ING Bank considers past due loans to be those loans where any payment of interest or principal is more than one day past due. The methodology is principally extended to loans to private individuals, such as residential mortgage loans, car loans, and other consumer loans. For business loans (governments, institutions, corporates), ING Bank has adopted a policy to classify the obligor as a problem loan as quickly as possible upon the occurrence of a payment default. This can even occur before a payment default has taken place. Therefore, the concept of past due loans does not exist for these types of obligors (and hence the reason why certain exposure classes show no figures).
As a general rule, ING Bank considers business loans as non-performing after a payment default of fourteen days. This is much stricter than required under the Basel 2.5 definition.
Clients that are offered a loan modification, and who have accepted such modification, are assigned a specific risk rating and PD. A loan modifications is, on itself, not considered as a credit default trigger, but may be applied to loans that are in default based on other triggers. For significant loan modifications, the difference between the net present value of expected future cash flows before and after the modification is charged to the profit and loss account and added to the loan loss provision. All modified loans are flagged in the credit risk systems. Loan modifications include one or more of the following (i) tenor extension, (ii) temporary interest-only payments, (iii) loan consolidation and (iv) refinancing.
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Corporate Banking: Fair Value Adjustment There are loan situations where we have entered into a troubled debt restructuring (and have incurred a financial loss) but where we expect the Borrower to fully perform the restructured debt service. In such a case, the Borrower may be upgraded to a regular / performing Risk Rating – implying that the restructured debt is money good – while the loss is reflected in a Fair Value Adjustment to the original asset. In such a case the original loan asset will be derecognised and administered / rebooked as a new loan however with a lower carrying value than the original loan value – the difference being the fair value adjustment. As per 2012, ING Bank recognised EUR 189 million (2011: EUR 97.2 million) of Fair Value adjustments on EUR 1.3 billion of original exposure (EUR 1.1 billion in 2011) for the Corporate Lending
The largest sector remained private individuals and is a function of the large mortgage portfolio of ING Bank. The sale of ING Direct Canada and especially ING Direct US reduced the amount of private individuals in default. On the contrary, the amount of exposure to real estate customers in default increased sharply during 2012. This was largely the result of the deterioration of commercial real estate markets in many countries where ING is active.
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The market risk Economic Capital is higher than the Regulatory Capital primarily due to the inclusion of the interest rate risk in banking books in Economic Capital. The main drivers for the decrease in market risk Economic Capital are the sale of ING Direct US and to a lesser extent due to divestments in the real estate portfolio. The decrease in market risk Regulatory Capital is due to position changes and more volatile scenarios dropping out of the VaR calculation.
Other pricing sources can be independent market vendors, brokers or market makers, or recent transactions. The range of prices obtained from these pricing sources can diverge. The choice of one or the other pricing source can therefore result in different estimates of fair value. Selecting the most appropriate price within this range requires expertise and judgement.
Model Disclosure of Trading Risk Measures Value at Risk MRM uses the historical simulation Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, equity prices, foreign exchange rates, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. Next to general market movements in these risk factors, VaR also takes into account market data movements for specific moves in e.g. the underlying issuer of securities. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and back testing, and VaR with a 10-day horizon for determining regulatory capital.
Back testing Back testing is a technique for the on-going monitoring of the plausibility of the VaR model in use. Although VaR models estimate potential future results, estimates are based on historical market data. In a back test, the actual daily result is compared with the 1-day VaR. In addition to using actual results for back testing, ING Bank also uses hypothetical results, which measure results excluding the effect of intraday trading, fees and commissions. When the actual or hypothetical loss exceeds the VaR an ‘outlier’ occurs. Based on ING Bank’s one-sided confidence level of 99% an outlier is expected once in every 100 business days. In 2012, like in 2011, there was no occurrence where a daily trading loss exceeded the daily consolidated VaR of ING Commercial Banking. ING Bank reports the results of this back testing to DNB on a quarterly basis.
Stress testing Stress testing is a valuable risk management tool. Stress testing evaluates the bank’s financial stability under severe but plausible stress scenarios and assists in decision-making that assures the bank to remain a financially-healthy on-going concern after a severe event occurs. In addition to the bank-wide stress test framework as described in the ING Bank risk profile section, MRM performs separate stress tests to monitor market risks under extreme market conditions. Since VaR in general does not produce an estimate of the potential losses that can occur as a result of extreme market movements, ING Bank uses structured stress tests for monitoring the market risk under these extreme conditions. Stress scenarios are based on historical as well as hypothetical extreme events. The result of the stress test (also called event risk) is an estimate of the profit and loss caused by a potential event and its world-wide impact for ING Commercial Banking. The event risk number for the ING Commercial Banking trading activity is generated on a weekly basis. Like VaR, event risk is limited by ALCO Bank.
Other trading controls VaR and event risk limits are the most important limits to control the trading portfolios. Additionally, limits have been set on SVaR and IRC. Furthermore, ING Bank uses a variety of other controls to supplement these limits. Position and sensitivity limits are used to prevent large concentrations in specific issuers, sectors or countries. In addition to this, other risk limits are set with respect to the activities in complex derivatives trading. The market risk of these products is controlled by product specific limits and constraints.
The risk figures in the table below only relate to the CAD2 trading books for which the internal model approach is applied.
(1) The total VaR for the columns Minimum and Maximum cannot be calculated by taking the sum of the individual components since the observations for both the individual markets as well as total VaR may occur on different dates.
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Total Regulatory Capital 772 1,124 Market Risk Weighted Assets (2) 10 14
(1) Standardised model is applied to FX positions in trading and banking books and to securitisations in the trading books. The capital requirement for securitisations, which equals 100% of outstanding exposure amounts to EUR 3 million.
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 it stable at the same time.
Commercial activities result in interest rate risk, as for example repricing tenors of assets differ from those of liabilities. Linear interest rate risk is transferred from the commercial business to the treasury books (Bank Treasury), based on estimations of customer behaviour. The originating commercial business is ultimately responsible for estimating customer behaviour, leaving convexity risk and (unexpected) customer behaviour risk with the commercial business.
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. The risk transfer process takes 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. Models and parameters are backtested regularly 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, prepayment behaviour and the interest sensitivity of the embedded offered rate options are modelled.
Net Present Value (NPV) at Risk NPV-at-Risk measures the impact of changing interest rates on value. As a full valuation approach is applied, the risk figures include convexity risk that results from embedded optionalities like mortgage prepayment options. Like for ES calculations, an instantaneous shock up of 1% is applied.
The NPV-at-Risk is dominated by the interest rate sensitive long-term investments of own funds. The value of these investments is impacted significantly if interest rates move up by 1%. Convexity risk in retail portfolios as well as the strategic interest position in Bank Treasury also contributes to the overall NPV at Risk.
Basis Point Value (BPV) BPV measures the impact of a 1 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.
The Pound sterling Foreign Investments decreased significantly mainly due to losses occurred at ING Direct UK related to the announced sale and derisking actions in the investment portfolio, the hedges were adjusted accordingly. The Canadian dollar position became nil due to the sale of ING Direct Canada.
Real Estate price risk in banking books Real estate price risk arises from the possibility that real estate prices fluctuate. This affects both the value of real estate assets and earnings related to real estate activities.
ING Bank has two main different categories of real estate exposure on its banking books: First, the own buildings ING Bank occupies, and second development assets, which is mostly consisting of former Real Estate Development and Real Estate Investment Management activities.
ING Bank’s real estate exposure in the banking books (i.e. including leverage and committed purchases) is EUR 3.3 billion. For market risk management purposes, the total real estate exposure amounts to EUR 3.2 billion since property from foreclosures (EUR 0.05 billion) and third party interests (EUR 0.04 billion) is excluded.
The risk appetite statements are also directly linked to liquidity stress testing. In accordance with Dutch Central Bank guidelines, ING Bank’s liquidity positions are stress tested on a monthly basis under a scenario that is a mix between a market event and an ING Bank specific event. Additional stress testing exercises are undertaken on consolidated and local level on a periodic and ad-hoc basis. The outcome of stress tests provides input to any contingency measures and follow-up required. In view of emerging macro-economic risks in the Eurozone, ING has increased its focus on the exposures across the Eurozone and taken additional measures to limit and manage these risks.
• Maintaining a funds transfer pricing (FTP) mechanism in which ING Bank’s cost of liquidity is adequately reflected both under a going concern and a contingency perspective. The FTP mechanism also serves to make the business aware of liquidity costs and that these are also properly incorporated in product evaluation and pricing.
Maintenance of the liquidity profile is also reflected in the adherence to regulatory liquidity limits, both at home and host regulatory level. As regulatory requirements on a local level increase, the objective is to reduce or eliminate dependencies on intra-group funding.
