any additional requirements for SIFIs or G-SIFIs, if and as applicable to the Group, will depend on how the CRD IV Directive will be transposed into national laws in each Member State, including the extent to which national regulators and supervisors can set more stringent limits and additional capital requirements or surcharges, as well as on the economic and financial environment at the time of implementation and beyond, we expect these rules to have a material impact on ING’s operations and financial condition and they may require the Group to seek additional capital. Further, the International Accounting Standards Board (‘IASB’) has issued and proposed certain amendments to several IFRS standards during the course of 2012 and 2013, which changes include a package of amendments to the accounting requirements for financial instruments announced in November 2013, introducing a new hedge accounting model and allowing changes to address the so-called ‘own credit’ issue that were already included in IFRS 9 Financial Instruments that would replace IAS 39, the accounting standard heavily criticized in the wake of the financial crisis. Such changes could also have a material impact on our reported results and financial condition, as well as on how we manage our business, internal controls and disclosure.
Risk factors continued 359ING Group Annual Report 2013 1 W h o w e are 2 R
for non-U.S. financial institutions with a U.S. presence, such as ING. Dodd-Frank directs existing and newly created government agencies and bodies to perform studies and promulgate a multitude of regulations implementing the law, a process that is underway and is expected to continue over the next few years. While some studies have already been completed and the rulemaking process is well underway, there continues to be significant uncertainty regarding the results of ongoing studies and the ultimate requirements of regulations that have not yet been adopted. We cannot predict with certainty how Dodd-Frank and such regulations will affect the financial markets generally and impact the Group’s business, credit or financial strength ratings, results of operations, cash flows or financial condition or liquidity. Key aspects of Dodd-Frank that we have identified to date as possibly having an impact on the Group include: • Title VII of Dodd-Frank creates a new framework for regulation of the over-the-counter derivatives markets and certain market participants which could affect various activities of the Group and its subsidiaries. New margin and capital requirements for market participants that will be contained in final regulations to be adopted by the SEC and U.S. Commodity Futures Trading Commission (‘CFTC’) could substantially increase the cost of hedging and related operations, affect the profitability of our products or their attractiveness to our customers, or cause us to alter our hedging strategy or change the composition of risks that we do not hedge. In addition, new position limits requirements for market participants that may be contained in final regulations to be adopted by the CFTC could limit the scope of hedging activity that is permitted for commercial end users, limiting their ability to utilize certain of our products, and could also limit the scope of our ability to provide derivatives products for our non-end user customers.
• Dodd-Frank also established the Consumer Financial Protection Bureau (‘CFPB’) as an independent agency within the Federal Reserve to regulate consumer financial products and services offered primarily for personal, family or household purposes. The CFPB will have significant authority to implement and enforce federal consumer financial laws, including the new protections established under Dodd-Frank, as well as the authority to identify and prohibit unfair and deceptive acts and practices. In addition, the CFPB will have broad supervisory, examination and enforcement authority over certain consumer products, such as mortgage lending. Insurance products and services are not within the CFPB’s general jurisdiction, and broker-dealers and investment advisers are not subject to the CFPB’s jurisdiction when acting in their registered capacity.
• On December 10, 2013, various federal agencies approved a final rule implementing Section 619 of Dodd-Frank, commonly referred to as the ‘Volcker Rule’ and which places limitations and restrictions on the ability of U.S. FDIC insured depository institutions and non-U.S. banks with branches or agencies in the U.S. that become subject to the U.S. Bank Holding Company Act, as well as their affiliates, to engage in certain proprietary trading or sponsor and invest in private equity and hedge funds. Such organisations will have until 21 July 2015 to comply fully with most requirements of the Volcker Rule, with an important exception for organisations with significant trading activities, which will be required to report information on their trading activities beginning in July 2014. In the event that we or one of our affiliates becomes subject to the Volcker Rule, our investment activities could be so restricted. It is expected that we will experience significant additional compliance and operational costs and may be prohibited from engaging in certain activities we currently conduct if the Volcker Rule becomes applicable to us and our affiliates. For instance, ING Group’s wholly owned subsidiary, ING Bank, may from time to time consider whether to establish a branch office in the U.S. If ING Bank were to establish a U.S. branch, we would be subject to supervision and regulation by the Federal Reserve under various laws and various restrictions on our activities under those laws, including the Bank Holding Company Act of 1956, as amended, and the International Banking Act of 1978, and, as a consequence, such supervision and regulation, including such restrictions on activities could materially impact our operations. These would include, among others, the Volcker Rule and heightened supervisory requirements and prudential standards.
