Estimate of cumulative claims: At the end of underwriting year 2,023 1,891 1,889 1,898 2,851 1 year later 1,785 1,754 1,821 1,798 2 years later 1,594 1,620 1,708 3 years later 1,537 1,568 4 years later 1,520 Estimate of cumulative claims 1,520 1,568 1,708 1,798 2,851 9,445
Liability relating to prior underwriting years 1,931 Total amount recognised in the balance sheet 5,542
Savings accounts relate to the balances on savings accounts, savings books, savings deposits and time deposits of personal customers. The interest payable on savings accounts, which is contractually added to the accounts, is also included.
As at 31 December 2008, the Funds on deposit include amounts payable of EUR 63,107 million (2007: EUR 93,781 million) with regard to repurchase transactions.
Deferred taxes are calculated on all temporary differences under the liability method using tax rates applicable to the jurisdictions in which the Group is liable to taxation.
Deferred acquisition costs and VOBA 3,047 778 36 –632 266 –14 3,481
Other provisions –1,146 19 –255 41 –70 –11 –1,422 Receivables 100 –41 –12 –1 –107 –61 Loans and advances to customers 96 494 –1 –4 –25 560 Unused tax losses carried forward –932 –633 97 –20 –165 –1,653
Financial assets and liabilities at fair value through profit and loss 119 –40 82 –11 –2 8 156 Deferred acquisition costs and VOBA 3,201 3 151 –312 4 3,047
Comprising: – deferred tax liabilities 4,042 3,432 – deferred tax assets –1,872 –2,723
Total unused tax losses carried forward 6,392 3,814 Unused tax losses carried forward not recognised as a deferred tax asset –638 –688 Unused tax losses carried forward recognised as a deferred tax asset 5,754 3,126
The following tax loss carry forwards and tax credits will expire as follows as at 31 December: Total unused tax losses carried forward analysed by expiry terms
More than 1 year but less than 5 years 68 176 425 249 More than 5 years but less than 10 years 219 230 2,802 610 More than 10 years but less than 20 years 298 71 1,540 1,010
Releases –18 –62 Charges –169 –175 Exchange rate differences –6 –3 Other changes 2 8 Closing balance 583 619
Releases –6 –149 –6 –149 Charges –28 –24 –279 –195 –307 –219 Exchange rate differences –6 1 –15 –8 –21 –7
Actuarial gains and losses related to pensions and post-employment benefits for the year ended 31 December 2008 include EUR –2,647 million (2007: EUR –789 million; 2006: EUR –180 million) experience gain adjustments for assets and EUR –70 million (2007: EUR 83 million; 2006: EUR –163 million) experience gain adjustments for liabilities.
Employer’s contribution 2 Participants contributions 7 2 Benefits paid –601 –556 –8 –13 Actuarial gains and losses –369 –1,727 1 –8 Past service cost 79 –83 1 Changes in the composition of the group and other changes –169 207 –18 –11 Effect of curtailment or settlement –135 –32 Exchange rate differences –183 –217 1 –11
Relating to: The estimated unrecognised past services cost and unrecognised actuarial gains and losses for the defined benefit plans to be amortised to pension and other staff related liability costs during 2009 are nil and EUR 46 million, respectively.
Opening balance 14,708 14,361 Expected return on plan assets 886 869 Employer’s contribution 1,366 816 Participants contributions 7 6 Benefits paid –584 –540 Actuarial gains and losses –2,647 –789 Changes in the composition of the group and other changes –127 176
Equity securities include ING Group ordinary shares of EUR 4 million (0.3% of total plan assets) as at 31 December 2008 (2007: EUR 5 million, 0.3% of total plan assets). Other includes mainly real estate. Real estate occupied by ING Group as at 31 December 2008 which is included in Other includes nil (0.0% of total plan assets) (2007: nil, 0.0% of total plan assets).
Determination of expected return on assets An important aspect of financial reporting is the assumption used for return on assets (ROA). The ROA is updated at least annually, taking into consideration the Plans’ asset allocations, historical returns on the types of assets held in the Funds, and the current economic environment. Based on these factors, it is expected that the Funds’ assets will earn an average annual percentage in the long term. This estimate takes into account a reduction for administrative expenses and non-ING investment manager fees paid from the Funds. For estimation purposes, it is assumed that the long term asset mixes will be consistent with the current mixes. Changes in the asset mixes could have an impact the amount of recognised pension income or expense, the funded status of the Plans, and the need for future cash contributions.
An increase of 1% in the assumed medical cost trend rate for each future year would have resulted in an additional accumulated defined benefit obligation of EUR 4 million as at 31 December 2008 (2007: EUR 4 million) and nil increase in the charge for the year (2007: nil). A decrease of 1% in the medical cost trend rate for each future year would have resulted in lower defined benefit obligation of EUR 4 million as at 31 December 2008 (2007: EUR 4 million) and nil decrease in the charge for the year (2007: nil).
Customer deposits and other funds on deposit 463,995 23,988 26,864 8,369 2,000 525,216 Financial liabilities at fair value through profit and loss
23 DERIVATIVES AND HEDGE ACCOUNTING Use of derivatives and hedge accounting As described in the ‘Risk management’ section, ING Group uses derivatives (principally interest rate swaps and cross currency interest rate swaps) for economic hedging purposes in the management of its asset and liability portfolios and structural positions. The objective of economic hedging is to enter into positions with an opposite risk profile to an identified exposure to reduce that exposure. The impact of ING Group’s hedging activities is to optimise the overall cost to the Group of accessing debt capital markets and to mitigate the market risk which would otherwise arise from structural imbalances in the duration and other profiles of its assets and liabilities. In addition, hedging activities are undertaken to hedge against the interest rate risk in the mortgage offer period in relation to retail mortgages and to lock-in the interest margin in relation to interest bearing assets and the related funding.
ING Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU. The EU ‘carve-out’ macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core deposits and under-hedging strategies. Under the IFRS-EU ‘carve-out’, hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. ING applies the IFRS-EU ‘carve-out’ to its retail operations in which the net exposure of retail funding (savings and current accounts) and retail lending (mortgages) is hedged. The hedging activities are designated under a portfolio fair value hedge on the mortgages, using the IFRS-EU provisions.
For the year ended 31 December 2008, ING Group recognised EUR 746 million (2007: EUR –925 million) after tax in equity as effective fair value changes on derivatives under cash flow hedge accounting. As a consequence, the balance of the cash flow hedge reserve in equity as at 31 December 2008 was EUR 1,457 million (2007: EUR 574 million) gross and EUR 1,177 million (2007: EUR 431 million) after deferred tax. This cash flow hedge reserve will fluctuate with the fair value changes of the underlying derivatives and will be reflected in the profit and loss account under Interest income/expense over the remaining term of the underlying hedged items. The cash flow hedge reserve relates to a large number of derivatives and hedged items with varying maturities, up to 40 years for insurance operations and 21 years for banking operations, with the largest concentrations in the range of 20 to 30 years and 35 to 40 years for insurance operations and 1 to 15 years for banking operations. Accounting ineffectiveness on derivatives designated under cash flow hedge accounting of EUR 22 million (2007: EUR –9 million) was recognised in the profit and loss account.
As at 31 December 2008, the fair values of outstanding derivatives designated under cash flow hedge accounting was EUR –318 million (2007: EUR 229 million), presented in the balance sheet as EUR 5,771 million (2007: EUR 3,417 million) positive fair values under assets and EUR 6,089 million (2007: EUR 3,188 million) negative fair values under liabilities.
As at 31 December 2008 and 31 December 2007, there were no non-derivatives designated as hedging instruments for cash flow hedge accounting purposes.
Included in Interest income and interest expense on non-trading derivatives is EUR 3,082 million (2007: EUR 1,533 million) and EUR 2,744 million (2007: EUR 1,242 million), respectively, relating to derivatives used in cash flow hedges.
As at 31 December 2008, the fair values of outstanding derivatives designated under net investment hedge accounting was EUR 300 million (2007: EUR –71 million), presented in the balance sheet as EUR 670 million (2007: EUR 281 million) positive fair values under assets and EUR 370 million (2007: EUR 352 million) negative fair values under liabilities.
Cash and balances with central banks 22,045 12,406 Amounts due from banks – loans and advances to banks 40,705 45,790 – cash advances, overdrafts and other balances 7,742 3,098 Trading assets – debt securities 26,652 37,345 – loans and receivables 59,449 116,164
Non-trading derivatives 16,484 7,637 Designated as at fair value through profit and loss 8,277 11,453 Available-for-sale debt securities 234,030 255,950 Held-to-maturity debt securities 15,440 16,753 Loans and advances to customers – policy loans 2,960 3,468 – public authorities 26,385 23,638 – secured by mortgages 318,917 290,933 – guaranteed by credit institutions 548 2,528 – personal loans 5,244 5,453 – other personal lending 26,894 24,204 – other corporate lending 244,452 204,528
Banks includes Amounts due from banks and balances with central banks. ING Bank N.V. has an obligation to maintain a reserve with an average monthly balance with the Dutch central bank. In December 2008 the required monthly average was EUR 5,810 million (2007: EUR 5,676 million). As at 31 December 2008 the balance on this reserve was EUR 3,529 million (2007: EUR 1,375 million).
26 CONTINGENT LIABILITIES AND COMMITMENTS In the normal course of business the Group is a party to activities whose risks are not reflected in whole or part in the consolidated financial statements. In response to the needs of its customers, the Group offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
Irrevocable facilities mainly constitute unused portions of irrevocable credit facilities granted to corporate clients. Many of these facilities are for a fixed duration and bear interest at a floating rate. ING Group’s credit risk and interest rate risk in these transactions is limited. Most of the unused portion of irrevocable credit facilities is secured by customers’ assets or counter-guarantees by the central governments and exempted bodies under the regulatory requirements. Irrevocable facilities also include commitments made to purchase securities to be issued by governments and private issuers.
Future rental commitments for operating lease contracts years after 2013 166 27 SPECIAL PURPOSE ENTITIES AND SECURITISATION Securitisation ING as originator ING Group enters into synthetic securitisation programmes in order to reduce credit risk on certain assets. In synthetic securitisations, ING enters into a credit default swap with securitisation Special Purpose Entities (SPEs), in relation to which ING purchases credit protection in respect of residential mortgage loans and loans to small and medium-sized enterprises. The SPEs have in turn hedged their exposure with investors through the issue of credit linked notes or credit linked commercial paper. As a result of these transactions, ING Group has transferred a substantial part of the credit risk related to these loan portfolios to third-party investors. In general, the third-party investors in securities issued by the SPE have recourse only to the assets of the SPE and not to ING Group.
Loans to small and medium-sized enterprises 8,603 8,946 Corporate loans 430
ING as sponsor of multi-seller conduit In the normal course of business, ING Group structures financing transactions for its clients by assisting them in obtaining sources of liquidity by selling the clients’ receivables or other financial assets to an SPE. The SPE issues asset-backed commercial paper to the market to fund the purchases. ING Group, in its role as administrative agent, facilitates these transactions by providing structuring, accounting, funding and operations services.