With respect to funding sources, ING Bank manages its balance sheet prudently, whereby short-term funding is primarily utilised for short-term assets and we are decreasing these types of funding sources. Consequently, the bank aims to fund all longer term assets and investments by stable and longer term liabilities. In the first half of 2012, the uncertainty with regard to economic developments in Europe and possible implications for the Eurozone led to US MM Funds being more restrictive in funding European counterparties. Monitoring and control of this funding is effectuated through a dedicated USD funding and liquidity risk framework which includes limits and measures in case of contingencies. In the table below, the various funding sources are presented in the funding mix.
Contingency liquidity risk Contingency liquidity risk specifically relates to the organisation and planning for liquidity management in time of stress. Within ING Bank, for contingency purposes, a specific crisis team – consisting of key Board Members, representatives from staff departments (e.g. Finance, Risk and Capital Management) and Bank Treasury – is responsible for liquidity management in times of crisis. Throughout the organisation adequate and up-to-date contingency funding plans are in place to enable senior management to act effectively and efficiently in times of crisis.
ING Bank believes that fully embedding controls preserves and enhances the trust of its customers, staff and shareholders and so is essential to building sustainable businesses. ING Bank’s Business Principles set the foundation for the high ethical standards ING Bank expects of all business activities. ING Bank’s Business Principles require all staff to conduct themselves, not only within the letter of laws and regulations, but also with integrity, being open and clear, respectful, and responsible.
The Head of Non-Financial Risk is responsible for developing the framework of policies and standards within ING Bank and for monitoring the quality of non-financial risk management in the business lines. The Bank NFRC is the primary approval and oversight committee. The Non-Financial Risk dashboard (NFRD) enables management to focus on the ten operational risk areas through the quarterly report on regional, divisional and Bank level.
The risk appetite (defined as the acceptable and authorised maximum level of risk) is set in each of the NFR risk areas and must be adhered to. This risk appetite is monitored quarterly through the Non-Financial Risk Dashboard which reports the key non-financial risk exposures.
Processes are in place to identify key threats, vulnerabilities and the associated risks which might cause adverse events. Event identification is performed proactively and precedes a risk assessment. Different techniques for event identification exist within ING Bank, e.g. Risk & Control Self-Assessments, scenario analysis, external events inventories, internal incident analysis (e.g. lessons learned based on information from incident reporting), key risk indicator events and threat scans.
Operational Risk Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the related risk of reputation loss, as well as legal risk but strategic risks are not included. Effective operational risk management leads to more stable business processes (including IT systems) and lower costs.
Cybercrime There continues to be an increase in the world-wide cyber threat and more stringent regulations are being introduced regarding cyber security of e-banking (e.g. ECB’s Recommendations for the security of Internet Payments). Under the auspices of the Management Board, a Cybercrime Task Force has been set up within ING Bank to ensure a coordinated and effective response to the threat of cybercrime. The Cybercrime Task Force aims to improve knowledge sharing and to structure effective prevention, detection and incident response across the ING Bank. In 2012 ING Bank further strengthened collaboration against cybercrime with the industry (e.g. national bank associations), law enforcement, government (e.g. Nationale Cyber Security Center) and Internet Service Providers (ISPs).
AMA Model The AMA model of ING Bank used for regulatory capital reporting follows the Loss Distribution Approach (LDA) and is based on both external and internal loss data exceeding EUR 1 million. The model is adjusted for the specific measured quality of control in a business line. This provides an incentive to local (operational risk) management to better manage operational risk.
Conceptual differences between Operational Risk model used for Regulatory Capital and Economic Capital Regulatory Capital Economic capital
Governance Compliance Risk Management function The Chief Compliance Officer (CCO) is the General Manager of the Compliance Risk Management department. This is an independent function responsible for developing and establishing the Bank-wide Compliance Risk Management Charter & Framework, establishing the Minimum Standards for managing compliance risks and assisting and supporting the Management Board Bank in managing ING Bank’s compliance risks.
To avoid potential conflicts of interest, it is imperative that the Compliance Officers are impartial and objective when advising business management on Compliance Risk in their business unit, region, country or entity. To facilitate this, a functional reporting line to the next higher level Compliance Officer is in place. The functional reporting line has clear accountabilities relating to objective setting, remuneration, performance management and the appointment of new Compliance Risk Management staff as well as obligations to veto and escalate.
ING INSURANCE ING INSURANCE RISK MANAGEMENT GOVERNANCE ING is engaged in selling a broad range of life and non-life insurance products. Risks from these products arise with respect to the adequacy of insurance premium rate levels and provisions for insurance liabilities, earnings and capital position, as well as uncertainty as to the future returns on investments of the insurance premiums. Financial Risks include investment risk, asset and liability management and surplus and capital issues. Insurance product risks include insurance risks (actuarial and underwriting) and interest rate sensitivity. Compliance risk, legal risk, reputation risk and operational risk are classified as Non-Financial Risks.
IFRS reserve adequacy test As per 31 December 2012, the reserves for ING Insurance remained adequate above the prudent 90% confidence level, and all business lines exceeded the 90% confidence level with the exception of the US Closed Blocked Variable Annuities (VA), which improved from EUR –3.2 billion at year-end 2011 to EUR –1.7 billion at year-end 2012, driven by assumption and model changes as well as market performance during the year. That improvement was offset by a decline at Insurance Benelux as a result of derisking and low interest rates as well as new mortality tables in the Netherlands.
If the aggregate reserves for a business line fall below the 50% confidence level, the shortfall must be recognised immediately in the profit and loss (P&L) account. Such a charge may be triggered in Asia as ING divests its business units in the region, because a reserve inadequacy in Japan is currently compensated by a surplus in other units. The reserve inadequacy for the Japanese insurance business, including the VA guarantees reinsured by ING Reinsurance, was approximately EUR 0.4 billion at the 50% confidence level at 31 December 2012. This is comprised of an inadequacy of approximately EUR 0.9 billion for the closed block VA, offset by a sufficiency of EUR 0.5 billion for the corporate-owned life insurance business. The nature and timing of any P&L charge from such reserve inadequacy depends on the closing of other divestments in Asia as well as various options currently under investigation for ING Life Japan. Further announcements will be made if and when appropriate.
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L ev el 1st line of defence 2nd line of defence 3rd line of defence ti er b o ar d s tr u ct u re
As part of the integration of risk management into the strategic planning process, the MBE annually issues a Planning Letter which provides the organisation with the corporate strategic planning, and addresses key risk issues. Based on this letter the business lines develop their own business plans, including qualitative and quantitative assessment of the risks involved. Risk appetite, risk tolerance levels and risk limits are explicitly discussed as part of the process. Based on the business plans the MBE formulates the Strategic plan which is submitted to the Supervisory Board for approval.
Capital and Market-Consistent Valuations which are applied within ING Insurance EurAsia; – Impairment Committee – The authority where impairments for financial reporting purposes are approved (including loan loss provisions). • Risk Committee MBE
The CRO delegates day-to-day Risk Management within ING Insurance EurAsia to the Deputy CRO. The Deputy CRO department consists of several risk functions that support the overall Risk Management function. Doug Caldwell joined as CRO of ING Insurance EurAsia as of December 2012. A new reporting structure will become effective in 2013.
Regional level and business unit level have separate risk committees. The Regional CROs report functionally to the Deputy CRO, while the Business Units CROs in turn functionally report to the Regional CROs. Within ING Insurance EurAsia Compliance Risk Management is part of the Legal and Compliance function.
Dashboards. The risk committee monitors the exposures versus the tolerances and limits and can decide to take mitigating actions or waivers. Waivers need to be asked upfront. Capital ratios are reported to the Management Board through the Capital Adequacy Report; • Investment risks are reported at group level to the Risk Committee of ING Insurance EurAsia through the Investment Risk Dashboard and the Liquidity Risk Report. The Risk Committee monitors the exposures versus the tolerances and limits and can decide to take mitigating actions or waivers. Waivers need to be asked upfront; • Furthermore, the investment mandate process, the New Investment Class Approval and Review Process (NICARP), policies and procedures on investment risk are monitored by the Financial Risk Committee; • Underwriting risk is monitored mostly through the product approval process (PARP) at business line and business unit level. Adequacy of our technical reserves is monitored and reported at all levels of the organisation; • The non-financial risks are monitored through the non-financial risk dashboard (NFRD) process at all levels in the organisation. The NFRD provides management at all organisational levels with information about key operational, compliance and legal risks and incidents.
Risk Profile Risk type description ING Insurance EurAsia identifies the following main types of risk that are associated with its business: • Insurance risk – risks such as mortality, morbidity, longevity and property and casualty (P&C) associated with the claims under insurance policies it issues/underwrites; specifically, the risk that premium rate levels and provisions are not sufficient to cover insurance claims; • Business risk – risk driven by the possibility that experience deviates from expectations with respect to policyholder behaviour, expenses and premium re-rating. These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent in strategy decisions and internal efficiency, and as such strategic risk is included in business risk; • Market risk – the risk of potential losses due to adverse movements in market variables. Market risks include interest rate, equity, real estate, implied volatility, credit spread including illiquidity premium, and foreign exchange risks; • Credit risk – the risk of potential losses due to default by ING Insurance EurAsia debtors (including bond issuers) or trading counterparties; • Liquidity risk – the risk that ING Insurance EurAsia or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions; • Operational risk – the risk of direct or indirect losses resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputational risk, as well as legal risk; • Compliance risk – the risk of damage to ING Insurance EurAsia’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, internal policies, procedures and ethical standards.