Risk factors continued 361ING Group Annual Report 2013 1 W h o w e are 2 R
The Intervention Act will need to be amended following the implementation of the ‘Recovery and Resolution Directive’. This is a draft legislative proposal aimed at harmonising national rules on bank recovery and resolution and on which the European Council and the European Parliament reached a political agreement in December 2013. The Recovery and Resolution Directive includes, among other things, the obligation for institutions to draw up a recovery plan and the obligation for resolution authorities in the Member States to draw up a resolution plan, the resolution authorities’ power to take early intervention measures and the establishment of a European system of financing arrangements. The Recovery and Resolution Directive confers extensive resolution powers to the resolution authorities, including the power to require the sale of (part of a) business, to establish a bridge institution, to separate assets and to take bail-in measures. The draft Recovery and Resolution Directive will need to be formally adopted by the European Council and the European Parliament and is expected to enter into force on 1 January 2015. The stated aim of the Recovery and Resolution Directive is to provide supervisory authorities, including the relevant Dutch resolution authority, with common tools and powers to address banking crises pre-emptively in order to safeguard financial stability and minimise taxpayers’ exposure to losses.
Risk factors continued 363ING Group Annual Report 2013 1 W h o w e are 2 R
Additional Governmental Measures Governments in the Netherlands and abroad have also intervened over the past few years on an unprecedented scale, responding to stresses experienced in the global financial markets. Some of the measures adopted subject us and other institutions for which they were designed to additional restrictions, oversight or costs. Restrictions related to the Core Tier 1 Securities and the IABF (together, the ‘Dutch State Transactions’) and the Restructuring Plan are further described in — ‘Risks related to the Restructuring Plan’.
monetary asset purchases (‘tapering’), the level of U.S. national debt and the U.S. housing market, inflation levels, energy costs and geopolitical issues all have contributed to increased volatility and diminished expectations for the economy and the markets in recent years.
European Sovereign Debt Crisis In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt in Greece, Ireland, Italy, Portugal and Spain, which created concerns about the ability of these EU ‘peripheral’ Member States to continue to service their sovereign debt obligations. Significant concerns regarding the sovereign debt of these countries, as well as certain other countries of the ‘core’ EU Member States are ongoing and, in some cases, have required countries to obtain emergency financing. These concerns impacted financial markets and resulted in high and volatile bond yields on the sovereign debt of many EU nations. If these or other countries require additional financial support or if sovereign credit ratings continue to decline, yields on the sovereign debt of certain countries may continue to increase, the cost of borrowing may increase and credit may become more limited. Despite assistance packages to Greece, Ireland, Portugal and Cyprus, the creation of a European Financial Stability Facility as a temporary rescue mechanism in May 2010, the approval of a further bail-out of Greece by the relevant government and monetary bodies of the Eurozone and the International Monetary Fund in March 2012, and the establishment of the European Stability Mechanism in October 2012 (which provided its first financial assistance in February 2013 for the recapitalisation of Spain’s banking sector), uncertainty over the outcome of the EU governments’ financial support programs and concerns regarding sovereign finances persisted during the course of 2013. Market concerns over the direct and indirect exposure of European banks and insurers to the EU sovereign debt further resulted in a widening of credit spreads and increased costs of funding for some European financial institutions. In December 2011, European leaders agreed to implement steps (and continue to meet regularly to review, amend and supplement such steps) to encourage greater long-term fiscal responsibility on the part of the individual Member States and bolster market confidence in the Euro and European sovereign debt, and the Treaty on Stability, Coordination and Governance (‘Fiscal Treaty’) was signed by 25 EU Member States in March 2012 and entered into force on 1 January 2013. However, the Fiscal Treaty needs to be incorporated into the existing EU treaties, which is expected to take many years, and, even if such steps are implemented, there is no guarantee that they will ultimately and finally resolve uncertainties regarding the ability of Eurozone states to continue to service their sovereign debt obligations. Further, despite such long-term structural adjustments and improvements being proposed and implemented, the future of the Euro in its current form, and with its current membership, remains uncertain. The financial turmoil in Europe continues to be a threat to global capital markets and remains a challenge to global financial stability.
With respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realised, or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. We also have exposure to a number of financial institutions in the form of unsecured debt instruments, derivative transactions and equity investments. For example, we hold certain hybrid regulatory capital instruments issued by financial institutions which permit the issuer to defer coupon payments on the occurrence of certain events or at their option. The EC has indicated that, in certain circumstances, it may require these financial institutions to defer payment. If this were to happen, we expect that such instruments may experience ratings downgrades and/or a drop in value and we may have to treat them as impaired, which could result in significant losses. There is no assurance that losses on, or impairments to the carrying value of, these assets would not materially and adversely affect our business, results of operations or financial condition.