ING Group supports the commercial paper programmes by providing the SPE with short-term standby liquidity facilities. These liquidity facilities are intended primarily to cover temporarily disruptions in the commercial paper market. Once drawn these facilities bear normal credit risk. A number of programmes are supported by granting structured liquidity facilities to the SPE, in which ING Group covers at least some of the credit risk incorporated in these programmes itself (in addition to normal liquidity facilities), and might suffer credit losses as a consequence. Furthermore, under a Programme Wide Credit Enhancement ING Group guarantees to a limited amount all remaining losses incorporated in the SPE to the commercial paper investors. All facilities, which vary in risk profile, are granted to the SPE subject to normal ING Group credit and liquidity risk analysis procedures. The fees received for services provided and for facilities are charged subject to market conditions. The SPE is included in the consolidation of ING Group. This transaction is therefore not an offbalance sheet arrangement.
Investment funds ING as fund manager and investor ING Group sets up investment funds for which it acts as a fund manager and sole investor at the inception of the fund. Subsequently, ING will seek third-party investors to invest in the fund, thereby reducing the interest of ING Group. In general, ING Group will maintain a small percentage of interest in these funds. These funds are included in the consolidated financial statements of the Group if and when control exists, taking into account both ING’s financial interests for own risk and its role as investment manager.
ING as fund manager ING acts as fund manager for several funds. Fees related to these management activities are charged on an at arm’s-length basis. In general, as a fund manager ING will hold these funds in a fiduciary capacity. These funds are therefore generally not included in the consolidated financial statements of the Group.
ING North America Insurance Corporation United States of America Lion Connecticut Holdings Inc. United States of America ReliaStar Life Insurance Company United States of America ReliaStar Life Insurance Company of New York United States of America Security Life of Denver Insurance Company United States of America ING USA Annuity and Life Insurance Company United States of America ING Seguros de Vida S.A. Chile AFP Capital S.A. Chile ING Afore S.A. de C.V. Mexico ING Life Insurance Company (Japan) Limited Japan ING Life Insurance Company (Korea) Limited South Korea ING Life Insurance Company of America United States of America ING Australia Holdings Limited Australia ING Australia Pty Limited Australia ING Re (Netherlands) N.V. The Netherlands
Profit since date of acquisition 3 –7 –7 –11 Income if acquisition effected at start of year 17 275 12 61 42 407 Profit if acquisition effected at start of year 1 8 –20 –1 –12 (1) Goodwill recognised in 2008 on immaterial acquisitions and real estate portfolios was EUR 133 million, resulting in total Goodwill recognised in 2008 of
Disposals effective in 2008 In December 2007, ING reached an agreement with Berkshire Hathaway Group to sell its reinsurance unit NRG N.V. for EUR 272 million. The sale resulted in a net loss of EUR 144 million. As disclosed in note 21 ‘Other liabilities’ a loss on disposal of EUR 129 million was reported in 2007 (see page 135). In 2008 EUR 15 million additional losses, predominantly relating to currency exchange rate changes were recognised.
Disposals announced and occurring or expected to occur in 2009 In October 2008 ING announced that it had reached agreement to sell its entire Taiwanese life insurance business, ING Life Taiwan, to Furbon Financial Holding Co. Ltd. for approximately EUR 447 million. As at 31 December 2008 ING Life Taiwan qualified as a disposal group held for sale. The sale was completed on 13 February 2009. Consequently ING Life Taiwan will be deconsolidated in the first quarter of 2009. ING will be paid in a fixed number of shares with the difference between the fair value of those shares at the closing date and the sale price being paid in subordinated debt securities of the acquirer. ING Life Taiwan is included in the segment Insurance Asia/Pacific. This transaction is expected to result in a loss of EUR 292 million. A provision has been recognised for this loss in Other liabilities. The loss has been recognised in 2008 in ‘Net gains/losses on disposal of group companies’ in the profit and loss account.
ING Life Taiwan will be deconsolidated in 2009 when ING loses control. It qualifies as a disposal group held for sale at 31 December 2008 as ING expects to recover the carrying amount principally through the sale transaction. ING Life Taiwan is available for sale in its immediate condition subject to terms that are usual and customary for sales of such assets and the sale is highly probably.
Loans and advances to customers 4,824 15 4,839 Amounts due from banks 508 508 Financial assets at fair value through profit and loss 520 41 2 563
Profit since date of acquisition 1 8 –1 8 Income if acquisition effected at start of year 15 209 38 262 Profit if acquisition effected at start of year (3) 4 46 80 –2 128 (1) Goodwill recognised in 2007 on immaterial acquisitions and real estate portfolios was EUR 222 million, resulting in total Goodwill recognised in 2007 of
In July 2007, ING announced that it had reached agreement to acquire full ownership of Landmark Investment Co Ltd, the twelfth largest asset manager in South Korea. The purchase price paid for Landmark was EUR 255 million. Goodwill of approximately EUR 208 million was recognised on acquisition and is mainly attributable to the operational synergies and to the future business potential resulting from the acquisition. There was no significant difference in the carrying values of the net assets acquired immediately before the acquisition and their fair values. All significant intangibles were recognised separately from goodwill and are included in Intangible assets. No significant adjustments were made in 2008 to amounts recognised provisionally in 2007.
Loans and advances to customers 301 4 1,156 1,461 Financial assets at fair value through profit and loss 350 350
Liabilities Insurance and investment contracts 5,075 5,075 Customer deposits and other funds on deposit 2,052 2,052 Miscellaneous other liabilities 178 –4 –811 –637
In September 2007, ING sold its Belgian broker and employee benefits insurance business to P&V Verzekeringen for EUR 777 million, resulting in a gain of EUR 418 million.
In July 2006, ING acquired 100% of Appleyard Vehicles Contracts, a UK based car leasing company. The purchase price paid for Appleyard was EUR 110 million.
In June 2006, ING sold its UK brokerage unit Williams de Broë Plc for EUR 22 million. The sale is part of ING Group’s strategy to focus on core businesses. The result on the sale is subject to closing adjustments.
In September 2006, ING sold its 87.5% stake in Deutsche Hypothekenbank AG, a publicly listed mortgage bank in Germany, as part of ING’s strategy to focus on its core business. The sale resulted in a loss of EUR 83 million.
In December 2006, ING sold its stake in Degussa Bank, a unit of ING-DiBa specialising in worksite banking for private customers. The sale resulted in a loss of EUR 23 million.
30 LEGAL PROCEEDINGS ING Group companies are involved in litigation and arbitration proceedings in the Netherlands and in a number of foreign jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of their businesses, including in connection with their activities as insurers, lenders, employers, investors and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal and regulatory proceedings, management does not believe that their outcome will have a material adverse effect on the Group’s financial position or results of operations.
Like many other companies in the mutual funds, brokerage, investment, and insurance industries, several of our companies have received informal and formal requests for information from various governmental and self-regulatory agencies or have otherwise identified issues arising in connection with fund trading, compensation, conflicts of interest, anti-competitive practices, insurance risk transfer and sales practices. ING is responding to the requests and working to resolve issues with regulators. We believe that any issues that have been identified thus far do not represent a systemic problem in the ING businesses involved and in addition that the outcome of the investigations will not have a material effect on ING Group.
31 JOINT VENTURES Joint ventures are included proportionally in the consolidated financial statements as follows: Most significant joint ventures
Base salary and short-term bonus 7,052 16,898 986 673 8,038 17,571
Retirement benefit 1,222 1,222 Fair market value of long-term incentives 9,072 9,072
33 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The following table presents the estimated fair values of ING Group’s financial assets and liabilities. Certain balance sheet items are not included in the table, as they do not meet the definition of a financial asset or liability. The aggregation of the fair values presented below does not represent, and should not be construed as representing, the underlying value of ING Group.
Investment contracts for risk of company 9,804 9,520 9,804 9,520 Investment contracts for risk of policyholders 11,281 14,132 11,281 14,132 Amounts due to banks 153,368 167,365 152,265 166,972 Customer deposits and other funds on deposit 522,693 522,859 522,783 525,216 Financial liabilities at fair value through profit and loss
– designated as at fair value through profit and loss 14,009 13,882 14,009 13,882
(1) Other assets do not include (deferred) tax assets, property held for sale, property under development for third parties, pension assets and deferred charges. (2) Other liabilities do not include (deferred) tax liabilities, pension liabilities, insurance provisions, property under development for third parties, share-based payment plans, other provisions and other taxation and social security contributions.
Amounts due from banks The fair values of receivables from banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting future cash flows using available market interest rates offered for receivables with similar characteristics.
Other liabilities The carrying amount of other liabilities are stated at their book value which is not materially different than fair value.
Financial liabilities designated at fair value through profit and loss 7,723 6,159 13,882 Investment contracts (for contracts carried at fair value) 12,074 2,058 14,132
Reference to published price quotations in active markets This category includes financial instruments whose fair value is determined directly by reference to published quotes in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
Valuation technique supported by market inputs This category includes financial instruments whose fair value is determined using a valuation technique (a model), where inputs in the model are taken from an active market or are market observable. If certain inputs in the model are not market observable, but all significant inputs are, the instrument is still classified in this category, provided that the impact of those elements on the overall valuation is insignificant. Included in this category are items whose value is derived from quoted prices of similar instruments, but for which the prices are (more than insignificantly) modified based on other market observable external data.
Valuation technique not supported by market inputs This category includes financial assets/liabilities whose fair value is determined using a valuation technique (model) for which more than an insignificant level of the input in terms of the overall valuation are not market observable. This category also includes financial assets and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive.
As a result of the low trading volumes in the market and the widened disparity between prices for the same security from different price sources, valuation for these securities is inherently complex and subjective. Although each security in the portfolio is priced based on an external price, without modification by the ING Group, and management is confident that it has selected the most appropriate price in the current market circumstances, the valuation of these portfolios would have been significantly different had different prices been selected. The sensitivity of the valuation in this respect is illustrated as follows: had the valuation been based on the highest available market price for each and every security in these portfolios, the overall valuation • would have been approximately 10% higher than the valuation applied by the ING Group; had the valuation been based on the lowest available market price for each and every security in these portfolios, the overall valuation • would have been approximately 15% lower than the valuation applied by the ING Group; had the valuation been based on the weighted average available market price for these portfolios, the overall valuation would have • been approximately 5% lower than the valuation applied by the ING Group.
Futhermore, the ‘Risk management’ section provides under Impact of financial crisis a breakdown of the methods applied in determining fair values of pressurised assets.