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The EC numbers for business and insurance risk are calculated in local systems based on industry data, experience studies and expert judgement. These EC numbers are aggregated with the EC for market risk and credit default risk, taking into account diversification. Operational risk capital is treated as an add-on and therefore not part of the diversification between risk types.
For EC calculation ING Insurance EurAsia uses a one-year time horizon. The Economic Capital model will continue to be updated to reflect most recent market data, developments in best practices, and regulations such as Solvency II.
In 2012, ING Insurance EurAsia revisited and refined Economic Capital methodologies. This resulted in an overall decrease of EC of EUR 0.9 billion as per year end 2011. This is mainly driven by changes in market risk methodology. In 2011 the impact of several future model changes was anticipated and the changes were fully implemented in 2012. The main changes leading to a lower market risk EC were driven by lower than anticipated contributions of spread and equity risk. Furthermore the methodology to capture equity and interest rate option hedges was refined, leading to a lower equity and interest rate risk EC. Simultaneously, EC increased for business risk which was updated to better capture risk for expense risk and persistency. The tables below start with the restated figures for EurAsia after these model changes.
While the figures above are shown by business line, the diversification across ING Insurance EurAsia businesses is calculated across business units. The increase in Central and Rest of Europe was mainly due to a change in mass lapse assumptions driven by Solvency II. Total diversification across ING Insurance EurAsia’s business units and the Corporate Line Insurance is 28% (2011: 31%).
Economic Capital break-down ING Insurance EurAsia excluding discontinued operations (99.5%) by risk category
Insurance risk 1,921 1,642 Market risk 3,153 3,404 Credit default risk 357 557 Operational risk 391 344 Business risk 2,337 2,118 Diversification across risk types –2,291 –2,469 Total insurance operations EurAsia excluding discontinued operation 5,868 5,596
Model disclosure The table below shows the main risk categories for insurance risks within ING Insurance EurAsia. IFRS Earnings sensitivities are defined on a shock scenario at the 90% confidence level, EC numbers are determined using a 99.5% confidence interval, both on a one year horizon.
Economic Capital ING Insurance EurAsia excluding discontinued operations (99.5% undiversified) by risk category
AFR & IFRS earnings sensitivities: – Measured by the impact of a 10% up and down movement of currencies compared to the euro.
in implied volatilities. – For Equity measured by the impact of a relative increase in implied volatilities based on tenor: 80% for tenors less than 1 year, up 30% for tenors between 1and 3 years, up 20% for tenors between 3–7 years and up 10% for tenors of 7 years and above.
IFRS Earnings, AFR & EC: Embedded options in: – guaranteed separate account pension business in the Netherlands.
– AAA and AA rated government bonds and home government bonds in local currency are excluded, exception only applicable to Greek bonds.
In order to avoid double counting, only Credit Spread risk for AFR is measured.
AFR & IFRS earnings sensitivities: – For AFR this is measured by the impact of a 15% drop in real estate prices for all real estate holdings.
Economic capital reduced due to a higher offset of the Liquidity Premium in a credit spread up scenario due to an increased duration of our liabilities. Furthermore a better matching of assets and liabilities resulted in lower interest rate and interest rate implied volatility risk. These decreases in Economic Capital were partly offset by reduced positions in equity put options.
Interest Rate Up 97 –61 306 –91 Interest Rate Down –59 103 –310 314
Given the size of the portfolio, term loans (including private placements) compared to bonds are a much smaller source of credit risk for ING Insurance EurAsia. These exposures are also included in the issuer & lending limit monitoring. Residential mortgages and policy loans form the retail credit risk exposures of ING Insurance EurAsia. Credit risks are contained through underwriting criteria and the availability of collateral.
Within ING Insurance EurAsia, the goal is to maintain a low-risk, well diversified credit portfolio that meets or exceeds market based benchmark returns. ING Insurance EurAsia has a policy of maintaining a high quality investment grade portfolio while avoiding large risk concentrations. The emphasis is on managing business developments within the business lines by means of top-down concentration limits for individual borrowers and certain asset classes.
Model disclosure The table below shows the main risk categories for credit risk within ING Insurance EurAsia. EC numbers are based on a 99.5% confidence interval on a one-year horizon. IFRS and AFR sensitivities measurement is described in the table below.
Credit Default Impact of a default of counterparties on IFRS earnings and EC.
The table below shows the covers values for ING Insurance EurAsia, with the exception of covers received for derivatives and securities lending/(reverse) repo’s.
LIQUIDITY RISK Liquidity risk refers to the risk that a company is unable to settle financial obligations when they fall due. Liquidity in this context is the availability of funds, or certainty that funds will be available without significant losses, to honour all commitments when due. ING Insurance EurAsia identifies two related liquidity risks: funding liquidity risk and market liquidity risk. Funding liquidity risk is the – primary – risk that ING Insurance EurAsia will not have the funds to meet its financial obligations when due. Market liquidity risk is the – secondary – risk that an asset cannot be sold without significant losses. The inter relation with funding liquidity stems from the fact that when payments are due, and not enough cash is available, investment positions need to be converted into cash. When Market liquidity is low, this would lead to a loss.
Under the terms of our Over-The-Counter Derivative International Swaps and Derivatives Association, Inc. (‘ISDA’) Agreements, we may receive from, or deliver to, counterparties, collateral to assure that all terms of the ISDA Agreements will be met with regard to the Credit Support Annex (‘CSA’). Currently the amount received exceeds the amount delivered. Analysis show this balance will remain positive under stressed scenarios.
COMPLIANCE RISK Compliance Risk is defined as the risk of damage to ING Insurance EurAsia’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, internal policies, procedures and ethical standards. In addition to reputational damage, failure to effectively manage Compliance Risk could expose ING Insurance EurAsia to fines, civil and criminal penalties, and payment of damages, court orders and suspension or revocation of licenses, which would adversely impact customers, staff and shareholders of ING Insurance EurAsia.
The following principles support this objective: • Maintaining functional independence; • Facilitating transparent communication to internal and external stakeholders on risk management and value creation; • Providing formal checkpoints to facilitate adherence to internal and external compliance requirements; • Monitoring products and portfolios to ensure they are appropriately approved and managed; • Maintaining transparency of the risk profile of ING US, manage to avoid surprises; • Keeping delegated authorities consistent with the overall ING US strategy and risk appetite.
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Board level risk oversight ING US has a two-tier board structure consisting of the Board of ING U.S., Inc. and the Supervisory Board.
 Reviews methods and techniques for calculating Asset Liability Management risk, advises about limits, monitors breaches in the risk limits, and considers remediation.
– Operational Risk Committee  Oversees all non-financial risk across ING US - operational, compliance, legal and reputation risk.  Recommends action on reported risks and what risks ING US is willing to accept.
Risk Management Function The ING Group CRO has delegated the day-to-day Risk Management within ING US to the ING US Chief Risk Officer (CRO). The ING US CRO directly reports to the ING US CEO and functionally reports to the ING Group CRO. The ING US Chief Risk Officer bears primary and overall responsibility for the risk management function within ING US, which identifies, measures, monitors and reports risk within ING US The risk function maintains and updates the policy framework, develops and maintains risk methodologies and advises on the risk tolerance and risk profile. The CRO makes sure both the Supervisory Board and Board of ING U.S., Inc. are well informed and understand ING US’s risk position at all times.
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RISK FRAMEWORK In order to manage the risk on a day-to-day basis and balance value, earnings and capital decisions, ING US has implemented a risk limit framework. The risk limit framework follows a top down approach.
Other limit structures exist at both the corporate and business unit level. Examples include, but are not limited to, the following: • Issuer concentration limits; • Mortality concentration limits; • Catastrophe and mortality exposure retention; • Minimum liquidity requirements; • Investment and derivatives guidelines and limits.
Stress Testing ING US complements its regular risk reporting process with (ad hoc) stress tests. Stress testing examines the effect of exceptional but plausible scenarios on the capital position for ING US. Stress testing can be initiated internally or on certain request from external constituents.
underwrites; specifically, the risk that premium rate levels and provisions are not sufficient to cover insurance claims; • Market risk – the risk of potential losses due to adverse movements in market variables. Market risks include interest rate, equity, real estate, implied volatility, credit spread including illiquidity premium, and foreign exchange risks; • Credit risk – the risk of potential losses due to default by ING US debtors (including bond issuers) or trading counterparties; • Business risk – risk driven by the possibility that experience deviates from expectations with respect to policyholder behaviour, expenses and premium re-rating. These fluctuations can occur because of internal, industry, or wider market factors. It includes strategic risk; • Liquidity risk – the risk that ING US or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions; • Operational risk – the risk of direct or indirect losses resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputational risk and legal risk; • Compliance risk – the risk of damage to ING US integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, internal policies, procedures and ethical standards.
iNSURANce RiSk Insurance risks are comprised of actuarial and underwriting risks such as mortality, longevity, and morbidity, which result from the pricing and acceptance of insurance contracts.