Risk factors continued 367ING Group Annual Report 2013 1 W h o w e are 2 R
Economic and other factors could lead to further contraction in the residential mortgage and commercial lending market and to further decreases in residential and commercial property prices, which could generate substantial increases in impairment losses.
Declining interest rates or a prolonged period of low interest rates may result in: • life insurance and annuity products being relatively more attractive to consumers due to minimum guarantees with respect to such products that are frequently mandated by regulators; • increased premium payments on products with flexible premium features; • a higher percentage of insurance and annuity contracts remaining in force from year to year than we anticipated in our pricing, potentially resulting in greater claims costs than we expected and creating asset-liability cash flow mismatches; • additional provisions for guarantees included in life insurance and annuity contracts, as the guarantees become more valuable to policyholders; • lower investment earnings over time on existing investments, as premiums and reinvestments will earn lower rates; • reserve strengthening by affecting the results of our reserve adequacy testing in extreme cases of low interest rates; • potential impact on the solvency level under Solvency 1.5; • higher prepayment or redemption of mortgages and fixed maturity securities in our investment portfolios as borrowers seek to borrow at lower interest rates. Consequently, we may be required to reinvest the proceeds in securities bearing lower interest rates; • lower profitability as the result of a decrease in the spread between interest rates charged to policyholders and savings/other liabilities and returns on our investment portfolios; • higher costs for certain derivative instruments that may be used to hedge certain of our product risks; and/or • lower profitability, since we may not be able to fully track the decline in interest rates in our savings rate.
(2) result in increased surrenders of certain life and savings products, particularly those with fixed rates below market rates, (3) actual claims payments significantly exceeding associated insurance reserves in the context of certain non-life risks, due to: – claims inflation (which is an increase in the amount ultimately paid to settle claims several years after the policy coverage period or event giving rise to the claim), together with
Risk factors continued 369ING Group Annual Report 2013 1 W h o w e are 2 R
A significant and sustained increase in inflation has historically also been associated with decreased prices for equity securities and sluggish performance of equity markets generally. A sustained decline in equity markets may: (1) result in impairment charges to equity securities that we hold in our investment portfolios and reduced levels of unrealised capital gains available to us which would reduce our net income and negatively impact our solvency position, (2) negatively impact performance, future sales and surrenders of certain products where underlying investments are often allocated to equity funds, (3) negatively impact the ability of our asset management subsidiaries to retain and attract AUM, as well as the value of assets they do manage, which may negatively impact their results of operations, and/or (4) result in decreased fee income associated with a decline in the variable annuity balances invested in fixed income funds. (5) lower the value of our equity investments impacting our capital position.
Developing an effective strategy for dealing with these risks is complex, and no strategy can completely insulate us from risks associated with those fluctuations. Our hedging strategies also rely on assumptions and projections regarding our assets, liabilities, general market factors and the creditworthiness of our counterparties that may prove to be incorrect or prove to be inadequate. Accordingly, our hedging activities may not have the desired beneficial impact on our results of operations or financial condition. Poorly designed strategies or improperly executed transactions could actually increase our risks and losses. Hedging strategies involve transaction costs and other costs, and if we terminate a hedging arrangement, we may also be required to pay additional costs, such as transaction fees or breakage costs. There have been periods in the past, and it is likely that there will be periods in the future, during which we have incurred or may incur losses on transactions, possibly significant, after taking into account our hedging strategies. Further, the nature and timing of our hedging transactions could actually increase our risk and losses. Hedging instruments we use to manage product and other risks might not perform as intended or expected, which could result in higher (un)realised losses, such as credit value adjustment risks or unexpected P&L effects, and unanticipated cash needs to collateralise or settle such transactions. Adverse market conditions can limit the availability and increase the costs of hedging instruments, and such costs may not be recovered in the pricing of the underlying products being hedged. In addition, hedging counterparties may fail to perform their obligations, resulting in unhedged exposures and losses on positions that are not collateralised. As such, our hedging strategies and the derivatives that we use or may use may not adequately mitigate or offset the risk of interest rate volatility, and our hedging transactions may result in losses.
We may also be subject to claims made by third parties for (i) patent, trademark or copyright infringement, (ii) breach of copyright, trademark or licence usage rights, or (iii) misappropriation of trade secrets. Any such claims and any resulting litigation could result in significant expense and liability for damages. If we were found to have infringed or misappropriated a third-party patent or other intellectual property right, we could in some circumstances be enjoined from providing certain products or services to our customers or from utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licences. Alternatively, we could be required to enter into costly licensing arrangements with third parties or to implement a costly workaround. Any of these scenarios could have a material adverse effect on our business and results of operations.