Interest income on available-for-sale securities 7,449 7,397 6,989 Interest income on held-to-maturity securities 669 736 755 Interest income on trading portfolio 45,510 32,443 21,414 Interest income on non-trading derivatives 7,076 6,190 5,231 Other interest income 5,157 3,619 2,798 Interest income banking operations 97,011 76,749 59,170
Gross premium income from life insurance policies 38,869 40,732 40,502 Gross premium income from non-life insurance policies 4,943 6,086 6,333
Reinsurance assumed gross premiums written 23 24 54 1,382 1,562 1,664 1,405 1,586 1,718
Notes to the consolidated profit and loss account of ING Group amounts in millions of euros, unless stated otherwise
Direct gross premiums earned 4,889 6,003 6,248 Reinsurance assumed gross premiums earned 20 24 58 Total gross premiums earned 4,909 6,027 6,306
Realised gains/losses on disposal of debt securities 48 –9 –56 40 138 93 88 129 37 Reversals/Impairments of available-for-sale debt securities –777 –76 36 –2,127 –57 –2,904 –133 36 Realised gains/losses and impairments of debt securities –729 –85 –20 –2,087 81 93 –2,816 –4 73
Realised gains/losses on disposal of equity securities 685 2,975 772 30 330 149 715 3,305 921 Impairments of available-for-sale equity securities –1,585 –36 –25 –331 –17 –17 –1,916 –53 –42 Realised gains/losses and impairments of equity securities –900 2,939 747 –301 313 132 –1,201 3,252 879
Change in fair value of real estate investments –50 75 108 –350 93 67 –400 168 175
Asset management fees related to the management of investments held for the risk of policyholders of EUR 1,174 million (2007: EUR 1,261 million; 2006: EUR 1,069 million) are included in Commission income.
Other include commission expenses of nil (2007: nil; 2006: nil) in respect of underwriting syndication loans.
Change in fair value of derivatives relating to: – cash-flow hedges (ineffective portion) 22 –5 –4 –7 22 –9 –7 – hedges of net investment in foreign entities
Net result on non-trading derivatives 2,235 –999 –259 –5,327 956 587 –3,092 –43 328
Securities trading results –239 246 159 130 –2,147 –804 –109 –1,901 –645
Gross underwriting expenditure: – before effect of investment result for risk
Expenditure from life underwriting Reinsurance and retrocession premiums 1,802 1,968 2,004
Reinsurance recoveries –1,662 –1,749 –1,705 Change in life insurance provisions for risk of company 17,407 11,979 13,420 Costs of acquiring insurance business 1,877 1,098 1,083 Other underwriting expenditure 462 457 439 Profit sharing and rebates –416 424 801
Reinsurance recoveries –92 –157 –470 Change in provision for unearned premiums 28 79 65 Change in claims provision 54 13 –209 Costs of acquiring insurance business 742 979 1,043 Other underwriting expenditure –22 –50 –71
Expenditure from Life underwriting includes an amount of EUR 136 million in 2008 (2007: EUR 110 million; 2006: EUR 181 million) in relation to reserve strengthening for Insurance Asia/Pacific as described in further detail under Segment reporting.
Property under development for third parties 93 41 19 –31 –43 62 –2 19
Amortisation of intangible assets relates to intangible assets recognised as part of companies acquired. Until 2007, these were classified in Other operating expenses. The comparatives for 2007 and 2006 have been amended to reflect the revised presentation. There is no impact on Total expenses.
Pension and other staff-related benefit costs 140 48 79 104 159 206 244 207 285
Expected return on assets –886 –869 –820 –886 –869 –820 Amortisation of unrecognised past service cost –1 –5 –5 –1 –5 –5 Amortisation of unrecognised actuarial (gains)/losses –23 29 22 4 –23 33 22 Effect of curtailment or settlement –140 –32 –6 –147 4 –140 –32 –149
Stock option and share plans ING Group has granted option rights on ING Group shares and conditional rights on depositary receipts (share awards) for ING shares to a number of senior executives (members of the Executive Board, general managers and other officers nominated by the Executive Board), to ING Group staff in the Netherlands and to a considerable number of employees outside the Netherlands. The purpose of the option and share schemes, apart from promoting a lasting growth of ING Group, is to attract, retain and motivate senior executives and staff.
The entitlement to the share awards is granted conditionally. If the participant remains in employment for an uninterrupted period of three years from the grant date, the entitlement becomes unconditional. In 2008, 211,049 shares (2007: 139,113; 2006: 52,100) have been granted to the members of the Executive Board and 3,380,706 shares (2007: 2,415,649; 2006: 2,432,686) have been granted to senior management and other employees remaining in the service of ING Group.
The aggregate intrinsic value of options outstanding and exercisable as at 31 December 2008 was nil and nil, respectively.
As at 31 December 2008 total unrecognised compensation costs related to stock options amounted to EUR 94 million (2007: EUR 69 million; 2006: EUR 90 million). These costs are expected to be recognised over a weighted average period of 1.8 years (2007: 1.7 years; 2006: 1.9 years). Cash received from stock option exercises for the year ended 31 December 2008 was EUR 22 million (2007: EUR 131 million; 2006: EUR 355 million).
The fair value of options granted is recognised as an expense under staff expenses and is allocated over the vesting period of the options. The fair values of the option awards have been determined by using a Monte Carlo simulation. This model takes the risk free interest rate into account (3.55% to 4.92%), as well as the expected life of the options granted (5 year to 8 years), the exercise price, the current share price (EUR 18.70 – EUR 33.92), the expected volatility of the certificates of ING Group shares (25% – 39%) and the expected dividends yield (3.57% to 8.99%). The source for implied volatilities used for the valuation of the stock options is ING’s trading system. The implied volatilities in this system are determined by ING’s traders and are based on market data implied volatilities not on historical volatilities.
As at 31 December 2008 total unrecognised compensation costs related to share awards amounted to EUR 56 million (2007: EUR 53 million; 2006: EUR 88 million). These costs are expected to be recognised over a weighted average period of 1.8 years (2007: 1.7 years; 2006: 1.8 years).
Total interest income and total interest expense for items not valued at fair value through profit and loss for 2008 were EUR 52,505 million (2007: EUR 46,900 million; 2006: EUR 41,281 million) and EUR 33,507 million (2007: EUR 31,173 million; 2006: EUR 27,014 million) respectively. Net interest income of EUR 18,144 million is presented in the following lines in the profit and loss account.
Depreciation of property and equipment 95 98 102 353 321 361 448 419 463
Addition/(releases) of provision for reorganisations and relocations 8 11 –16 136 434 63 144 445 47
The potential conversion of the non-voting equity securities has an antidilutive effect on the earnings per share calculation (the diluted earnings per share becoming less negative than the basic earnings per share). Therefore, the potential conversion is not taken into account in determining the weighted average number of shares for the calculation of diluted earnings per share.
49 PRIMARY REPORTING FORMAT – BUSINESS SEGMENTS ING Group’s business segments relate to the internal segmentation by business lines. These include the business lines: Insurance Europe, Insurance Americas, Insurance Asia/Pacific, Wholesale Banking, Retail Banking and ING Direct. Other mainly includes items not directly attributable to the business lines.
ING applies a system of capital charging that makes the results of the banking business units globally comparable, irrespective of the book equity they have and the currency they operate in. ING’s policy for the banking business units is that equity may only be invested locally at the local risk free rate. Banking business units are charged by the Corporate Line for the income that they make on the invested equity and are given a benefit based on the risk free euro rate on the economic capital they employ. Consequently, the results of the businesses as disclosed are the local results after Group overhead charges while the investment returns on equity are based on the risk free euro rate on economic capital.
Underlying result before taxation 651 –534 116 609 1,691 –1,125 –2,194 –786 –786
Share in profit or loss of associates –227 31 –1 –217 10 –404 –404
Cost incurred to acquire property, equipment and intangibles 272 1,161 58 256 767 516 –17 3,013 3,013
Cost incurred to acquire property, equipment and intangibles 219 766 122 180 1,324 296 345 3,252 3,252
– Addition to loan loss provision –142 199 68 125 125
Cost incurred to acquire property, equipment and intangibles 1,322 243 90 226 182 144 3 2,210 2,210
50 SECONDARY REPORTING FORMAT – GEOGRAPHICAL SEGMENTS ING Group’s six business lines operate in seven main geographical areas: the Netherlands, Belgium, Rest of Europe, North America, Latin America, Asia and Australia. Geographical distribution of income is based on the origin of revenue.
Cost incurred to acquire property, equipment and intangibles 833 102 662 756 448 56 41 115 3,013
Cost incurred to acquire property, equipment and intangibles 467 62 1,218 316 679 113 56 341 3,252
The claims ratio relates to claims, including claims handling expenses, expressed as a percentage of net earned premiums. The expense ratio relates to costs expressed as a percentage of net premiums written. The claims ratio and the expense ratio together form the combined ratio. A combined ratio of more than 100% does not necessarily mean that there is a loss on non-life insurance policies, because the result also includes the allocated investment income.
Notes to the consolidated statement of cash flows of ING Group amounts in millions of euros, unless stated otherwise 51 NET CASH FLOW FROM INVESTING ACTIVITIES Information on the impact of companies acquired or disposed of is presented in Note 29 ‘Companies acquired and companies disposed’.
Treasury bills and other eligible bills 7,009 4,130 4,333 Amounts due from/to banks 2,217 –33,347 –20,454 Cash and balances with central banks 22,045 12,406 14,326 Cash and cash equivalents at end of year 31,271 –16,811 –1,795
Treasury bills and other eligible bills included in trading assets 2,770 1,806 1,286 Treasury bills and other eligible bills included in available-for-sale investments 4,239 2,324 3,047
Not included in cash and cash equivalents – amounts due to banks –138,527 –124,818 –94,341 – amounts due from banks 32,492 40,068 33,824
Included in balance sheet – amounts due to banks –152,265 –166,972 –120,839 – amounts due from banks 48,447 48,875 39,868
ING’s risk management (including liquidity) is explained in the ‘Risk management’ section.
RISK MANAGEMENT IN 2008 Taking measured risks is part of ING Group’s business. As a financial services company active in banking, investments, life insurance and retirement services. ING Group is naturally exposed to a variety of risks. To ensure measured risk-taking ING Group has integrated risk management in its daily business activities and strategic planning. Risk Management assists with the formulation of risk appetite, strategies, policies and limits and provides a review, oversight and support function throughout the Group on risk-related issues. The main financial risks ING Group is exposed to are credit risk (including transfer risk), market risk (including interest rate, equity, real estate, and foreign exchange risks), insurance risk and liquidity risk. In addition, ING Group is exposed to non-financial risks, e.g. operational and compliance risks. The way ING Group manages these risks on a day-to-day basis is described in this risk management section.
MARKET DEVELOPMENTS 2008 Although the whole of 2008 was characterised by significant turmoil, it was in the second half of the year, after the default of Lehman Brothers, Washington Mutual and three Icelandic banks, that volatility in financial markets intensified. Throughout the world the prices of most major asset classes fell sharply. Equity markets came down significantly: year on year the S&P 500 declined 38% and the Dutch Amsterdam Exchange Index (AEX) declined 52%. Real estate prices were also under pressure. At 31 December 2008 the most prominent real estate index in the United States, the S&P Case-Shiller Index, was 18.6% lower than at the end of 2007. Moreover, credit spreads in the financial and corporate sector widened materially, both in the US and in Europe. The second half of 2008 showed a steep increase in corporate credit spreads which was for a major part driven by the auto and industrial sectors. Both short and long term interest rates dropped in Europe and more profoundly in the United States.