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BUSiNeSS RiSk Business risk for insurance is the risk insurance operations accept as consequence of choosing to be in the business. In practice this can be defined as the exposure to the possibility that experience differs from expectations with respect to expenses, the run-off of existing business (persistency/renewals), future premium rerating, etc. The calculation of Business Risk Capital is specified by the regulatory capital methodology prescribed by the National Association of Insurance Commissioners (NAIC).
– Measured by the impact of a 25% drop in equity prices.
– Impact that credit default risk can have on credit impairment levels in a ‘1 in 10’ scenario (using ‘1 in 10’ 1-year default rates by rating category, combined with stressed ‘Loss Given Default’ assumptions); plus impact that a ‘1-in-10’ increase in credit spreads levels can have on previously impaired structured assets (re-impairment risk) and on CDS transactions that are carried at market value.
– Impact of losses related to changes in foreign currency exchange rates.
Sensitivities The stress events are described above. The ING US earnings sensitivities are dominated by credit, equity and interest rate exposure.
Interest Rate Up 58 72 Interest Rate Down –77 –146 Equity –244 –293 Credit – Default –283 –355 Credit – Spread –236 –188
Earnings sensitivity before RAT Policy Impact 1,150 700 250 –100 –350 –550
Within ING US, the goal is to maintain a low-risk, well diversified credit risk portfolio that meets or exceeds market based benchmark returns. ING US has a policy of maintaining a high-quality investment grade fixed income portfolio while avoiding large risk concentrations. The emphasis is on managing total exposure and concentration risk by means of portfolio level risk limits and concentration limits for countries, individual borrowers and borrower groups. Counterparty credit risk is mitigated by only transacting with counterparties that meet minimum credit quality standards as well as by requesting collateral for all larger exposures.
The table below shows the main risk categories for credit risk within ING US: Description Key Drivers
Investments in public bonds, commercial paper, securitisations and other publicly traded securities.
(1) Based on credit risk measurement contained in lending, pre-settlement, money market and investment activities. The ratings reflect probabilities of default and do not take collateral into consideration and are based on ultimate parent.
Non-Bank Financial Institutions 35.3% 38.6% Real Estate 8.3% 8.5% Central Governments 7.3% 8.2% Natural Resources 7.1% 6.9%
ING US largely invests in financial instruments issued in the United States, as required by regulation. The decrease in exposures to the Netherlands is related to the transfer of the note reflecting the obligations of the Dutch Government related to the Alt-A RMBS sales transaction in 2009 to ING Group Bonds and private placements issued by Western European corporations reduced in 2012 from 9.3% per 31 December 2011 to 8.2% per 31 December 2012. It still accounts for the majority of the non-US exposure.
LIQUIDITY RISK Liquidity risk refers to the risk that a company is unable to settle financial obligations when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions. As with other market risks, liquidity risk falls under the supervision of the Risk Committee function. Under the volatile market circumstances in 2012, funding and liquidity risk remains an important topic on the agenda of senior management and the Risk Committee that needs continuous monitoring and management. External market and regulatory developments and internal financial developments are closely monitored. Regular stress testing and measurement of early warning indicators are, among others, used to provide additional management information.
ING US defines two levels of liquidity management. Short-term liquidity, or cash management covers the day-to-day cash requirements under normally expected or likely business conditions. Long-term liquidity management takes into consideration various expected and adverse business conditions, which might result in the inability of realising the current market values of the assets. The assets might only be sold at a further distressed price simply due to the lack of liquidity. Stress liquidity management looks at the company’s ability to respond to a potential crisis situation. The day-to-day and ongoing cash management allows for a more proactive response to potential liquidity problems in distressed markets. Liquidity risk is measured through several metrics including ratios and cash flow scenario analysis, in a base case and under several stressed scenarios. Liquidity risk is evaluated separately by legal entity because of certain regulatory restrictions on the transfer of assets between legal entities.
ING US principal available sources of liquidity are product charges, investment income, proceeds from the maturity and sale of investments, proceeds from debt issuance and borrowing facilities, repurchase agreements, contract deposits and securities lending. Primary uses of these funds are payments of policyholder benefits commissions and operating expenses, interest credits, investment purchases, derivative collateral requirements and contract maturities, withdrawals and surrenders. ING US liquidity risk metrics indicate that liquidity resources would be sufficient to meet expected liquidity uses under the scenarios tested.
Under the terms of ING US Over-The-Counter Derivative International Swaps and Derivatives Association, Inc. (‘ISDA’) Agreements, ING US may receive from, or deliver to, counterparties, collateral to assure that all terms of the ISDA Agreements will be met with regard to the Credit Support Annex (‘CSA’). The terms of the CSA call for ING US to pay interest on any cash received equal to the federal funds rate (‘Federal Funds Rate’). As of 31 December 2012, EUR 675 million of net cash collateral related to derivative contracts was being held. As of 31 December 2012, ING US delivered EUR 25 million and EUR 9 million of cash collateral related to derivative contracts and credit facilities, respectively. As of 31 December 2011, EUR 585 million of net cash collateral related to derivative contracts was being held. As of 31 December 2011, ING US delivered EUR 31 million and EUR 9 million of cash collateral related to derivative contracts and credit facilities, respectively. As of 31 December 2010, EUR 10 million of net cash collateral related to derivative contracts was being held. As of 31 December 2010, ING US delivered EUR 39 million and EUR 9 million of cash collateral related to derivative contracts and credit facilities, respectively. The collateral held and delivered is included in Payables under securities loan agreements, including collateral held and Short-term investments under securities loan agreements, including collateral delivered, respectively, on the Consolidated Balance Sheets. In addition, as of 31 December 2012, 2011 and 2010, ING US delivered securities as collateral of EUR 0.8 billion, EUR 1.0 billion and EUR 0.8 billion, respectively, which was included in Securities pledged on the Consolidated Balance Sheets. Collateral requirements are monitored on a daily basis and incorporate changes in market values of both the derivatives contract as well as the collateral pledged. Market value fluctuations are due to changes in interest rates, spreads and other risk factors.
OPERATIONAL RISK Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the risk of reputation loss, as well as legal risk whereas strategic risks are not included. Operational risk also includes IT risk.
For Operational risk, ING US follows the ING Group framework governing the process of identifying, assessing, mitigating, monitoring and reporting operational risks. The ING framework is based on the elements of the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission).
ING US also maintains the Whistleblower process on behalf of the broader organisation. The process is designed to encourage staff to speak up, without fear of reprisal, if they know of or suspect a breach of laws, regulations or internal policies. ING US also maintains a domestic ‘hotline’ operated by a third-party vendor that is available to all employees to report suspected misconduct, and reporting employees may elect to remain anonymous in doing so.
The shock scenarios applied for regulatory capital sensitivities are the same as those shown in the Market Risk section for Earnings at Risk. The regulatory capital sensitivity in aggregate is calculated by combining the joint impact of the various market stress events calculated by taking into account the correlations between risk types.
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PROCESSES FOR MANAGING CAPITAL In addition to measuring capital adequacy, Capital Management also ensures that sufficient capital is available through setting targets and limits relevant to the above mentioned metrics for ING Group, ING Bank, and ING Insurance and ensuring adherence to the set limits and targets through planning and executing capital management transactions. The ongoing assessment and monitoring of capital adequacy is embedded in Capital Management’s capital planning process. Following the annual budgeting process, each year a capital plan is prepared for the Group as a whole and each of its material businesses. This plan is updated on a quarterly basis and it is assessed to what extent additional management actions are required. At all times maintaining sufficient financial flexibility should be preserved to meet important financial objectives. At the foundation of the capital plan are ING’s risk appetite statements that determine target setting. These constraints are being cascaded to the different businesses in line with our risk management strategy.
EBA capital exercise An additional capital exercise was proposed by the EBA and agreed by the Council on 26 October 2011. This exercise required banks to strengthen their capital positions by building up a temporary capital buffer against sovereign debt exposures to reflect current market prices. In addition, it required them to establish a buffer such that the Core Tier 1 capital ratio reaches a level of 9% by the end of June 2012, after the removal of the prudential filters on sovereign assets in the Available-for-Sale portfolio and prudent valuation of sovereign debt in the Held-to-Maturity and Loans and receivables portfolios, reflecting current market prices. ING Bank meets the 9% Core Tier 1 ratio requirement since September 2011.