NN Group has a significant exposure to the take-up of policy options by policyholders. The exposure is greatest for variable annuity business with guarantees deeply in-the-money, policyholder behaviour is difficult to predict and small changes in the proportion of policyholders taking up an option can have a significant financial impact. Furthermore, assumptions about policyholder behaviour are sometimes made for new insurance business without a substantial amount of experiential data. These assumptions may prove imperfect, which may have a material impact on results. See ‘—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’.
371ING Group Annual Report 2013 1 W h o w e are 2 R
Our risk management policies and guidelines may prove inadequate for the risks we face. We have developed risk management policies and procedures and will continue to review and develop these in the future. Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective, particularly during extremely turbulent times. The methods we use to manage, estimate and measure risk are partly based on historic market behaviour. The methods may, therefore, prove to be inadequate for predicting future risk exposure, which may be significantly greater than suggested by historical experience. For instance, these methods may not predict the losses seen in the stressed conditions in recent periods, and may also not adequately allow prediction of circumstances arising due to government interventions and stimulus packages, which increase the difficulty of evaluating risks. Other methods for risk management are based on evaluation of information regarding markets, customers, catastrophic occurrence or other information that is publicly known or otherwise available to us. Such information may not always be accurate, complete, updated or properly evaluated. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record and verify large numbers of transactions and events. These policies and procedures may not be fully effective.
ING’s Dutch insurance subsidiaries have issued, sold or advised on approximately one million individual unit-linked policies. As noted above, there has been for some time and there continues to be political, regulatory and public attention focused on the unit-linked issue in general. Elements of unit-linked policies are being challenged or may be challenged on multiple legal grounds in current and future legal proceedings and there is a risk that one or more of these legal challenges will succeed. Customers of ING’s Dutch insurance subsidiaries have claimed, among others, that (a) the investment risk, costs charged or the risk premium was not, or not sufficiently, made clear to the customer, (b) the product costs charged on initial sale and on an on-going basis were so high that the expected return on investment was not realistically achievable, (c) the product sold to the customer contained specific risks that were not, or not sufficiently, made clear to the customer (such as the leverage capital consumption risk) or was not suited to his personal circumstances, (d) NN owed the customer a duty of care which NN has breached, or (e) the insurer failed to warn of the risk of not realising the projected policy values. These claims may be based on general standards of contract or securities law, such as reasonableness and fairness, error, duty of care, or standards for proper customer treatment or due diligence and may be made by customers, or on behalf of customers, holding active policies or whose policies have lapsed, matured or been surrendered. NN is currently subject to legal proceedings initiated by individual policyholders and is subject of a number of claims initiatives brought on behalf of policyholders by consumer protection organisations in which claims as set forth above or similar claims are being made. While to date less than 100 complaints are pending before the Dispute Committee of the Financial Services Complaints Board (the KiFiD), and less than 200 individual settlements were made, there is no assurance that further proceedings for damages will not be brought. As the current proceedings are only in early stages, the timing of reaching any finality on these legal claims and proceedings is uncertain and such uncertainty is likely to continue for some time. As a result, although the financial consequences of any of these factors or a combination thereof could be substantial for the Dutch insurance business of ING and, as a result, may have a material adverse effect on NN’s and ING’s reputation, results of operations, solvency and financial condition, it is not possible to reliably estimate or quantify NN’s and ING’s exposures at this time. See “Note 54 Legal Proceedings”.
Any of the developments described above could be substantial for NN and ING and as a result may have a material adverse effect on ING’s business, reputation, revenues, results of operations, solvency, financial condition and prospects.
Any failure to complete the divestments on favourable terms could have a material adverse impact on our assets, profitability, capital adequacy and business operations. If we are unable to complete the announced divestments in a timely manner, we would be required to find alternative ways to reduce our leverage, and we could be subject to enforcement actions or proceedings by the EC. In case of material non-compliance with the Amended Restructuring Plan, in particular, if we do not succeed in completing divestitures as described in the Amended Restructuring Plan within the timelines set out therein or subsequently agreed upon, do not repay the Core Tier 1 Securities according to the schedule as included in the Amended Restructuring Plan, and/or do not succeed in satisfying the commitments with respect to Nationale-Nederlanden Bank upon divestment of more than 50% of our interest in NN Group c.q in Nationale-Nederlanden Bank and/or by year-end 2015 as described in the Amended Restructuring Plan, the Dutch State will re-notify this to the EC, which may 376 ING Group Annual Report 2013
Our restructuring programs may not yield intended reductions in costs, risk and leverage. Projected cost savings and impact on our risk profile and capital associated with the Restructuring Plan are subject to a variety of risks, including: • actual costs to effect these initiatives may exceed estimates; • divestments planned in connection with the Restructuring Plan may not yield the level of net proceeds expected, as described under
The share price of ING shares has been, and may continue to be, volatile. The share price of our bearer depositary receipts has experienced periods of volatility in the past, and the share price and trading volume of our bearer depositary receipts may be subject to significant fluctuations in the future, due, in part, to changes in our actual or forecast operating results and the inability to fulfil the profit expectations of securities analysts, as well as to the high volatility in the securities markets generally and more particularly in shares of financial institutions. Other factors, besides our financial results, that may impact our share price include, but are not limited to: • market expectations of the performance and capital adequacy of financial institutions in general; • investor perception of the success and impact of our strategies; • investor perception of our positions and risks; • a downgrade or review of our credit ratings; • the implementation and outcome of our Restructuring Plan; • potential litigation or regulatory action involving ING or sectors that we have exposure to through our insurance and banking activities; • announcements concerning financial problems or any investigations into the accounting practices of other financial institutions; and • general market circumstances.