In response to these movements governments all over the world stepped in with rescue plans to buy pressurised assets, deposit guarantee programmes, capital injections or full nationalisations. In October 2008 ING Group and the Dutch state announced that an agreement had been reached on a EUR 10 billion capital injection from the Dutch State. See Note 12 Shareholders’ equity (parent)/ non-voting equity securities for details.
US Subprime RMBS, US Alt-A RMBS, CDOs/CLOs exposures, revaluations and losses
US Subprime RMBS 2,636 153 2,789 US Alt-A RMBS 23,312 4,170 27,482
An amount of EUR 25 billion of mortgage backed securities in the United States was reclassified from Reference to published price quotations in active markets to Valuation technique not supported by market inputs in the third quarter of 2008. Reference is made to Note 33 ‘Fair value of financial assets and liabilities’.
Impact on Real Estate By the end of 2008 ING Group’s total exposure to real estate was EUR 15.5 billion of which EUR 9.8 billion was subject to revaluation through the profit and loss account. In 2008, ING recorded EUR 1,184 million pre-tax negative revaluations and impairments. ING’s real estate portfolio has high occupancy rates and is diversified over sectors and regions, but is clearly affected by the negative real estate markets throughout the world.
Impact on Equity securities – available-for-sale Direct equity exposure at 31 December 2008 in this caption was EUR 5.8 billion (public) and EUR 0.4 billion (private). During 2008 ING booked EUR 1,707 million of pre-tax impairments on this direct public equity exposure. ING generally decides to impair a listed equity security based on two broad guidelines: when the fair value of the security is below 75% of the cost price or when the market price of the security is below the cost price for longer than six months.
Ongoing volatility in the financial markets The impacts have arisen primarily as a result of the deterioration of the US housing market which caused real estate prices to decline. This caused valuation issues in connection with ING’s exposure to US mortgage-related structured investment products, including sub-prime and Alt-A RMBS, CDOs and CLOs. In many cases, the markets for such instruments have become highly illiquid, and issues relating to counterparty credit ratings and other factors have exacerbated pricing and valuation uncertainties. Valuation of such instruments is a complex process involving the consideration of market transactions, pricing models, management judgement and other factors, and is also impacted by external factors such as underlying mortgage default rates, interest rates, rating agency actions and property valuations.
The financial crisis has demonstrated the importance of having a robust risk management organisation in place. Although ING’s risk management organisation and liquidity profile have helped it to limit the impact and manage the company through the turmoil, ING will continue to further strengthen its risk management organisation. The lessons learned in this crisis will contribute to this continuous process.
ING GROUP To ensure measured risk-taking throughout the organisation, ING Group operates through a comprehensive risk management framework. This ensures the identification, measurement and control of risks at all levels of the organisation so that ING Group’s financial strength is safeguarded.
The risk management function assists with the formulation of risk appetite, strategies, policies and limits. It also provides a review, oversight and support function throughout the Group on risk related issues.
Group Risk Committees The Group risk committees described below are also part of the second line of defence. They act within the overall risk policy and delegated authorities granted by the Executive Board and have an advisory role to the CRO. To ensure a close link between the business lines and the risk management function, the business line heads and the respective General Managers Corporate Risk are represented on each committee (except for the ORRC were the business is not represented).
In addition, the Finance and Risk Committee (F&RC) is a platform for the CRO and the CFO, along with their respective direct reports, to discuss and decide on issues that relate to both the finance and risk domains. F&RC meets every two weeks.
The Executive Board is responsible for managing risks associated with the activities of ING Group. Its responsibilities include ensuring • that internal risk management and control systems are effective and that ING Group complies with relevant legislation and regulations. On a regular basis, the Executive Board reports on these issues and discusses the internal risk management and control systems with the Supervisory Board. On a quarterly basis, the Executive Board reports on the Group’s risk profile versus its risk appetite to the Audit Committee, explaining changes in the risk profile. The Audit Committee is a sub-committee of the Supervisory Board. It assists the Supervisory Board in reviewing and assessing ING Group’s • major risk exposures and the operation of internal risk management and control systems. Audit Committee membership is such that specific business know-how and expertise relating to the activities of ING is available. The CRO attends the Audit Committee meetings.
ING Group’s risk appetite is defined by the Executive Board as part of the strategic planning process. Strict boundaries are established with regard to acceptable risk types and levels. ING’s ‘three lines of defence’ governance framework ensures that risk is managed in line with the risk appetite as defined by the EB. Risk appetite is cascaded throughout the Group, thereby safeguarding controlled risk taking. The role of the business lines is to maximise the value within established risk boundaries. Each quarter, the Executive Board monitors that the financial and non-financial risks are within the boundaries of the risk appetite as set in the strategic planning process.
The main differences and similarities between the risk metrics are illustrated below; Earnings at Risk Capital at Risk Economic Capital Confidence interval 90% 90% 99.95% (based on AA target rating) Stressed metric IFRS earnings Value Value Deviation from Expected IFRS earnings
(over next year) Current net asset value based on fair values (over next year)
Interpretation Potential IFRS earnings reduction against expectation during a ‘moderate’ stress scenario (i.e. 1 in 10)
When interpreting the Earnings and Capital at Risk metrics it is important to note that these are not loss estimates of a specific adverse scenario. Further, the metrics do not take into account discretionary management intervention in a specific crisis situation, and are based on instantaneous shock scenarios.
Risk types ING’s risk profile measures the following main types of risks that are associated with its business activities: Credit risk: the risk of potential loss due to default by ING’s debtors (including bond issuers) or trading counterparties;• Market risk: the risk of potential loss due to adverse movements in market variables, such as equity prices, real estate prices, interest • rates and foreign exchange rates. These four market risks cover all market risks identified in ING’s businesses; Insurance risk: risks such as mortality, morbidity and property and casualty 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.
The above risk metrics do not cover liquidity risk: the risk that ING or one of its subsidiaries cannot meet its financial liabilities when they fall due, at reasonable cost and in a timely manner. ING has a separate liquidity management framework in place to manage this risk. This framework is discussed in the respective Liquidity Risk section below.
Earnings at Risk The level of Earnings at Risk (EaR) provides insight into the level of risk ING can absorb relative to its earnings capacity. The risk appetite set by the Executive Board defines the maximum potential reduction in IFRS earnings over the next year during a moderate (i.e. ‘1 in 10’) stress scenario as a percentage of forecast (pre tax) earnings over the next 12 months. Since ING does not disclose forecast earnings, the table below provides the Earnings at Risk per risk type compared to actual full year underlying earnings.
Second, specific impairment rules on the available for sale debt securities, whereby securities are written down to market value, even if credit losses are much smaller, are not reflected in the dashboard. This concerns especially the impairments taken on the ALT-A portfolio where impairments amounts were significantly higher than estimated underlying credit losses.
Over 2008, ING’s Earnings at Risk profile increased. The increase is mainly driven by equity and credit risk. The increase in credit risk is driven by credit migration and expected addition of provisions for defaulted loans. The increase in equity risk is caused by higher impairment risk: due to sustained low stock prices more equities are approaching the impairment thresholds. This means that despite the substantial reduction in Capital-at-Risk (next paragraph), earnings at the end of 2008 were more exposed to further stock market declines. The January 2009 divestment of ING Canada was taken into account for the determination of EaR, since the dashboard is forward looking.
CaR/ Available financial resources 2008 Interest Rate Equity Real Estate FX
The Capital at Risk figure substantially decreased over 2008 as ING initiated several de-risking initiatives. Group CaR decreased because increased credit risk was more than offset by lower interest rate and equity risk.
In 2007 the Capital at Risk figure was dominated by ING Insurance, mainly due to interest rate risk related to long-term client guarantees and equity risk. Although these risks are still dominant for ING Insurance in the overall ING risk profile these risks have decreased significantly, while increased credit risk became the largest contributor to CaR during 2008.
Earnings at Risk increased considerably on group level with the rise of ING Bank and ING Insurance similar in magnitude. For ING Bank this was mainly caused by credit migration and clearly visible in ING Direct and Wholesale Banking. For ING Insurance the EaR impact is caused by higher impairment risk for listed equity and therefore most notable in the corporate line.
CaR Insurance Americas goes down slightly due to a significant decrease in equity risk (due to lower exposures and de-risking activities).
The sharp decrease in Insurance Asia/Pacific CaR was almost completely the result of the decrease in interest rate risk due to the sale of ING Life Taiwan. CaR Insurance Europe decreased due to a decrease in equity risk resulting from lower exposures and hedging activities.
* Other risks includes operational risk as well as business risk.
The table below shows the build up of ING Group Economic Capital. Please refer to the bank and insurance paragraphs below for further explanation on the respective EC numbers.
Credit risk limits for bank and insurance business;• Market Value at Risk limits for the insurance business;• ALM/Value at Risk limits for bank operations;• Mortality and concentration limits for insurance operations.•
ING BANK ING Bank is engaged in selling a broad range of products. The financial risks that arise from selling these products are managed by the Corporate Credit and Market Risk departments. Operational risks are managed by the Corporate Operational Risk department.
ING BANK RISK PROFILE Economic Capital ING Bank One of the main risk management tools for ING Bank is Economic Capital which is used to determine the amount of capital that a transaction or business unit requires to support the economic risks it faces. ING Bank implemented Economic Capital for internal use in 1998. Since 1999 ING Bank has been disclosing Economic Capital information externally. The tables below provide ING Bank’s Economic Capital by risk type and business line. Figures shown reflect all diversification effects within ING Bank, including risk reduction between the risk categories. Diversification effects that arise as a result of combining ING Bank and ING Insurance activities are not taken into account. Business risk is included in the other risks category to cover unexpected losses that may arise as a result of changes in volumes, margins and costs.
Total banking operations 22,407 17,927 (1) Other risks includes operational risk as well as business risk.
The following table provides the Economic Capital break down by business line including diversification benefits proportionally allocated to the risk types: Economic Capital (Bank diversified only) by Line of Business
Wholesale Banking 9,849 8,646 Retail Banking 6,169 5,360 ING Direct 4,050 2,831 Corporate Line Bank (1) 2,339 1,090 Total banking operations 22,407 17,927 (1) Corporate Line includes funding activities at ING Bank level, internal transactions between business units and the Corporate Line, and is managed by
The growth of the Economic Capital figure for the Wholesale Banking business line can be mainly explained by the credit migrations, market volatility and model enhancements. The Retail Banking Economic Capital figure increased predominantly due to the finalisation of the acquisition of Oyak Bank in the risk systems. The material increase in ING Direct is due to credit migration, model enhancements and increased market volatility.
The increase of the Economic Capital allocated to the Corporate Line can be explained by the inclusion of the core equity investments in Economic Capital Bank, previously taken as an add-on at Group level.