Available Tier 3 funds Deductions (3) –991 –1,014 BIS capital 47,116 47,124
(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) Includes revaluation debt securities, revaluation reserve cash flow hedge and the revaluation reserves excluded from Tier 1 as described in ING’s Capital base table.
(1) Hybrids issued by ING Group at notional value. (2) Hybrids issued by ING Insurance at notional value capped at 25% of EU required capital. (3) The actual required regulatory adjustments for IGD capital and the EU required capital may be different from the estimate since the statutory results are not final until filed with the regulators.
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(1) Hybrids issued by ING Group at amortised cost value consistent with IFRS carrying value. (2) Hybrids issued by ING Insurance at amortised cost value consistent with IFRS carrying value. (3) Includes net internal borrowings from the operating subsidiaries, net of cash and current tax liability at the at the holding level and current tax liabilities of the holding companies, mainly ING Verzekeringen N.V. and US Insurance Holdings.
The AFR-EC ratio for ING Insurance EurAsia decreased in 2012 as a result of higher EC and lower AFR. EC for ING Insurance EurAsia increased in 2012 primarily due to increases in insurance and business risk, partly offset by de-risking activities in the Benelux and overall lower market valuation leading to lower EC. Credit default risk decreased due to a methodology change and was offset by a lower diversification of this risk with other risk categories. AFR for ING Insurance EurAsia decreased in 2012 mainly due to market impacts (mainly credit and illiquidity spread changes on assets and liabilities), holding company interest, offset by the proceeds received for the divestment of Insurance Malaysia and capital injections from ING Verzekeringen N.V..
Required capital banking operations 28,774 31,107 Required capital insurance operations 9,523 9,515 Total required capital 38,296 40,622
ING Verzekeringen N.V. – short-term A–2 P–2 F2 – long-term A– negative Baa2 developing A– negative
THE SUPERVISORY BOARD THE EXECUTIVE BOARD J. van der Veer, chairman J.H.M. Hommen, CEO and chairman P.A.F.W. Elverding, vice-chairman P.G. Flynn, CFO J.P. Bahlmann W.F. Nagel, CRO H.W. Breukink J.H. Holsboer S. van Keulen P.C. Klaver J.Ch.L. Kuiper R.W.P. Reibestein Y.C.M.T. van Rooy L.A.C.P. Vandewalle L.J. de Waal 311ING Group Annual Report 2012 1 W h o w e are 2 R
Receivables from group companies 12,228 10,716 Other receivables, prepayments and accruals 395 487
As at 31 December 2012, the Share of associates reserve includes an amount of EUR 911 million (2011: EUR 836 million) related to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN that cannot be freely distributed.
Purchased/sold –86 –17 –14,554,460 –625,803 Share-based payments –67 –19 –4,638,786 –1,368,381 Other –102 –14 4 SUBORDINATED LOANS
Auditor’s responsibility Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing, and the standards of the Public Company Accounting Oversight Board (United States). This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether about the annual accounts are free from material misstatement.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination of whether the Report of the Executive Board, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the Report of the Executive Board, to the extent we can assess, is consistent with the annual accounts as required by Section 2:391 sub 4 of the Dutch Civil Code.
RISKS RELATED TO FINANCIAL CONDITIONS, MARKET ENVIRONMENT AND GENERAL ECONOMIC TRENDS Because we are a financial services company conducting business on a global basis, our revenues and earnings are affected by the volatility and strength of the economic, business and capital markets environments specific to the geographic regions in which we conduct business. The ongoing turbulence and volatility of such factors have adversely affected, and may continue to adversely affect, the profitability and solvency of our insurance, banking and asset management business. Factors such as interest rates, securities prices, credit spreads, liquidity spreads, exchange rates, consumer spending, changes in client behaviour, business investment, real estate and private equity valuations, government spending, inflation, the volatility and strength of the capital markets, political events and trends, and terrorism all impact the business and economic environment and, ultimately, our solvency, liquidity and the amount and profitability of business we conduct in a specific geographic region. In an economic downturn characterised by higher unemployment, lower family income, lower corporate earnings, higher corporate and private debt defaults, lower business investments, and lower consumer spending, the demand for banking and insurance products is usually adversely affected and ING’s reserves and provisions typically would increase, resulting in overall lower earnings. Securities prices, real estate values and private equity valuations may also be adversely impacted, and any such losses would be realised through profit and loss and shareholders’ equity. Some insurance products contain minimum return or accumulation guarantees. If returns do not meet or exceed the guarantee levels, we may need to set up additional reserves to fund these future guaranteed benefits. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Similarly, a downturn in the equity markets causes a reduction in commission income we earn from managing portfolios for third parties, income generated from our own proprietary portfolios, asset-based fee income on certain insurance products, and our capital base. We also offer a number of insurance and financial products that expose us to risks associated with fluctuations in interest rates, securities prices, corporate and private default rates, the value of real estate assets, exchange rates and credit spreads. See also ‘—Interest rate volatility and other interest rate changes may adversely affect our profitability’, ‘—Continued turbulence and volatility in the financial markets and the economy generally have adversely affected and may continue to affect our business and results of operations’, and ‘—Market conditions observed over the past few years may increase the risk of loans being impaired. We are exposed to declining property values on the collateral supporting residential and commercial real estate lending’ below.
Adverse capital and credit market conditions may impact our ability to access liquidity and capital, as well as the cost of credit and capital. The capital and credit markets have been experiencing extreme volatility and disruption since the second half of 2008. Adverse capital market conditions may affect the availability and cost of borrowed funds, thereby impacting our ability to support or grow our businesses.
The default of a major market participant could disrupt the markets. Within the financial services industry the severe distress or default of any one institution (including sovereigns) could lead to defaults or severe distress by other institutions. Such distress or defaults could disrupt securities markets or clearance and settlement systems in our markets. This could cause market declines or volatility. Such a failure could lead to a chain of defaults that could adversely affect us and our contractual counterparties. Concerns about the credit worthiness of a sovereign or financial institution (or a default by any such entity) could lead to significant liquidity and/or solvency problems, losses or defaults by other institutions, because the commercial and financial soundness of many financial institutions may be closely related as a result of their credit, trading, clearing or other relationships. Even the perceived lack of creditworthiness of, or questions about, a sovereign or a counterparty may lead to market-wide liquidity problems and losses or defaults by us or by other institutions. This risk is sometimes referred to as ‘systemic risk’ and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with whom we interact on a daily basis and financial instruments of sovereigns in which we invest. Systemic risk could have a material adverse effect on our ability to raise new funding and on our business, financial condition, results of operations, liquidity and/or prospects. In addition, such a failure could impact future product sales as a potential result of reduced confidence in the financial services industry.
EU Insurance Guarantee Scheme In July 2010, the European Commission released a white paper detailing the need to establish minimum levels of protection for consumers of life and non-life insurance products in the event that insurance companies in the European Union with which they do business were to become insolvent. Though the mechanisms for providing any such protections remain under review by the European Commission, the European Parliament and the member states, the European Commission may currently be considering providing this protection by (i) mandating the creation of (or harmonisation of existing) national level insurance guarantee schemes and/or (ii) implementing an EU-wide insurance guarantee scheme, which such scheme(s) may require significant prefunding by insurance companies. As of 31 December 2012 no legislative proposal has been made at the EU level. However, the implementation of an insurance guarantee scheme requiring significant levels of prefunding (or, in the event that prefunding is not required, the occurrence of circumstances requiring the commencement of event-driven contributions) may have a material and adverse impact on the liquidity, financial condition and operations of companies engaged in the insurance business, including us.
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• Dodd−Frank established the Federal Insurance Office (‘FIO’) within the United States Department of the Treasury (‘Treasury Department’) to be headed by a director appointed by the Secretary of the Treasury Department. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office would perform various functions with respect to insurance (other than health insurance), including participating in the FSOC’s decisions regarding insurers (potentially including the Group and its subsidiaries), to be designated for stricter regulation. The FIO may recommend enhanced regulations to state insurance regulatory bodies.
• 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.
Foreign Account Tax Compliance Act Under the Foreign Account Tax Compliance Act (‘FATCA’), U.S. federal tax legislation passed in 2010, a 30% withholding tax will be imposed on ‘withholdable payments’ made to non-U.S. financial institutions (including non-U.S. investment funds and certain other non-U.S. financial entities) that fail (or, in some cases, that have 50% affiliates which are also non-U.S. financial institutions that fail) to provide certain information regarding their U.S. accountholders and/or certain U.S. investors (such U.S. accountholders and U.S. investors, ‘U.S. accountholders’) to the U.S. Internal Revenue Service (‘IRS’). For non-U.S. financial institutions that fail to comply, this withholding will generally apply without regard to whether the beneficial owner of a withholdable payment is a U.S. person or would otherwise be entitled to an exemption from U.S. federal withholding tax. ‘Withholdable payments’ generally include, among other items, payments of U.S.source interest and dividends and the gross proceeds from the sale or other disposition of property that may produce U.S.-source interest and dividends. Furthermore, FATCA may also impose withholding on non-U.S. source payments by non-U.S. financial institutions that comply with FATCA to non-U.S. financial institutions that fail to comply with FATCA. This withholding will take effect on a ‘phased’ schedule, starting in January 2014 with withholding on non-U.S. source payments by non-U.S. financial institutions to start no earlier than January 2017. In general, non-publicly traded debt and equity interests in investment vehicles will be treated as ‘accounts’ and subject to these reporting requirements. In addition, certain insurance policies and annuities are considered accounts for these purposes.