Other risk 31 Describe how ‘other risk’ types are identified, governed, measured and managed 308 - 311 32 Discuss publicly known risk events related to other risks 309 - 311
Additional Pillar 3 information amounts in millions of euros, unless stated otherwise 380 ING Group Annual Report 2013
– Residential mortgages 4,102 3,524 – Other retail 1,335 1,286 Total portfolios subject to AIRB approach 15,530 13,920
Securitisation exposures 218 442 Equity portfolios in the banking book under the simple risk weight approach 69 201 Other Non-Credit Obligation Assets 1,233 1,708 Total Credit Risk 19.074 18,685
This table includes securitisation benefits of the SA, AIRB and securitisation portfolios, amounting to EUR 21 million for 2013. * The floor is 80% of Basel I required Regulatory Capital.
ONCOA represents assets of non-credit obligation character that are not included in the SA or AIRB calculations. Capital requirement for ONCOA as of 31 December 2013 is EUR 1,233 million (2012: EUR 1,708 million).
Additional Pillar 3 information continued 382 ING Group Annual Report 2013
Additional Pillar 3 information continued 383ING Group Annual Report 2013 1 W h o w e are 2 R
Subordinated loans qualifying as Tier 1 capital (3) 5,123 6,774 5,123 6,774 5,123 6,774 Minority interests, counting as Additional Tier 1 capital 17 18 83 91
(2) As result of the revision of IAS 19, this number is EUR 154 million higher than was presented in the 2012 annual report, resulting in slightly higher capital ratios.
Additional Pillar 3 information continued 384 ING Group Annual Report 2013
CREDIT RISK Basis and scope of credit risk presentation In the credit risk section of the Pillar 3, data included in tables are related to ING Bank’s core credit risk activities in the areas of: Lending (both on- and off-balance sheet); Securities Financing, Derivatives (collectively Pre-Settlement Risk, Money Market) activities (including reserve deposits at Central Banks) and Investment Risks. Credit Risk in the trading book is excluded and covered in the Market Risk section of the Annual Accounts.
Unless stated otherwise, the tables included in this section focus on the measurement of Regulatory Exposure at Default (READ) and Risk Weighted Assets (RWA) under the Basel II definitions. READ is generally the sum of the on-balance and off-balance sheet: Lending, Investment and Money Market activities plus an estimated portion of the unused credit facilities extended to the obligor. The amounts associated with Investment and Lending activities are based on the original amount invested less repayments. Additionally, the risk weighting amounts (plus add-ons) are included. Multiplying RWA by 8% will result in the level of Regulatory Capital (RC) that is required to be held against these portfolios (for the Credit Risk portion of the activities).
Figures for Derivatives and Securities Financing are based on ‘risk weighted amounts’, which generally is equal to the mark-to-market value of the underlying trades plus a (regulatory defined) ‘add-on’ which represents estimated potential future exposure. The amounts are then further modified by an adjustment that is related to the underlying collateral (market) values (after a haircut is applied) and any legal netting or compensation that may be permitted under various master agreement arrangements such as ISDA master agreements and Credit Support Annexes (CSAs).
Additional Pillar 3 information continued 386 ING Group Annual Report 2013
Model approaches per exposure class Sovereigns Institutions Corporate Retail Total 2013 Total 2012
The ING bank portfolio falls for 87.4% under the AIRB approach and for 12.6% under SA in terms of RWA. The total portfolio decreased in 2013 by EUR 56.6 billion in READ to EUR 750.3 billion while RWA increased by EUR 12.4 billion to EUR 222.2 billion. The increase in RWA is mainly a result of adjusting key risk factors in AIRB models to reflect the economic downturn environment, especially related to Dutch mortgages, SME clients in the Benelux and sovereign entities, while the decrease in READ is a result of the divestment of ING Direct UK, partially the WestlandUtrecht Bank portfolio and the targeted downsizing of the REF and securitisation portfolio. Next to the portfolio decline, a methodology change has also contributed significantly to the decrease in READ. The conservative approach of the off balance commitment calculations, which is a factor of the READ, has now been brought more in line with the actual exposure for the best rated Corporates and Institutions portfolios, resulting in a significant READ decrease.