ING BANK – CREDIT RISKS Credit risk is the risk of loss from default by debtors (including bond issuers) or trading counterparties. Credit risks are split into five principal risk categories: a) lending (including guarantees and letters of credit); b) investments; c) pre-settlement (derivatives, securities financing and foreign exchange trades); d) money markets and e) settlement. Corporate Credit Risk Management (CCRM) is responsible for the measurement and management of credit risk incurred by all ING Group entities, including country-related risks. CCRM is organised along the three business lines of ING Bank (e.g. Retail Banking, Wholesale Banking and ING Direct) and ING Insurance. The CCRM General Manager is functionally responsible for the global network of credit risk staff, while the heads of the credit risk management functions for the business lines report directly to him. Credit risk management is supported by dedicated credit risk information systems and internal credit risk measurement methodologies for debtors, issuers and counterparties. CCRM creates consistency throughout the credit risk organisation by providing common credit risk policies, methodologies, manuals and tools across the Group.
ING Group’s credit policy is to maintain an internationally diversified loan and bond 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 countries, individual borrowers and borrower groups. The aim within the banking sector is to expand relationship-banking activities, while maintaining stringent internal risk/return guidelines and controls.
Pre-settlement risk Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk (potential or expected risk) is the cost of ING replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps, and securities financing transactions. Where there is a mutual exchange of value, the amount of credit risk outstanding is generally based on the replacement value (mark-to-market) plus a potential future volatility concept, using an historical 7 year time horizon and a 99% confidence level.
Settlement risk Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and receipt is not verified or expected until ING has paid or delivered its side of the trade. The risk is that ING delivers, but does not receive delivery from the counterparty. Settlement risk can most commonly be contained and reduced by entering into transactions with delivery-versus-payment (DVP) settlement methods, as is common with most clearing houses, or settlement netting agreements.
ING BANK CREDIT RISK PROFILE ING Bank’s credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and other securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Bonds in the investment portfolio are generally unsecured. Securitised assets such as Mortgage Backed Securities (MBS) and Asset Backed Securities (ABS) are secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and other assets) held by the issuer of the security. The last major area of credit risk involves pre-settlement credit exposures which arise from trading activities, including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
For the banking operations, ING uses various market pricing and measurement techniques to determine the amount of credit risk on pre-settlement activities. These techniques estimate ING’s potential future exposure on individual and portfolios of trades. Master agreements and collateral agreements are frequently entered into to reduce these credit risks.
From restructuring (18-19) to regular (1-17) status 1,183 1,414 From recovery (20-22) to regular or restructuring status (1-19) 978 1,170 Total of renegotiated Business loans 2,161 2,584
Past-due obligations ING continually measures its portfolio in terms of payment arrears. Particularly the retail portfolios are closely monitored on a monthly basis to determine if there are any significant changes in the level of arrears. Generally, an obligation is considered ‘past-due’ if a payment of interest or principal is more than one day late. In practice, the first 5-7 days after an obligation becomes past due are considered to be operational in nature for the retail loans and small businesses. After this period, letters are sent to the obligor reminding the obligor of its (past due) payment obligations. If the arrear still exists after 90 days, the obligation is transferred to one of the ‘problem loan’ units. In order to reduce the number of arrears, ING banking units encourage their obligors to set up automatic debits from their (current) accounts to ensure timely payments.
Private individuals 3,718 2,356 Construction, Infrastructure and Real Estate 1,770 635 General Industries 1,036 270 Food, Beverages and Personal Care 397 264 Financial Institutions 372 538
The table above represents the economic sector breakdown of credit risk outstandings (including impaired amounts) for loans and positions that have been classified as problem loans and for which provisions have been made. Against this portfolio, ING holds specific and collective provisions of EUR 1,067 million and EUR 799 million, respectively (2007 EUR 711 million and EUR 680 million respectively), representing the difference between the amortised cost of the portfolio and the estimated recoverable amount discounted at the effective rate of interest.
Increase/(decrease) in loan loss provision 596 –115 401 172 283 68 1,280 125 Exchange differences –17 –23 –36 5 3 –1 –50 –19
Risk classes are defined based upon the quality of the exposures in terms of creditworthiness, varying from investment grade to problem grade expressed in S&P equivalents.
ING Bank experienced a modest downward migration in terms of risk classes, in particular from the AA class to lesser quality classes. The principle driver was the downgrading of many securitisations, particularly at ING Direct. Additionally problem grades also increased during the year. These negative effects were modestly offset by a shift to higher quality counterparties for Money Market and PreSettlement activities.
Food Beverage and Personal Care 3.6% 3.4% 2.5% 1.6% 0.1% 2.2% 1.9%
(1) Based on the total amount of credit risk in the respective column using ING’s internal credit risk measurement methodologies.
(1) Only covers total exposures in excess of EUR 9 billion, including intercompany exposure with ING Insurance. (2) Country is based on the country of residence of the obligor.
Within ING Bank, market risk (including liquidity risk) falls under the supervision of the ALCO function with ALCO Bank as the highest approval authority. ALCO Bank determines the overall risk appetite for market risk. The ALCO function is regionally organised with the exception of ING Direct, which has a separate ALCO. The business lines Retail Banking and Wholesale Banking are represented within the respective regional and local ALCO’s. The ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk. This ensures a correct implementation of the ING Bank risk appetite.
Market risk in trading portfolios Organisation Within the trading portfolios, positions are maintained in the professional financial markets for the purpose of benefiting from short term price movements. Market risk arises in the trading portfolios through the exposure to various market risk factors, including interest rates, equity prices and foreign exchange rates.
The Financial Markets Risk Committee (FMRC) is a market risk committee that, within the guidelines set by ALCO Bank, sets market risk limits both on an aggregated level and on a desk level, and approves new products. CMRM advises both the FMRC and ALCO Bank on the market risk appetite of Wholesale Banking activities.
Measurement CMRM uses the 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, foreign exchange rates, equity prices, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING uses VaR with a 1-day horizon for internal risk measurement, control and backtesting, and VaR with a 10-day horizon for determining regulatory capital. ING’s VaR model has been approved by the Dutch Central Bank to be used for the regulatory capital calculation of its most important trading activities.
Limitations VaR as a risk measure has some limitations. VaR quantifies the potential loss under the assumption of normal market conditions. This assumption may not always hold true in reality, especially when market events occur, and therefore could lead to an underestimation of the potential loss. VaR also uses historical data to forecast future price behaviour. Future price behaviour could differ substantially from past behaviour. Moreover, the use of a one-day holding period (or ten days for regulatory calculations) assumes that all positions in the portfolio can be liquidated or hedged in one day. In periods of illiquidity or market events, this assumption may not hold true. Also, the use of 99% confidence level means that VaR does not take into account any losses that occur beyond this confidence level.
More details on the VaR of the ING Wholesale Banking trading portfolio for 2008 and 2007 are provided in the table below.
(1) The total VaR for the columns Minimum and Maximum can not 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. Note: the above captions are consistent with those used for internal risk management purposes and do not relate to financial statement captions.
In general, the level of the trading VaR was not only higher in 2008, but also showed larger movements. The interest rate market, which includes both the general interest rate and credit spread exposures, provided the largest contribution to the trading VaR.
Foreign exchange Singapore dollar –91 Mexican peso 69 South Korean won –68 US dollar 55 Chinese yuan 46
The risk transfer principle forms the basis of ING Bank’s ALM framework. This refers to the principle whereby the outright interest rate risk resulting from the commercial business is transferred to the ALM books. The interest rate risk from the commercial business arises from the fact that own originated assets and liabilities do not reprice simultaneously with respect to interest rate characteristics. The transfer of the outright interest rate risk is to a large degree based on modelling client behaviour. Within CMRM, extensive research is being done in order to optimise this modelling. For this purpose, several methods are in place to replicate the interest rate risk, taking into account both the contractual and behavioural characteristics of demand deposits, saving accounts and mortgages. All models and assumptions are back-tested regularly and results are presented to the designated ALCO.
By Business Line ING Wholesale Banking –91 –87 ING Retail Banking –102 –121 ING Direct 5 –5 ING Bank Corporate Line 46 26 ING Bank Total –142 –187
The end-of-year overall NPV-at-Risk figure as result of an upward shock of market rates of 1% is on a higher level compared to last year. This is mainly driven by Wholesale Banking’s ALM positions and the Corporate Line that increased in line with ING Bank’s higher capital position after the capital injection from the Dutch State in October 2008.
Realised results Every unit hedges realised results to the base currency of the unit. On a monthly basis the central Capital Management department hedges the non-EUR results to EUR. ING does not hedge the future EUR value of projected results in non-EUR currency.
FX Translation result ING’s strategy is to protect its Tier-1 ratio against unfavourable currency fluctuations. The protection is largely achieved by the issuance of USD and GBP denominated Tier-1 capital and furthermore by taking structural foreign currency positions. In general, open positions are deliberately taken in order to achieve protection of the Tier-1 ratio by establishing the right ratio of non-EUR denominated capital and risk weighted assets in these currencies. The US dollar, Pound sterling, Polish zloty, Australian dollar and Turkish lira are the main currencies in this respect. For other currencies the objective is to substantially mitigate the translation risk.
The following tables present the non-trading currency exposures of the central Capital Management department. As a consequence of the layered hedging policy described above, the net position of Capital Management in principle equals the aggregated non-trading currency exposure of the entire bank. Exception is the 2008 US dollar exposure which will be explained below. Note: all amounts are in EUR millions (equivalents).
The US dollar position at the end of 2007 was adjusted (reduced) in order to match with lower risk-weighted assets under the new Basel II rules starting January 1 2008. As a result of changing market circumstances this reduction was undone and the net position in US dollars increased significantly in 2008, for two reasons. Firstly, on the back of the credit crisis, the (credit) risk-weighted assets in US dollars increased significantly. The second reason is because of negative market value revaluations of Alt-A RMBS positions within ING Direct US, US dollar funding of ING Direct Holding was converted to EUR in order to avoid P/L volatility. As a consequence, a (net) long US dollar position emerged at ING Direct Holding level which has been added to the Capital Management position in the 2008 table above.
The drop in the Turkish lira position is caused by a depreciation of the currency. The position in local currency did not change significantly.
During 2008, the FX VaR increased significantly. The major contributor was the long position in US dollars.
Third, ING Bank is one of the largest real estate investment management companies in the world in terms of assets under management. For various real estate funds, ING Bank has co-invested seed capital and bridge capital to support the launch of new funds. A decrease in real estate prices will cause the value of this seed and bridge capital to decrease and will lower the level of third party assets under management, which in turn will reduce the fee income from this activity.
The crisis in the financial markets could lead to a further slowdown of the world economy in general. These global economic factors could also have future negative consequences for the value of real estate assets.
Real Estate exposure revalued through P&L 2008 Residential Office Retail Industrial Other Total
Real Estate exposure not revalued through P&L 2008 Residential Office Retail Industrial Other Total
ING BANK – LIQUIDITY RISK As with other bank market risks, liquidity risk falls under the supervision of the ALCO function within ING Bank with ALCO Bank as the highest approval authority.