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. For restrictions related to the Core Tier 1 Securities and the IABF, see ‘Risks related to the Restructuring Plan — Our agreements with the Dutch State impose certain restrictions regarding the issuance or repurchase of our shares and the compensation of certain senior management positions’. As a result of having received state aid through the Dutch State Transactions, we were required to submit our Restructuring Plan to the EC in connection with obtaining final approval for the Dutch State
In May 2012, the International Association of Insurance Supervisors (‘IAIS’), of which the DNB is a member, published a proposed assessment methodology for designating global systemically important insurers (‘G-SIIs’), as part of the global initiative to identify G-SIFIs. Insurers identified as G-SIIs would be subject to additional policy measures. IAIS stated that the proposed policy measures released in October 2012, as endorsed for consultation by the FSB will be finalised at the same time as the first group of G-SIIs is identified. The initial list of G-SIIs is expected to be published by the FSB in April 2013, with annual updates thereafter. The proposed policy measures, which would need to be implemented by legislation or regulation in relevant jurisdictions, include higher capital requirements (both for nontraditional and non-insurance activities and for G-SIIs overall), enhanced supervision (including more detailed and frequent reporting, removal of barriers to orderly resolution of the G-SII and reduction of the G-SII’s systemic risk over time), as well as additional measures to improve the degree of self-sufficiency of a G-SII’s different business segments (including separate legal structures for traditional insurance and non-traditional or non-insurance activities, and restrictions on intercompany subsidies). If ING were identified as a G-SII, compliance costs will increase and its competitive position relative to other life insurers that were not designated as G-SIIs may be adversely affected.
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’ 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’ European Union member rates 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 and Portugal, the creation of a joint EU-IMF European Financial Stability Facility in May 2010, the approval of further bailout 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 on 27 September 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 worries about sovereign finances persisted during the course of 2012. 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
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and bolster market confidence in the Euro and European sovereign debt, and the Treaty of Stability, Coordination and Governance (‘Fiscal Treaty’) was signed by 25 EU member states on 2 March 2012; however, such proposed steps are subject to final agreement (and in some cases, ratification and/or other approvals) by the European Union member states that are party to such arrangements and thus the implementation of such steps in their currently-contemplated form remains uncertain, 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, even if such long-term structural adjustments are ultimately 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.
Because we do business with many counterparties, the inability of these counterparties to meet their financial obligations could have a material adverse effect on our results of operations. General Third parties that owe us money, securities or other assets may not pay or perform under their obligations. These parties include the issuers and guarantors (including sovereigns) of securities we hold, borrowers under loans originated, customers, trading counterparties, counterparties under swaps, credit default and other derivative contracts, clearing agents, exchanges, clearing houses and other financial intermediaries. Severe distress or defaults by one or more of these parties on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other factors, or even rumours about potential severe distress or defaults by one or more of these parties or regarding the financial services industry generally, could lead to losses for us, and defaults by other institutions. In light of experiences with significant constraints on liquidity and high cost of funds in the interbank lending market, and given the high level of interdependence between financial institutions, we are and will continue to be subject to the risk of deterioration of the commercial and financial soundness, or perceived soundness, of sovereigns and other financial services institutions. This is particularly relevant to our franchise as an important and large counterparty in equity, fixed-income and foreign exchange markets, including related derivatives, which exposes it to concentration risk.
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 credit worthiness 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, perhaps 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 (‘CVA’) 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 and may use may not adequately mitigate or offset the risk of interest rate volatility, and our hedging transactions may result in losses.
Furthermore, ING Bank’s assets are risk-weighted. Downgrades of these assets could result in a higher risk-weighting, which may result in higher capital requirements. This may impact net earnings and the return on capital, and may have an adverse impact on our competitive position. For ING’s insurance businesses in a number of jurisdictions, such as the U.S. and the EU, downgrades of assets will similarly affect the capital requirements for ING Insurance in those jurisdictions.
(3) negatively impact the ability of our asset management subsidiaries to retain and attract assets under management, as well as the value of assets they do manage, which may negatively impact their results of operations, and/or
Operational risks are inherent in our business. Our businesses depend on the ability to process a large number of transactions efficiently and accurately. Although we endeavour to safeguard our systems, losses can result from inadequately trained or skilled personnel, IT failures, inadequate or failed internal control processes and systems, regulatory breaches, human errors, employee misconduct including fraud, or from external events that interrupt normal business operations. We depend on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The equipment and software used in our computer systems and networks may not always be capable of processing, storing or transmitting information as expected. Despite our business continuity plans and procedures, certain of our computer systems and networks, may have insufficient recovery capabilities in the event of a malfunction or loss of data. In addition, whilst we have polices and processes to protect our systems and networks they may be vulnerable to unauthorised access, computer viruses or other malicious code and other external attacks or internal breaches that could have a security impact and jeopardise our confidential information or that of our clients or our counterparts. These events can potentially result in financial loss, harm to our reputation and hinder our operational effectiveness.
The restrictions imposed by the Restructuring Plan could adversely affect our ability to maintain or grow market share in key markets as well as our results of operations. See ‘Risks Related to the Restructuring Plan. See ‘— The limitations required by the EC on our ability to compete and to make acquisitions or call certain debt instruments could materially impact the Group’.
The implementation of the divestments announced in connection with the Restructuring Plan, including the separation of the insurance and most of the investment management operations from the banking operations, will also give rise to additional costs related to the legal and financial assessment of potential transactions. The implementation may also result in increased operating and administrative costs. The process of completing the steps contemplated by the Restructuring Plan may be disruptive to our business and the businesses we are trying to sell and may cause an interruption or reduction of our business and the businesses to be sold as a result of, among other factors, the loss of key employees or customers and the diversion of management’s attention from our day-to-day business as a result of the need to manage the divestment process as well as any disruptions or difficulties that arise during the course of the divestment process. We may face other difficulties in implementing the Restructuring Plan and completing the planned divestments. For instance, the divestments, individually or in the aggregate, may trigger provisions in various contractual obligations, including debt and capital instruments, which could require us to modify, restructure or refinance those or other related obligations. We may not be able to effect any such restructuring or refinancing on similar terms as the current contractual obligations or at all. In addition, the announced divestments could be the subject of challenges or litigation, and a court could delay any of the divestment transactions or prohibit them from occurring on their proposed terms, or from occurring at all, which could adversely affect our ability to use the funds of the divestments to repay the remaining amount of the Core Tier 1 Securities, reduce or eliminate our double leverage and strengthen our capital ratios as anticipated and eliminate the constraints on competition imposed by the EC.
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: • contemplated 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
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Our agreements with the Dutch State impose certain restrictions regarding the issuance or repurchase of our shares and the compensation of certain senior management positions. In connection with the transactions with the Dutch State, the Dutch State was granted the right to nominate two candidates for appointment to the Supervisory Board (‘State Nominees’). The Dutch State’s nominees have veto rights over certain material transactions. For so long as the Dutch State holds at least 25% of the Core Tier 1 Securities, for so long as the IABF is in place or for so long as any of the government-guaranteed senior unsecured bonds issued by ING Bank N.V. under the Credit Guarantee Scheme of the Netherlands (‘Government Guaranteed Bonds’) are outstanding, we are prohibited from issuing or repurchasing any of our own shares (other than as part of regular hedging operations and the issuance of shares according to employment schemes) without the consent of the State Nominees. In addition, under the terms of the Core Tier 1 Securities and IABF, we have agreed to institute certain restrictions on the compensation of the members of the Executive Board and senior management, including incentives or performance-based compensation. These restrictions could hinder or prevent us from attracting or retaining the most qualified management with the talent and experience to manage our business effectively. See ‘Risks Related to the Group’s Business, Operations, and Regulatory Environment — ING Group may be unable to retain key personnel’ above. Our agreements with the Dutch State have also led to certain restrictions imposed by the EC as part of the Restructuring Plan, including with respect to our price leadership in EU banking markets and our ability to make acquisitions of financial institutions and other businesses. See ’— The limitations required by the EC on our ability to compete and to make acquisitions or call certain debt instruments could materially impact the Group’ above.