As a result of constant review of exposure classes certain public institutions have been reclassified from Corporates to Sovereigns, resulting in an increase in READ, in mainly the Term loan portfolio in the Netherlands.
Additional Pillar 3 information continued 388 ING Group Annual Report 2013
Institutions - credit risk disclosure in READ 2013 2012 Delta %
Institutions Product Type 101,311 112,307 –9.80% Bond Investments 26,372 30,895 –14.60%
Additional Pillar 3 information continued 389ING Group Annual Report 2013 1 W h o w e are 2 R
Corporate Industry 216,408 241,043 –10.20% Real Estate 42,279 51,371 –17.70% Natural Resources 37,046 41,665 –11.10%
The off balance commitment calculations, which is a factor of the READ, has now been brought more in line with the actual experience for the best rated Corporates and Institutions portfolios, resulting in a significant READ decrease. ING now has a long track record of showing that it is too conservative as a minimal amount of guarantees and LC’s has been called resulting in a significant READ decrease. The targeted reduction of the REF portfolio, the sale of ING’s Real Estate Finance (US) assets to Wells Fargo and the further decline of the ING Lease run-off portfolio have contributed to the decline and have led to an improvement of the risk profile of the Corporates portfolio.
The ING policy is to index property values on a quarterly basis. In some markets only annual figures are available while others are more practical to do on an annual basis. Unfortunately, some markets do not have a reliable index that matches the local ING portfolio. Quarterly or annual indexing is done for the Netherlands, Belgium, Australia, Italy and Spain representing 76% of the portfolio.
STANDARDISED APPROACH A subset of the ING portfolio is treated with the Standardized Approach The SA approach applies fixed risk weights to each exposure class, split into credit quality steps (based on external ratings) as dictated by the Capital Requirement Directive (CRD). Because the underlying obligors are relatively small, the underlying obligors tend not to have external ratings. As such, the SA Approach is the least sophisticated of the Basel II methodologies and is not as risk sensitive as the risk-based AIRB Approach.
In order to calculate the regulatory capital requirements under the SA approach, ING Bank uses eligible external ratings from Standard & Poor’s, Moody’s, Fitch Ratings and in some cases from DBRS. Ratings are applied to all relevant exposure classes in the standardized approach.
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Corporates Large 60,352 70,700 Commercial Property Finance 28,267 29,509 SME Belgium 20,814 20,644
Exposures (READ) per internal rating grade and corresponding PD, LGD and RWA 2013 Internal rating grade
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The relatively low RWA density for Sovereigns and central banks is because of sovereign entities, which are rated between 1-4 and whose exposures receive a regulatory risk weight of 0%.
For further analyses of the ING RWA stemming from differences in capital approach, please refer to the RMP section
The European Banking Authority (EBA) published an analysis in December 2013, containing the average RWA density per asset class of the investigated 60 banks from 12 different countries in Europe¹. The sample period of this study is 2012. In the below table, the RWA density of the peers are compared with ING Bank for the same period and for 2013. Over the course of 2013, ING has further reflected the deteriorated economic environment within the internal models and the RWA density has increased for all the portfolios.
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Changes in the composition of the Bank –2 –14 –4 –20 Amounts written off –756 –652 –201 –1,609 Recoveries of amounts written off in previous years 58 34 24 116 Addition to loan loss provisions (from income statement) 867 1,060 362 2,289 Exchange or other movements –12 –28 –87 –127
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Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. Excludes revaluations made directly through the equity account. (1) Economic sectors not shown specifically in the table have past due loans of less than EUR 150 million, and are grouped under ‘Other’.
Overall past due loans increased slightly over the year due to the deterioration witnessed in Europe, the improvements in Asia/ Pacific compensated for this. Total non-performing loans at ING Bank were 2.4% of the credit outstandings, up from 2.1% at the end of 2012. This increase was mainly seen in the Real Estate sector.
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The level of provisions is a function of many elements including the default definition, the amount and quality of collateral and the legal structure per jurisdiction. For instance, mortgages in Germany have a relatively higher proportion of provisions than in the Netherlands largely due to the level of (secondary) collateral and enforcement regime, which has an impact on the recovery rate and in turn drives the LGD higher. The Corporate segment is largely influenced by real estate companies, larger SME companies, and several run-off portfolios which are experiencing economic stress. The rise seen in the Netherlands was due to increased provisions reserved owing to the weakness seen in the residential mortgages sector and specific provisions for the SME sector.