Definition Liquidity risk is the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions. Within ING Bank the liquidity risk framework has been determined by ALCO Bank, which bears the overall responsibility for liquidity risk. The liquidity risk framework is further cascaded down the organisation under the responsibility of the regional and local ALCOs. The main objective of ING’s liquidity risk framework is to maintain sufficient liquidity in order to ensure safe and sound operations. For this purpose liquidity risk is considered from three different angles namely from a structural, tactical and a contingency point of view.
Structural liquidity risk Structural liquidity risk is the risk that the structural, long term balance sheet can not be financed timely or at a reasonable cost. In this view of liquidity risk the total on and off balance sheet positions are considered from a structural asset and liability management perspective. For this purpose ALCO Bank established a working group consisting of Corporate Market Risk Management, Capital Management and Financial Markets that focuses on liquidity risk aspects from a going concern perspective. The main objective of the working group is to maintain a sound liquidity profile through: Maintaining a well diversified mix of funding sources in terms of instrument types (e.g. unsecured deposits, commercial paper, long • term bonds or repurchase agreements), fund providers (e.g. professional money market players, wholesale or retail clients), geographic markets and currencies; Actively managing access to the capital markets by regularly issuing public debt in all material markets and the maintenance of • investor relations; Holding a broad portfolio of highly marketable assets that can be used to obtain secured funding;• Maintaining an adequate structural liquidity gap taking into account the asset mix and both the secured and unsecured funding • possibilities of ING Bank; Maintaining a funds transfer pricing methodology in which ING Bank’s cost of liquidity is adequately reflected both under a going • concern and a contingency perspective.
Within Financial Markets the focus is mainly on the daily and intraday cash and collateral positions and it is policy to sufficiently spread day-to-day funding requirements. For this purpose the Treasury function monitors all maturing cash flows along with expected changes in core business funding requirements.
ING INSURANCE 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 and capital position, as well as uncertainty as to the future returns on investments of the insurance premiums. Risks are classified as insurance risk (actuarial and underwriting), market risk, liquidity risk, credit risk, business risk and operational risk.
A critical aspect of risk management is that all new products are designed, underwritten and priced appropriately. This is explicitly covered by the Standard of Practice for the Product Approval and Review Process (PARP). This standard includes requirements related to risk profile, traditional and value-oriented pricing metrics and targets, and documentation. In addition to insurance and market risks, the requirements refer to operational risk, legal and compliance risk, etc. For these risks, the IRM network works closely together with the other relevant risk departments. The PARP also includes requirements to assess sensitivities to changes in financial markets, insurance risk (e.g. mortality and claims development), compliance risks and operational risks, as well as assessment of the administration and accounting aspects of the product.
More information on some of these limits is included in the sections below.
Credit risk (including Transfer risk) 891 1,021 Market risk 8,455 15,258 Insurance risk 1,557 3,293
Total diversification across these risk types is 34% for 2008 (31% for 2007).
The Economic Capital for ING Insurance is mostly related to market risks, both hedgeable and non-hedgeable. Overall, Economic Capital and risk profile reduced significantly during 2008. The primary change came from selling the Taiwan business (EUR 5.7 billion). In addition there were several changes to the risk profile in various businesses from de-risking, which included selling and hedging equity exposures, closing interest rate positions by investing longer, and entering (forward starting) receiver swaps and swaptions.
The sale of ING Life Taiwan and recent developments in the financial markets have distorted last years balance between the regions. The Taiwan sale decreases capital needs in both Asia/Pacific (EUR 4.0 billion) and Corporate Line (EUR 1.7 billion). Americas is now the largest user of Economic Capital. De-risking measures brought Americas otherwise increased capital need down by EUR 1 billion. Europe saw some substantial de-risking over the year. Most listed direct equity exposures are now sold or mostly hedged, and interest rate risk was reduced substantially. Economic Capital in Asia/Pacific and Europe has now an equal balance for financial and non-financial risks, while capital in Americas is still primarily driven by interest rate, credit spread and client fund related equity risk.
ING INSURANCE – MARKET RISKS ING Insurance is exposed to market risk to the extent to which the market value of surplus can be adversely impacted due to movements in financial markets; these include interest rates, equity prices, implied volatilities of options, foreign exchange rates and real estate prices. Changes in financial market prices impact the market value of ING’s current asset portfolio and hedging derivatives directly as well as the calculated market value of ING’s insurance liabilities. The following table provides information on Economic Capital split by risk category: Economic Capital insurance market risks
Interest rate risks are the largest market risks for ING Insurance. Interest rate risks are most significant in the United States and Europe. In general, the primary risk is to falling interest rates. The table shows a notable decrease in the interest rate risk during 2008 as a consequence of the divestment of ING Life Taiwan.
The equity risk has become less dominant due to risk reduction and hedging activities, relating to both direct and indirect exposure. Direct exposure relates to the holding of shares and is most significant for ING in the Netherlands. Indirect exposure relates to the potential loss of fee income from unit linked, variable annuity, and pension fund business across all regions. Direct exposure represents approximately 20% of the equity risk, after taking the hedge positions into account.
ING continued to manage the market and credit risks resulting from its global Insurance operations by setting Market Value at Risk (MVaR) limits. On at least an annual basis, ALCO Insurance sets an aggregate MVaR limit for ING Insurance and sub-limits for each of the business lines, which are ultimately allocated to the business units. The MVaR limit is measured in a manner consistent with the Economic Capital measure, i.e. based on a 99.95% confidence level over a one-year horizon.
The MVaR limits are managed by ALCO Insurance at the relevant organisational level. The Group Insurance ALCO determines the aggregate limit and ensures that the Group stays within the limit and allocates the sub-limits to business lines, with similar roles for the business line and business unit ALCO’s. Limit breaches by business lines are reported to ALCO Insurance and resolved in accordance with the policy within the next quarter.
CIRM consolidates and monitors the MVaR exposures of the business lines including diversification effects on a quarterly basis. Together with ING Capital Management, MVaR is managed within the limits. In 2008 and 2007 there were no breaches of the overall ING Insurance MVaR limit.
ING Insurance has two different categories of real estate exposure on its insurance books. First, ING Insurance owns buildings it occupies. Second, ING Insurance has invested capital in several real estate funds and direct real estate assets. A decrease in real estate prices will cause the value of this capital to decrease and as such ING Insurance is exposed to real estate price shocks.
The second category can be divided in minority stakes in real estate assets that are revalued through equity and stakes in funds managed by ING and direct real estate revalued through P&L. Only for the last category real estate price shocks will have a direct impact on reported net profit.
Earnings at Risk (EaR) Complementing Economic Capital, which is based on a market value analysis, ING Insurance also measures risk based on IFRS earnings. More specifically, using scenario analysis, ING Insurance measures the potential sensitivity of realised pre tax earnings of the insurance operations to an increase/decrease of different risk factors over a full year. These earnings sensitivities are used as input into the ING Group Earnings at Risk measure, where these sensitivities are fully diversified with the Bank. Interpretation of the underlying earnings sensitivities must be done individually as ING does not assume that all of the scenarios presented below will happen concurrently.
Earnings sensitivities are defined on a shock scenario at the 90% confidence level on pre tax IFRS earnings, projected one year forward from the calculation date. Therefore the table below provides earnings sensitivities to an instantaneous shock at the 90% confidence level projected through to 31 December 2009. The EaR information does not include ING Canada which was divested in January.
Measurement For portfolio risks which are not mitigated by diversification, the risks are managed primarily through concentration and exposure limits and through reinsurance and/or securitisation. Aggregate portfolio level limits and risk tolerance levels are set in reference to potential losses stemming from adverse claims in ING’s insurance portfolios which are reviewed annually by the ING Group Executive Board. ING Group has established actuarial and underwriting risk tolerance levels in specific areas of its insurance operations as described below. For non-life insurance, risk tolerance levels are set by line of business for catastrophic events (e.g. natural perils such as storms, earthquakes and floods) and for individual risks.
In order to determine how much reinsurance protection is required in each of the regions, these risk tolerance limits are compared to the estimated maximum probable loss resulting from catastrophic events with a 1 in 250 probability of occurrence which is in line with industry practice. The maximum probable loss estimates for Fire business are based on risk assessment models that are widely accepted in the industry.
With respect to life business, ING Group’s (pre-tax) risk tolerance level for 2008 was set at EUR 22 million (2007: EUR 22 million) per insured life for mortality risk. While life insurance risks are considered to be naturally diversifiable by virtue of each life being a separate risk, group contracts may result in significant exposures. For potential losses, resulting from significant mortality events (e.g. pandemics or events affecting life insurance contracts involving multiple lives), ING applies a separate risk tolerance level which equalled EUR 1,100 million in 2008 (2007: EUR 750 million). The potential impact of pandemics continues to be modelled by ING based on studies published by respected international organisations.
The following table provides an overview of the Economic Capital for insurance risks, split into mortality risk, morbidity risk and risk related to P&C products: Economic Capital Insurance risks
The mortality risk relates to the potential for increasing deaths (life risk) or decreasing deaths (longevity risk). This risk relates to a potential mortality catastrophe or to changes in long term mortality rates. As noted, ING manages these risks via limits and external reinsurance. Morbidity risk relates to disability products in the Netherlands and some health riders sold in Asia. The decrease in morbidity risk capital relates to the sale of ING Life Taiwan, which had a block of guaranteed health riders providing benefits for 30-60 years into the future. Finally, property and casualty risk exists primarily in Canada and the Benelux.
ING INSURANCE – CREDIT RISKS The credit risks in the general accounts portfolio within ING Insurance are subject to the same principles, policies, definitions and measurement as those of the banking operations. The credit risks are measured and monitored by Corporate Credit Risk Management (CCRM) as well as local credit risk managers within the various locations where credit risk is taken within ING Insurance and ING Investment Management. Within ING Insurance, the goal is to maintain a low risk, well diversified credit risk portfolio that meets or exceeds market based benchmark returns.
Risk classes: ING Insurance portfolio, as % of total outstandings (1)
ING Insurance risk class distribution remained fairly stable during 2008. The shift from AA to AAA at Insurance Europe is the result of data quality improvements. The deterioration in Asia/Pacific is due to the divestment of ING Life Taiwan.
amounts in billions of euros Insurance Americas Insurance Europe Insurance Asia/Pacific Total ING Insurance
(1) Only covers total exposures in excess of EUR 5 billion, including intercompany exposure with ING Bank. (2) Country is based on the country of residence of the obligor.