In 2011, ING reported to the Dutch authorities that ING has abstained from paying dividends on its shares for a period of two consecutive years (i.e. 2009 and 2010) as a result of which the EC opened an investigation into ING’s restructuring process. Following the approval of the Amended Restructuring Plan, the EC closed its formal investigations, and on 26 November 2012 ING repaid its first tranche of EUR 1,125 million to the Dutch State. This tranche consisted of EUR 750 million in repayment of Core Tier 1 Securities and EUR 375 million in premiums and interest. The remaining three tranches of EUR 1,125 million each will have a similar composition and are expected to be paid in November 2013, March 2014 and May 2015, respectively, translating into an overall internal rate of return of 12.5%. Any repayment of the remaining Core Tier Securities is conditional on approval from the DNB. Upon reaching the agreement on the Amended Restructuring Plan, ING indicated that it aims to repay the remaining Core Tier 1 Securities as soon as possible and accelerate repayments to the extent it is deemed prudent under prevailing financial circumstances. If the repayment of a tranche cannot be made in full or in part, ING will be required to make it up by a corresponding increase of the subsequent tranche to be repaid.
ADDITIONAL RISKS RELATING TO OWNERSHIP OF ING SHARES Because we are a Dutch company and because the Stichting ING Aandelen holds more than 99.9% of our Ordinary Shares, the rights of our depositary receiptholders may differ from the rights of shareholders in other jurisdictions or companies that do not use a similar trust structure, which could affect your rights as an equity investor. While holders of our bearer depositary receipts are entitled to attend and speak at our General Meeting of Shareholders (‘General Meeting’), voting rights are not attached to the bearer depositary receipts. Stichting ING Aandelen (‘Trust’) holds more than 99.9% of our Ordinary Shares, and exercises the voting rights attached to the Ordinary Shares (for which bearer depositary receipts have been issued). Holders of bearer depositary receipts who attend — in person or by proxy — the General Meeting must obtain and are entitled to voting rights by proxy from the Trust. Holders of bearer depositary receipts and holders of the American Depositary Shares (‘ADSs’) representing the bearer depositary receipts who do not attend the General Meeting may give binding voting instructions to the Trust. The Trust is entitled to vote on any Ordinary Shares underlying the bearer depositary receipts for which the Trust has not granted voting proxies, or voting instructions have not been given to the Trust. In exercising its voting discretion, the Trust is required to be guided primarily by the interests of the holders of bearer depositary receipts, while also taking into account: • our interests, and • the interests of our affiliates.
European Disclosure Task Force recommendations on financial disclosure In the course of 2012, the European Disclosure Task Force (EDTF) was formed to provide more comprehensive and consistent disclosure for Financial Institutions. The EDTF is an industry work group that together with the Financial Stability Board made several recommendations on financial disclosure. ING Bank is a member of the EDTF and supporter of both the principles and final paper. Since the final paper was only delivered in November 2012, ING Bank is unable to immediately implement all of the recommendations. Nonetheless, the key elements of the EDTF have been included in this Pillar 3 document using the same templates as outlined in the final recommendations. The glossary can be used as guidance to find the new tables implemented as part of the EDTF recommendations. Below an overview is given on how ING Bank has dealt with all EDTF recommendations.
Table of contents implemented in both Risk Management section and Pillar 3 2 Define the bank’s risk terminology and risk measures and present key parameter values used
To be addressed in future disclosures 11 Present a flow statement of movements since the prior reporting date in regulatory capital, including changes in common equity tier 1, tier 1 and tier 2 capital
Qualitative description included in the Liquidity Risk section of the Risk Management section. Quantitative component to be addressed in future disclosures.
Implemented in the Risk Management paragraph in the Credit Risk Mitigation section 28 Provide a reconciliation of the opening and closing balances of non-performing or impaired loans in the period and the allowance for loan losses
Implemented in Pillar 3 by adding the recommended EDTF template to the Derivatives section 30 Provide qualitative information on credit risk mitigation, including collateral held for all sources of credit risk and quantitative information where meaningful.
Implemented in Pillar 3 by adding the recommended EDTF template to the Credit Risk Mitigation section 31 Describe ‘other risk’ types based on management’s classifications and discuss how each one is identified, governed, measured and managed
During 2012 ING Bank decreased its SA portfolio in terms of Regulatory Exposure at Default (READ) by 1% as a result of the sale of ING Direct US and ING Direct Canada which both had a relatively small SA portfolio and the migration of the Commercial Finance Netherlands portfolio and a part of the Poland portfolio from SA to AIRB. ING Bank continues to work towards reducing the portion of its portfolio which falls under the Standardised Approach. At the moment the largest portfolio’s under SA are the Turkey, India (Vysya) and Poland (Slaski) portfolios. ING continues to work with local regulators especially in Poland and India to bring more portfolios to AIRB.
Additional Tier 1 capital Opening amount 6,850 8,438 Issued capital 571 Redeemed capital –2,349 Exchange rate differences –75 190 Closing amount 6,774 6,850
BASIS AND SCOPE OF CREDIT RISK PRESENTATION For credit risk, data included in these 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. The amounts presented in this section relate to amounts used for Credit Risk Management purposes, which follow ING Bank’s interpretation of the definitions as prescribed under the Basel II accords. Therefore, the numbers can be different from the accounting numbers as reported in the annual accounts under IFRS-EU.
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) is 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).
Key changes Over the year, RWA decreased by EUR 43.0 billion to EUR 209.7 billion: • The decreasing book size, excluding disinvestments and de-risking of the portfolio, reduced RWA by EUR 5.1 billion. The book size decrease is mainly seen in the Real Estate and in the Corporate Lending portfolio. • The deterioration of the book quality increased RWA by EUR 3.3 billion and was mainly seen in the Spanish Corporates and Financial
• The divestments in 2012 were related to the sale of ING Direct US to Capital One N.A. , which decreased RWA by EUR 29.7 billion and the sale of ING Direct Canada to Scotiabank which reduced RWA by EUR 2.7 billion.
Under these exposure class definitions, it is possible for a private individual to be included under both Residential Mortgages and Retail Other. For other types of counterparties or issuers, there is no potential overlap. In the tables below an overall picture is given of the ING Bank portfolio per exposure class, after which a breakdown per exposure class is given segmented by relevant factors. Securitisations segmentation is given in the Securitisation chapter.
READ RWA READ RWA READ RWA READ RWA READ RWA READ RWA
The ING bank portfolio falls for 85.6% under the AIRB approach and for 14.4% under SA in terms of RWA. The total portfolio decreased in 2012 by EUR 129.2 billion in READ to EUR 807.0 billion RWA declined by EUR 43.0 billion to EUR 209.7 billion.
Financial institutions credit risk disclosure In line with the EDTF recommendations, this table presents the READ, segmented by relevant factors, and the analysis for exposure class ‘Institutions’.
Non-Bank Financial Institutions (NBFI) 33,292 44,985 –26.0% Transportation & Logistics 22,060 23,763 –7.1% Food, Beverages & Personal Care 18,084 17,351 4.3%
LTV Residential Mortgages per country The table below shows the weighted average Loan to Value (LTV) ratio of the ING Bank Residential Mortgage portfolio per country. All LTV figures are based on market values. In most portfolio’s, ING uses house price development to index these market values. In several markets, customers provide additional collaterals or (government sponsored) mortgage insurance programs are used. None of these additional covers are included in the LTV figures.
The SA to AIRB migration of the Commercial Finance Netherlands portfolio and a part of the Polish portfolio, together with the sale of ING Direct US and ING Direct Canada decreased the READ and RWA in the SA portfolio. The RWA density or risk weights remained relatively stable as the sale of higher risk portfolios especially ING Direct US was partially compensated by risk migration.
Exposures before and after risk mitigation for the SA portfolio The table below shows how credit risk mitigation in the SA portfolio is distributed over the risk weight buckets. There are two principal methods for reducing or mitigating Credit Risk: by reduction of Credit Risk through the acceptance of pledged financial assets as collateral (such as marketable securities or cash) or mitigation or shifting of credit risks to a lower risk weighting group by accepting guarantees from unrelated third parties.
Includes the SA portfolio only; excludes securitisations, equities and ONCOA. * Exposure after conversion factors is the net exposure or READ as commonly referenced. It is lower than the other exposures in the table mainly because it does not take into account uncommitted limits. This column is provided for reference purposes only.
AIRB credit exposures by internal rating grade In line with the EDTF recommendations, the table below shows the AIRB portfolio per internal rating grade. Under Basel II rules, the nominal exposures are weighted to determine the RWA (and regulatory capital) of a portfolio, under a ‘risk-based approach’. This approach dictates that less capital is required for credit risks which are well-rated, while progressively more capital is required as an obligor’s risk (rating) deteriorates. This effect can cause RWA to increase or decrease together with risk rating migration without a significant change in the size of the underlying financial assets, in terms of financial accounting. As such, rating migrations are closely monitored within ING Bank
Disclosures of model outcomes In line with the EDTF recommendations the table below shows the PD, LGD READ, RWA and RWA density per exposure class. This should be read in conjunction with the table ‘changes in risk parameters since last reporting date’.