Loan loss provision shortfall The Loan loss provision shortfall is the difference between the expected loss (EL) and the loan loss provisions for AIRB exposures. This difference is caused by two main factors (i) the difference between down-turn factors used in regulatory LGD calculations vs. point in time LGD requirement of IFRS and (ii) the different PD time horizons that exist for IAS 39 Loan Provisioning (3, 6, and 9 months) and the 12 month time horizon used for EL and regulatory capital calculation. Basel II requires that the shortfall is deducted from the regulatory capital, 50% from Tier 1 and 50% from Tier 2 capital.
ING Bank has seen many of its Large Corporate customers obtain funding from capital markets in the course of 2013. This often leads to large undrawn commitments. These stand-by commitments are usually for top rated Corporates which have historically shown a reluctance to draw these facilities. The overall decrease in undrawn commitments comes mainly from this Corporates portfolio where the limits where lowered. Much of the undrawn commitments in the mortgage area relate to forward commitments of clients to lock in interest rates in mainly the German, Australian and Dutch mortgage portfolio.
If all of the unused commitments were called upon at the same time, ING Bank’s credit risks (in terms of outstandings) would increase by 12%. As part of its READ models, ING Bank makes an estimate of how much of these unused commitments would be drawn under normal circumstances. The effect is included in the calculation of RWA, together with a similar effect applied to uncommitted facilities, albeit at a lower rate.
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From the total notional value of OTC derivatives transactions that are not cleared by a CCP, 85% has been documented under bilateral (93%) and unilateral (7%) Collateral Support Annex (CSA) agreement. • The notional value of transactions that are done under bilateral CSA agreements relates for 79% to Interest Rate derivatives, for 17%
The ING Bank portfolio is characterised by significant amounts of secured lending especially in the key areas of residential and commercial mortgages, structured finance and leasing. Amount of collateral often has a significant impact on provisioning and LGD which directly affects risk density. The cover values are pre-haircut but indexed values and exclude any cost of liquidation. Covers can either be valid for all limits, sublimits or a particular outstanding of a borrower, the latter being the most common
The Risk Management Paragraph of the Annual Report includes an extensive cover section where exposures are categorised into different Loan-to-Value (LTV) buckets which gives insight in the level of collateralisation of ING Bank’s portfolio.
Credit default swaps ING Bank participates in the credit risk derivative trading market, as a net purchaser of credit risk protection from other counterparties. ING Bank has purchased a small amount of credit risk protection for hedging purposes, usually in order to reduce concentration on certain ‘legal one obligor groups’ without having to reduce ING Bank’s relationship banking activities. ING Bank does not actively sell Credit Default Swaps (CDS) for hedging or investment purposes. Although Basel II rules permit a reduction of credit risk capital under certain circumstances where ING Bank has purchased CDS protection, ING Bank does not currently make use of this provision in determining its Basel II capital base.
Credit derivatives used for hedging purposes – credit protection bought 238 884 – credit protection sold
Unwinding the IABF also resulted in eliminating a counter-guarantee that ING extended to the Dutch state in connection with the divestment of ING Direct USA in 2012. This was reflected in the EUR 1.4 billion decline in READ for Synthetic Investment Bonds which released EUR 1.8 billion in RWA.ING’s exposure to securitisations has declined compared to last year, targeted efforts to reduce securitisation exposures have been executed and will continue so in 2014 in order to decrease impairment risk, credit migration and concentration risk on ING’s non-trading books. More details can be found in the following specific securitisation sections.
In its role as administrative agent, ING Bank facilitates these transactions by acting as administrative agent, swap counterparty and liquidity provider to Mont Blanc. ING Bank also provides support facilities (liquidity and program wide enhancement) backing the transactions funded by the conduit.
ING Bank supports the commercial paper programmes by providing the Special Purpose Entity (SPE) with short-term liquidity facilities. These liquidity facilities primarily cover temporary disruptions in the commercial paper market. Once drawn these facilities bear normal credit risk. A number of programmes are supported by granting structured liquidity facilities to the SPE, in which ING Bank covers at least some of the credit risk incorporated in these programmes itself (in addition to normal liquidity facilities), and might suffer credit losses as a consequence. Furthermore, under a Programme Wide Credit Enhancement ING Bank guarantees to a limited amount all remaining losses incorporated in the SPE to the commercial paper investors. The liquidity facilities, provided to Mont Blanc are EUR 1,728.1 million. The drawn liquidity amount as at 31 December 2013 is EUR 158.7 million. Mont Blanc has no investments in securitisation positions that ING Bank has securitised. Nor are there entities either managed or advised by ING Bank that invest in Mont Blanc.
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Total * Both Memphis 2005 and Mars 2006 have been unwound in May 2013.