OPERATIONAL RISKS Operational risk is 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 whereas strategic risks are not included. Effective operational risk management leads to more stable business processes (including IT systems) and lower operational risk costs. ING recognises the following operational risk areas: Control risk• is the risk of loss due to non-adherence to business policies or guidelines. Control risks can lead to losses incurred due to non-compliance with controls established in connection with items such as governance procedures, new product approval procedures, and/or project management methods. Control risk can stem from improper or insufficient monitoring of entities or activities. The risk of a loss caused by unauthorised employee activities, including -but not limited to- unauthorised approvals or overstepping • of authority are considered unauthorised activity risk. Processing risk• deals with the risk of losses due to failed transaction processing or process management. These events are normally not intentional and usually involve documenting or completing current business transactions. Employment practice risk• is the risk of loss due to actions which are consistent with employment, health or safety laws, or agreements, from payment of personal injury claims or from diversity/discrimination events. Managing this risk means: meeting health and workplace regulations; preventing discrimination and harassment; and in case this does happen, taking adequate counter measures. Personal and physical security risk• is the risk of criminal and environmental threats that might endanger the security of ING personnel (within and outside ING locations, while travelling or being expatriated) and ING assets or might have an impact on the ING organisation. Information (Technology) risk• is the risk of loss due to inadequate information security, resulting in a loss of information confidentiality and/or integrity and/or availability. Aspects of information (technology) risks are user access controls, platform security controls, change management controls, sourcing controls, security monitoring controls and fundamental information security controls. Continuity risk• is the risk of events (e.g. natural disasters, power outages, terrorism) leading to a situation that threatens the continuation of business (including people and assets).
Internal and external fraud risk• is the risk of loss due to deliberate abuse of procedures, systems, assets, products and/or services of ING by those who intend to deceitfully or unlawfully benefit themselves or others.
Organisation of Operational Risk Management The General Manager Corporate Operational Risk management (CORM) reports directly to the CRO and is responsible for managing operational risks and developing and establishing the Operational Risk Framework within ING Group, ING Bank and ING Insurance. The General Manager Corporate ORM also establishes and approves the Minimum Standards, and assists and supports the Executive Board in managing ING’s operational risks. The ORM function is organised along functional reporting lines. The Business Line operational risk managers report functionally to the General Manager CORM.
To avoid potential conflicts of interests, it is imperative that the ORM officer is impartial and objective when advising business management on operational risk matters in their business unit or business line. To facilitate this, a strong functional reporting line to the next higher level ORM officer is in place. The functional reporting line has clear accountabilities with regard to objective setting, remuneration, performance management and appointment of new ORM staff.
Operational risk framework ING has developed a comprehensive framework supporting and governing the process of identifying, mitigating, measuring and monitoring operational risks thus reflecting the stages described in the COSO model (Committee of Sponsoring Organisations of the Treadway Commission). Generic mandatory controls are described in the ORM policy house. The policies have been refreshed in 2008 and are structured in line with the risk areas. Each policy has one or more minimum standards.
At least once a year all business units perform an integrated risk assessment with involvement of other risk departments such as Compliance and Legal.
To ensure robust operational risk management ORM develops and communicates the ORM framework, policies and guidance throughout ING Group and monitors the key risks of ING Group to ensure that ING’s risk policies and Minimum Standards are fully implemented. Business units have to demonstrate that the appropriate steps have been taken to control their operational risk. ING applies scorecards to measure the quality of management of the operational risk processes within a business unit. Scoring is based on the ability to demonstrate that the required risk management processes are in place with the business units. The scorecards indicate the level of control within the business units. These scorecards are integral part of ING’s Dutch Central Bank approved regulatory capital model (AMA).
The Operational Risk Capital model of ING is based on a Loss Distribution Approach (LDA). The Loss Distribution is based on both external and internal loss data exceeding EUR 1 million. The model is adjusted for the scorecard results taking into account the specific quality of control in a business line and the occurrence of large incidents (‘bonus/malus’). This provides an incentive to local (operational risk) management to better manage operational risk. From 2008 onwards, the model is used for regulatory capital reporting purposes as well. ING received approval for its Advanced Measurement Approach (AMA) from the Dutch Central Bank.
The NFR Dashboard was presented to the Executive Board and the Audit Committee in November 2008. As of the fourth quarter 2008 report, the quarterly NFRD will be a recurring agenda point in Executive Board and Audit Committee meetings.
Fraud risks Based on the Corporate Anti-Fraud policy each business unit had to conduct a fraud-risk assessment and translated this into an anti-fraud implementation plan (to prevent both internal and external fraud). In reaction to the SocGen incident ING initiated a project aiming to further mitigate all trading risk related fraud risks.
ING believes that fully embedded Compliance Risk Management preserves the trust its customers, shareholders and staff have in ING and is important for the way ING does business. Managing Compliance Risk is fundamental to driving value. The pursuit of long term business sustainability requires proper conduct of business activities in accordance with the high ethical standards of ING’s Business Principles. These principles not only reflect laws and regulations, but are also based on ING’s core values: integrity, entrepreneurship, professionalism, responsiveness and teamwork.
The Scope of the Compliance Risk Management function The Compliance Risk Management function focuses on managing the risks arising from laws, regulations and standards which are specific to the financial services industry and which are issued by legislative and regulatory bodies relevant to ING’s businesses, or by ING Corporate Compliance Risk Management. The Compliance Risk Management function actively educates and supports the business in managing areas such as anti-money laundering, preventing terrorist financing, conflicts of interest management, sales and trading conduct and customer interest and protection.
Money laundering• Terrorist financing• Political or reputational • exposed person Client engagements • or transactions with sanctioned countries
Market abuse & • personal trading Breaches of the ING Business • Principles or local code of conduct Outside positions • by ING officers Gifts or entertainment given • or received; bribery External incident reporting•
ING uses a functional approach within Business Lines to ensure systematic and consistent implementation of the company-wide Charter & Framework and Minimum Standards and related policies and procedures. The local Compliance Officer has the responsibility to assist local management in managing Compliance Risk within that business unit. The regional or division Compliance Officer has a management and supervisory role of all functional activities of the Compliance Officers in the respective region or division. The Business Line Compliance Officers perform this task for their Business Line and also provide leadership and overall direction to the regional or divisional Compliance Officers.
C. Scorecard The Compliance Risk Management function works with the Operational Risk Management Scorecard process to evaluate how well the Compliance Risk Management Framework is embedded in each business. Scoring is based on the ability of the business unit to demonstrate that the required policies and procedures are implemented. The scoring indicates the level of control within the business units and the result is integrated with the Operational Risk Management results into ING’s Dutch Central Bank approved regulatory capital model (AMA).
The Charter and Framework and the supporting documentation were produced in close collaboration with the Business Lines, Legal and Compliance Risk Management and business leaders.
– Updated FEC Policy and Guidance The ING Group Financial Economic Crime (FEC) Policy provides a clear statement on Financial Economic Crime in order to guard against any involvement in criminal activity, and to participate in international efforts to combat money laundering and the funding of terrorist and criminal activities. The FEC Policy has been updated in 2008 explicitly recognising the differences between business lines and their inherent FEC related risk, without lowering existing standards. A risk-based approach allows each Business Line to identify the criteria to measure potential money laundering risks and implement proportionate measures and controls to mitigate these risks. Managing Compliance Risk in accordance with the ING Group FEC Policy and Minimum Standards is required.
– Compliance Risk Management Training and Education In 2008, Compliance Risk Management has developed and is executing several global training programmes, including: 1. ‘Managing Compliance Risk in your Business’. This programme targets the top four echelons of management (approximately 13,500)
Additionally, the e-Learning course ‘Compliance, more than money’ created in 2006 and made mandatory by the Netherlands Board for all ING employees in the Netherlands was refreshed. The follow-up course named ‘Compliance, part of our business’ takes into account changes in financial services laws and regulation and internal ING policies and procedures.
The four key messages defining good Compliance Risk Management are: knowing, understanding and applying the rules;• a culture where people are trusted and accountable;• effectively managing Compliance Risk in our businesses; and• vital for sustainable profitable growth – our licence to operate.•
Discussions with regulators and implementation of enhanced compliance and risk management procedures ING Bank N.V. has continued discussions with its Dutch bank regulator De Nederlandsche Bank (DNB) related to transactions involving persons in countries subject to sanctions by the EU, the US and other authorities and its earlier review of transactions involving sanctioned parties. In connection with that review and related discussions ING Bank has undertaken to complete the global implementation of enhanced compliance and risk management procedures, and to monitor the implementation of such procedures on an ongoing basis, as instructed by DNB. ING Bank also remains in discussions with authorities in the US and in other jurisdictions concerning these matters, including with respect to ongoing information requests, and it is not possible to predict at this time the outcome thereof. Financial institutions continue to experience close scrutiny by regulatory authorities, governmental bodies, shareholders, rating agencies, customers and others to ensure they comply with the relevant laws, regulations, standards and expectations. Bank and insurance regulators and other supervisory authorities in Europe, the US and elsewhere continue to oversee the activities of financial institutions to ensure that they operate with integrity and conduct business in an efficient, orderly and transparent manner. ING seeks to meet the standards and expectations of regulatory authorities and other interested parties through a number of initiatives and activities, including scrutinizing account holder information, payment processing and other transactions to support compliance with regulations governing money-laundering, economic and trade sanctions, bribery and other corrupt practices. The failure or perceived failure by ING
The analyses set out in the risk management section provide a valuable guide to investors as to the risk profile of ING Group. Users of the information should bear in mind that the analyses provided are forward looking measures that rely on assumptions and estimates of future events, some of which are considered extreme and therefore unlikely to occur. In the normal course of business ING Group continues to develop, recalibrate and refine the various models that support risk metrics, which may result in changes to the risk metrics as disclosed.
Capital at Risk The Capital at Risk (CaR) measures the potential reduction of the net asset value (based on fair values) over the next year relative to expected value. CaR is measured using a 90% confidence level (i.e. ‘1 in 10’ stress scenario). Discretionary management interventions are not explicitly modelled unless their measurement can be based on historical performance tracking (e.g. regular or planned actions).
The first aggregation step is between ING Bank and ING Insurance for each major risk type. All risk capitals, except for credit risk that is already aggregated for ING Bank and ING Insurance, are delivered on a standalone basis for ING Bank and ING Insurance. These risk capitals are aggregated between ING Bank and ING Insurance using a variance-covariance approach. Depending on the accounting treatment the Bank – Insurance correlation factors used for EaR may differ from CaR correlation factors (e.g. for interest rate risk). The result of this aggregation step are Group diversified EaR and CaR figures for each major risk type.
Major risk types distinguished: Risk type Distribution used Credit and transfer risk (2) KMV distribution Market risk (8) – Interest rate risk Europe, Asia and America – Equity risk Europe, Asia and America – FX risk – Real estate risk Normal distribution Insurance risk (1) Normal distribution Business risk (1) Normal distribution Operational risk (1) Empirical distribution
ECONOMIC CAPITAL ING BANK Economic Capital is defined as the amount of capital that a transaction or business unit requires in order to support the economic risks it originates. In general Economic Capital is measured as the unexpected loss above the expected loss at a given confidence level. Specific measurement by risk type is described in greater detail in the separate risk type sections; i.e. credit and transfer and operational risk as well as market and business risk bank.
This Economic Capital definition is in line with the net market value (or surplus) definition. The process of Economic Capital modelling enables ING Bank to allocate Economic Capital to the business units and support risk-adjusted performance measurement (RAROC). By comparing Economic Capital figures with ING’s available financial resources, adequate capital buffers can be ensured.