Disclosure of estimated and actual loss parameters In line with the EDTF recommendations the table below provides a back-testing of the PD models per exposure class. ING has dedicated AIRB credit risk models per business unit, segment and country. An independent Model Validation department periodically reviews all AIRB models for compliance including back testing when possible. If a model is considered not to be robust or the back testing indicates insufficient conservatism, than the model is either re-calibrated or re-developed. All model recommendations from Model Validation department are tracked in the same internal database as the Internal Audit Department. All significant model changes are submitted to the Home Regulator and implemented after regulatory approval. On average, 91% of the AIRB credit risk models in the validation cycle have a ‘No’ to ‘Remote’ (58%) and ‘Minor’ (33%) model deficiencies.
CREDIT QUALITY This section focusses on non-performing loans, which are loans where there is a reasonable probability that ING Bank may end up with a loss, unless ING Bank intervenes with specific and significant actions. In other words, in this category, an account or portfolio requires a more intensified approach, which may include renegotiations of terms and conditions and/or business/financial restructuring. This section should be read in conjunction with the Risk Management paragraph sections on: Risk Appetite Framework, and Credit Quality.
Classified as impaired during the year (1) 2,896 3,154 1,085 7,135 Transferred to not impaired during the period –947 –1,571 –424 –2,942 Amounts written off –717 –772 –185 –1,675 Changes in the composition of the Bank (2) –1,007 –1,007 Exchange and other movements (3) –2 13 10 Other –21 –68 21 –68
Following the economic distress, the risk costs (additions to LLP) increased from EUR 1.7 billion in 2011 to EUR 2.1 billion in 2012. The increase was mainly visible in the Corporate (mainly real estate) and in the Retail portfolio. The risk costs in Retail International decreased materially after the sale of ING Direct US in Q1 2012. Despite the sale of ING Direct US, the total non-performing loans increased by 11% from EUR 13.4 billion to EUR 14.9 billion. While additions to risk costs rose in 2012, continued write offs diminished the provisioning stock. The provisions were still more than 2 times the risk costs and more than 3 times the amounts written off.
Past due loans by economic sector ING Bank considers past due loans to be those loans where any payment of interest of principal is more than one day past due. The methodology is principally extended to loans to private individuals, such as Residential Mortgage loans, Car loans and other consumer loans. For business loans (Sovereigns, 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. Therefore, the concept of past due loans does not exist for these types of obligors and hence the reason why the business exposure classes are not included.
Cumulative provisions by geographic area The table below is based on the country of residence of the obligor. The Cumulative Provision table should be read in conjunction with the corresponding tables below related to ‘past due loans by geographic area’ as well as information and statements made in the Risk Management paragraph.
Over the year, Regulatory Expected Loss (REL) for the AIRB portfolio declined from EUR 6.3 billion to EUR 6.0 billion in line with the reduced portfolio size. Provisions reported in the SA portfolio increased by EUR 0.1 billion while overall provisions remained stable at EUR 5.5 billion.
ING Bank has seen many of its Large Corporate customers obtain funding from capital markets in the course of 2012. 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. Much of the undrawn commitments in the mortgage area relate to forward commitments of clients to lock in interest rates.
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 11%. 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.
The Derivatives portfolio is largely represented by Interest Rate Derivatives provided to Institutions and is mainly seen in the UK, Germany, France and in the Netherlands portfolio. Derivatives which are exchange traded have seen a significant decline in the derivatives traded in the Eurozone exchange market. However, this figure can be volatile as it is based on a single balance sheet date.
Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. * ETD Derivatives settle price movements daily. Therefore there is no MTM build-up that generates exposure.
Maximum Exposure to Credit Risk per 31 December 2012 Cover Values* Cover Values Cover Values Cover Values
In 2012, ING Bank changed the way it allocated guarantees by implementing a calculation method that ensures that no guaranteed facility has less RWA allocated than if this facility would be granted to the guarantor directly, on an unsecured base. Previously this calculation was done centrally and allocated by borrower group instead of facility and a maximum of 100% of the facility was used for guarantees. These factors led to a significant increase in guarantees recorded especially for exposure class Corporates. In addition, ING Lease has begun classifying certain purchase obligations as guarantees. For the Residential Mortgages portfolio the guarantees relate to mortgages covered by governmental insurers under the Nationale Hypotheek Garantie (NHG) in the Netherlands.
Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. Non-performing Loans (rating 20-22) are excluded in the figures above.
The large decrease in current outstandings compared to last year is mainly related to the sale of ING Direct US and ING Direct Canada. As these were mainly mortgages portfolios, the long term tenor buckets were impacted the most. As an outcome of a methodology change, certain Pre-Settlement and trade related products are now based on the outstandings maturity instead of the limit maturity. This resulted in shorter maturities for these products.
Securitisations Product Type Residential Mortgage Backed Securities 5,874 12,416 –52.7% Asset Backed Securities 2,399 3,242 –26.0% Synthetic Investment Bonds (1) 1,439 0 –
The total liquidity facilities, including programme wide enhancements, provided to the Mont Blanc conduit are EUR 2,528 million which represents the limit. The total drawn liquidity amount as of 31 December 2012 is EUR 229 million.
Originator securitisations ING Bank originates own securitisation transactions for economic and regulatory capital purposes, as well as liquidity and funding purposes.
Securitisations originated by a company may only be considered for balance sheet derecognition when the requirements for significant credit risk transfer have been fulfilled. However, for a securitisation transaction to be recognised for RWA reduction, risk transfer alone may be insufficient due to the increasing impact of the maturity mismatch formula. As a consequence, the RWA of the retained tranches for one of the transactions in the table below would be higher than the total RWA of the underlying pool before securitisation, and therefore that transaction is treated for RWA purposes as if it was not securitised.
Exposures securitised (amounts in EUR million) Cut-off Date Initial Pool Outstandings Credit Events Past due Assets Losses
Past Due Assets Outstandings on the Cut-off date of assets that are past due, but not in credit event on that date, as more fully detailed in the quarterly reports. Past due for Residential Mortgage transactions means ‘more than 1 monthly payment in arrears’. Past due for SME deals means ‘reference entities that are rated 20-22’.
ING Bank has created a number of these securitisations with a 31 December 2012 position of approximately EUR 90.3 billion of AAA rated notes and unrated subordinated notes. The underlying exposures are residential mortgages in the Netherlands, Germany, Belgium, Spain, Italy and Australia and SME Loans in the Netherlands and Belgium. As long as the securitisation exposures created are not transferred to third parties, the regulatory capital remains unchanged. These are not detailed hereunder. Apart from the structuring and administration costs of these securitisations, these securitisations are profit / loss neutral.
ADVANCED MEASUREMENT APPROACH (AMA) The risk methodology to calculate the regulatory Operational Risk capital.
COMMERCIAL PAPER Promissory note (issued by financial institutions or large firms) with very-short to short maturity period (usually 2 to 30 days, and not more than 270 days), and unsecured.
FUTURE CONTRACTS Commitments to exchange currencies or to buy or sell other financial instruments at specified future dates. Exchanges act as intermediaries and require daily cash settlement and collateral deposits.
IMPAIRMENT LOSS The amount by which the carrying amount of an asset exceeds its recoverable amount.
INVESTMENT RISK Investment risk is the credit default and risk rating migration risk that is associated with ING Group’s investments in bonds, commercial paper, securitisations, and other similar publicly traded securities. Investment risk arises when ING purchases a (synthetic) bond with the intent to hold the bond for a longer period of time (generally through maturity).
MINORITY INTERESTS The part of the profit and loss and net assets of a subsidiary attributable to an interest which is not owned, directly or indirectly, by the parent company.
MONEY MARKET RISK Money market risk arises when ING Group places short term deposits with a counterparty in order to manage excess liquidity, as such, money market deposits tend to be short term in nature (1-7 days is common). In the event of a counterparty default, ING Group may lose the deposit placed. Money market risk is therefore measured simply as the notional value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment.
REDEMPTION VALUE With respect to investments in fixed-interest securities, the amount payable on the maturity date.
REINSURANCE The practice whereby one party, called the reinsurer, in consideration for a premium paid to him, agrees to indemnify another party, called the reinsured or ceding company, for part or all of the liability assumed by the reinsured under a contract or contracts of insurance which the reinsured has issued. The reinsured may also be referred to as the original or primary insurer, the direct writing company, or the ceding company.
TIER-1 CAPITAL Tier-1 capital comprises paid up share capital, reserves excluding revaluation reserves, retained earnings, minority interests and hybrid capital. Where a reference is made to Basel III, we follow the definition of the Basel Committee on Banking Supervision, which means that revaluation reserves are included, but goodwill, intangibles, defined benefit pension fund assets and part of the deferred tax assets and minority interests are excluded.
TRADING PORTFOLIO Comprises those financial instruments which are held to obtain short-term transaction results, to facilitate transactions on behalf of clients or to hedge other positions in the trading portfolio.
Commercial Register of Amsterdam, no. 33231073 378 ING Group Annual Report 2012