Exposures securitised 2012 Cut-off Date Initial Pool Outstandings Credit Events Past due Assets Losses
Cut-off Date Most recent date in respect of which determination and allocation of losses have been made pursuant to the legal documentation of the transaction. Information on the performance of ING’s securitised exposures is published regularly.
Liquidity and funding Although the most senior tranches in securitisations are no longer efficient to release regulatory capital under Basel II, they are used to obtain funding and improve liquidity. To be eligible as collateral for central banks securitised exposures must be sold to a Special Purpose Vehicle (SPV) which, in turn, issues securitisation notes (‘traditional securitisations’) in two tranches, one subordinated tranche and one senior tranche, rated AAA by a rating agency. The AAA tranche can then be used by ING Bank as (stand-by) collateral in the money market for secured borrowings.
MARKET RISK Introduction After the turmoil in the financial markets and the consequent need for governments to provide aid to financial institutions, financial institutions have been under more scrutiny from the public, supervisors and regulators. This has resulted in more stringent regulations intended to avoid future crises in the financial system and taxpayers’ aid in the future. Reference is made to the General Risk Management section ‘Ongoing changes in the regulatory environment’.
P&L Impact Items on fair value which revalue through P&L, excluding debit valuation adjustments, impact IFRS-EU equity as well as Basel II and Basel III equity. Debit valuation adjustments of own issued debt only impacts IFRS-EU equity and not Basel II or Basel III equity. Debit valuation adjustments of derivatives impacts Basel II equity, but will not be part of Basel III equity.
LIQUIDITY RISK 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.
The presented distribution of liquid assets over different classes represents the liquid assets across the whole bank. This includes also entities where restrictions may apply on transferability and convertibility due to regulatory constraints or other measures. The decrease of the buffer in 2013 in comparison with 2012 is due to less cash placed at the central bank and the unwinding of retained RMBS.
As part of the liquidity buffer management, ING Bank also monitors the existing asset encumbrance. Encumbered asset represent the on-balance sheet assets that are pledged or used as collateral for ING Bank’s liabilities. Below presented table defines asset encumbrance as the total pool of assets used for covered bond programs, external securitisations and collateral posted for derivatives.
ACTUARIAL AND UNDERWRITING RISK These risks (mortality, longevity, morbidity, adverse motor or home claims, etc.), result from the pricing and acceptance of insurance contracts. Actuarial risk is the risk that premium levels and provisions in respect of insurance risk may turn out to be (no longer) correct. Underwriting risk is the risk that an issuer will receive a claim under an insurance policy it issues/underwrites. Maximum underwriting exposures are limited through exclusions, cover limits and reinsurance.
ASSET BACKED SECURITIES (ABS) A type of bond or note that is based on pools of assets, or collateralised by the cash flows from a specified pool of underlying assets.
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CREDIT RISK The risk of loss from default by borrowers (including bond issuers) or counterparties. Credit risks arise in ING’s lending, pre-settlement and investment activities, as well as in its trading activities. Credit risk management is supported by dedicated credit risk information systems and internal rating methodologies for debtors and counterparties.
INTEREST RATE REBATES Profit sharing for group life insurance business. A rebate granted to policyholders based on the discounted value of the difference between the interest rate used to calculate the premiums and the expected yield on investment. The profit sharing is granted by means of a premium discount related to the yield on government bonds.
IRREVOCABLE LETTERS OF CREDIT Concerns an obligation on behalf of a client to pay an amount of money under submission of a specific document or to accept a bill of exchange, subject to certain conditions. An irrevocable letter of credit cannot be cancelled or adjusted by the bank that has granted it during the duration of the agreement unless all those concerned agree.
LIQUIDITY PREMIUM In order to correct the value of the liabilities for their illiquidity a premium is added to the risk free liability valuation curve. This premium reflects the price of illiquid long term funding which increases in stressed markets.
LOSS GIVEN DEFAULT (LGD) Anticipated percentage loss in the event of a default of a customer of counterpart.
NET PREMIUMS WRITTEN Gross premiums written for a given period less premiums ceded to retrocessionaires during the given period.
OBLIGOR Corporate borrower, counterparty or individual to which ING has recourse for repayment of the obligation.
POST-EMPLOYMENT BENEFIT PLANS Formal or informal arrangements under which a company provides post-employment benefits for one or more employees. Postemployment benefits are employee benefits other than termination benefits and equity compensation benefits, which are payable after the completion of employment.
PROBABILITY OF DEFAULT (PD) The likelihood that a customer or counterparty will default.
STRUCTURED ENTITY An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
(in accordance with SEC guidelines) • ING Bank Annual Report • NN Group N.V. Annual Report • ING Jaaroverzicht 2013
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