The following fundamental principles and definitions have been established for the model: ING Bank uses a one-sided confidence level of 99.95% – consistent with ING’s target debt rating (AA) – and a one-year time horizon • to calculate Economic Capital; It is assumed that all currently known measurable sources of risk are included;• The best estimate risk assumptions are as objective as possible and based on proper analysis of statistical data. There is one set • of best-estimate assumptions for each risk type to be used at ING Bank; The Economic Capital calculation is based on fair value principles. Where complete and efficient markets exist, fair value is equal • to market value; Risk management (continued)
The Economic Capital calculations reflect known embedded options and the influence of client behaviour in banking products;• The Economic Capital calculations are on a pre-tax basis and do not consider the effect of regulatory accounting and solvency • requirements on capital levels; The framework does not include any franchise value of the business, discretionary management intervention or future business • volumes and margins.
As a foundation the correlations in the risk dashboard are applied based on a 90% confidence level, i.e. they correspond to the correlations observed in the 10% largest downward movements (a ‘1 in 10’ event). As shown in the flow-chart, these correlation factors are stressed upwards where necessary to account for potential measurement inaccuracy in extreme events due to limited historic data observations. For aggregating other risk (business and operational), expert opinion is used.
CREDIT AND TRANSFER RISK Economic Capital for credit risk and for transfer risk is the portion of Economic Capital held to withstand unexpected losses inherent in the credit portfolios related to (unexpected) changes in the underlying creditworthiness of debtors or the recovery value of underlying collateral (if any). Credit risk and transfer risk capital are calculated on all portfolios which contain credit or transfer risk, including investment portfolios. The same methodology is used for both the banking and the insurance operations.
With regard to methodology, the EC-MC Portfolio calculator provides a sophisticated and consistent framework to measure capital numbers for credit risk. Because of its complexity and required calculation time the EC-MC Portfolio calculator is more suited for portfolio calculation, rather than to be implemented in an environment requiring real time reporting at a transactional level for day-to-day management, pricing of new transactions and limit setting. As a result, Economic Capital figures are based on RAC figures that are derived from the EC-MC Portfolio calculator but are not fully equivalent. The main characteristics are: RAC• is calculated at facility level with closed algebraic formulas rather than from a Monte Carlo Simulation. The RAC algebraic formula includes parameters which incorporate the impact of portfolio dynamics, such as correlations and diversification effects. These parameters are derived through a regression of the outputs of the EC-MC portfolio calculator; Due to its proprietary nature the inputs in the • EC-MC Portfolio calculator are subject to certain technical caps and floors (LGD/EAD is constant and PD migration matrix is capped) which are not applicable in RAC. Also, due to the implemented mathematical routines the EC-MC portfolio calculator is subject to a minimum Probability of default (PD) and maximum tenor, which are not applicable in RAC.
During 2008, the Economic Capital levels for credit and transfer risk were calculated on a weekly basis for most of the Wholesale Bank and ING Direct investment portfolios and for the SME portfolios within the Retail banking operations. For consumer loans, residential mortgages, credit cards, and the insurance portfolios, the calculations are made on a monthly basis. On a quarterly basis, the Economic Capital for credit risk and transfer risk figures are consolidated with the corresponding Economic Capital components from other disciplines.
MARKET RISK BANK General Economic Capital for market risk is the Economic Capital necessary to withstand unexpected value movements due to changes in model risks and market variables, such as interest rates, equity prices, foreign exchange rates and real estate prices. Economic Capital for market risk is calculated for exposures both in trading portfolios and non-trading portfolios.
Measurement Economic capital for market risk is calculated using internally developed methodologies with a 99.95% confidence interval and a horizon of one year, which represents extreme events and ING’s rating. The Economic Capital for market risk for non trading portfolios is calculated for each risk type, while for trading portfolios it is calculated on a portfolio level. The calculations for Economic Capital market risk include real estate risk, foreign exchange rate risk, equity price risk, interest rate risk and model risks.
Real estate price risk includes both the market risks in the investment portfolio and the development risk of ING Real Estate. The real estate price risk for ING Real Estate is calculated by stressing the underlying market variables. The stress scenarios at a portfolio level take into account all diversification effects across regions and real estate sectors. Also, the leverage of participations in the real estate investment funds is taken into account.
Economic Capital for market risk for the large non-trading portfolios within ING Retail Banking and ING Wholesale Banking is calculated for embedded option risk (e.g. the prepayment option in mortgages) and model risk. The model risk is calculated by stressing the underlying assumptions in the models for behavioural assets and liabilities. For example, the hedge for savings portfolios is based on assumptions with respect to developments of volumes and client rates. Deviations in these assumptions can lead to (ex-post) incorrect estimation of the typical interest rate maturity of saving deposits. If there is more outflow than initially modelled, the duration of the savings money may be lower than the duration of the investments, which leads to losses if interest rates go up. The economic capital figures of ING Direct capture the model risk of the behavioural liabilities in line with the model described above.
While aggregating the different Economic Capital market risk figures for the different portfolios, diversification benefits are taken into account as it is not expected that all extreme market movements will appear at the same moment.
BUSINESS RISK BANK The current calculation method applied within ING Bank defines business risk as the ‘residual risk category‘ that includes all risks that are not covered by the explicitly defined (and managed/measured) credit/transfer, market and operational risk categories. In accordance with the residual risk definition, the measurement of business risk capital is based on a single risk factor; i.e. the volatility of the ‘residual’ profit and loss figures (for each BU) that are cleansed for the effects of other risk types. As a consequence there is no further gain in insight regarding sub business risks.
The level of the business risk capital is linked to the volatility of (cleansed historical) profit and loss data taking into account observed trends. In practice, this means that more stable earnings over time generally lead to less capital.
Using a T-distribution and the level of confidence, the volatility is then ‘capitalised’ to obtain a business risk capital. The T-distribution is a theoretical probability distribution, is symmetrical, bell-shaped and similar to the standard normal curve. However, the T-distribution has relatively more scores in its tails than the normal distribution.
The adjustment of the MVS for the illiquidity of our insurance liabilities impacts the market risk in our Economic Capital model in the following ways: Interest Rate Risk: The illiquidity spread applied on our liability cash flows effectively reduces the duration of our liabilities and • therefore reduces the duration mismatch between our assets and liabilities resulting in a reduced interest rate risk; Credit Spread Risk: The Economic Capital model stresses both the asset spreads and the illiquidity spread on our liabilities. • The netting of asset spread risk with illiquidity liability spread risk results in a lower credit spread risk; Foreign Exchange Risk: The adjustment of the MVS for illiquidity results in a reduced net exposure to foreign currency movements • and in particular US dollar. This results in a lower foreign exchange risk.
Strategic business risk has been excluded from the EC calculations of ING Insurance.
Economic Capital Model The ING Economic Capital calculation is calculated based on a ‘Surplus-at-Risk’ concept. ‘Surplus-at-Risk’ is calculated based on the steps: Calculate the complete balance sheet (all assets and liabilities) on a Market Value basis;• Generate Monte-Carlo shock scenarios for all of the relevant risk factors (market and non-market);• Recalculate the complete balance sheet (all assets and liabilities) on a Market Value basis for each shock scenario. For practical • purposes, the MVM is not recalculated under shock scenarios; Calculate the 99.95% worst case decrease in the Market Value Surplus over all the shock scenarios. This value will be the EC. Note • that the shock scenario resulting in the Economic Capital will differ by business unit, business line, and at an ING Insurance level.
Further details on Economic Capital model Market Data and Scenario Generation ING Insurance uses ING Bank’s Global Market Database (GMDB) as a provider of market price and risk data for financial risk drivers. All market data is obtained from reputable data providers such as Reuters and Bloomberg. The GMDB operational team then validates the market data and calculates relevant risk parameters. This validated data is then automatically delivered to the ECAPS system.
Non-market risk Economic Capital is calculated by business units, Corporate Credit Risk Management and Corporate Operational, Information and Security Risk Management and inputted into ECAPS at the sub risk level. ECAPS than aggregates 21 sub-risk types (e.g. mortality and trend risk) to 9 non market risk types using a bottom-up Economic Capital diversification approach based on a matrix of tail correlations. The information inputs relate to 9 sub risk types: Credit risk;• Business risk;• Operational risk;• Life risk catastrophe;• Life risk non-catastrophe;• Morbidity risk catastrophe;• Morbidity risk non-catastrophe;• P&C risk catastrophe;• P&C risk non-catastrophe.•
Replicating Portfolios To handle the full complexity of calculating diversification by Monte Carlo simulation, ING maps its assets and liabilities to a set of standard financial instruments. The set of standard instruments consists of zero coupon bonds, market indices, equity forwards, swaptions, callable bonds, F/X options and equity options. Assets and the financial components of the liabilities are represented by a portfolio of this standard set of instruments. A user interface allows the selection of different types of replicating instruments for different cash flow types. Then an optimal replicating portfolio is created that matches the risk profile of the stochastically generated cash flows as good as possible. The resulting replicating portfolio is used in the calculation of Economic Capital.
Through the inclusion of equity options, F/X options and swaptions in the set of replicating instruments, ING is able to incorporate implied volatility risk in the considered risk types. The same holds for the credit spread risk through the inclusion of credit risk bearing zero coupon bonds in the set of replicating instruments.
The quality of the replicating portfolio is monitored by several statistical criteria including R-squared and benchmarked against market value sensitivities such as duration, convexity, and changes in value for larger interest rate and equity shocks. High quality replicating portfolios are important in several ways. First, they ensure a good reflection of the actual risk profile and an accurate calculation of Economic Capital. Second, they assist Business Units in hedging strategies and management of Economic Capital. Third, the process of replicating portfolio calculations increases the understanding of the complex nature of insurance liabilities in a market consistent environment.
Economic Capital Calculation ECAPS uses Monte-Carlo simulation to determine diversification benefits for the complete ‘portfolio hierarchy’, from business unit level up to an ING Group level. All diversification calculations are done within ECAPS and are driven by the Gaussian copula of all risk drivers using the underlying distributions applicable for each risk type.
The above capital definitions and policies have been approved by the ING Group Executive Board or delegated authorities.
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 Bank, ING Insurance and ING Group and ensuring adherence to the set limits and targets through planning and executing capital management transactions. The process is supplemented by stress testing and scenario analysis. The ongoing assessment and monitoring of capital adequacy is embedded in Capital Management’s capital planning process and results in a quarterly Capital Adequacy Assessment Report which is presented to both the ING Group Finance and Risk Committee and the ING Group Executive and Supervisory Boards. The main objective of the assessment is to ensure that ING Group as a whole has sufficient capital relative to its risk profile both in the short and the medium term.
BASEL II As of 1 January 2008, ING Bank calculates its capital ratios under Basel II. In 2008, ING Bank published risk weighted assets (RWA), Tier-1 and BIS capital and the accompanying capital ratios based on Basel II data only. In addition, ING publishes the minimum required capital level according to Basel II and according to the Basel I floor. The Basel I floor is a temporary minimum capital requirement based on 90% of Basel I RWA for 2008 and 80% of Basel I RWA for 2009. The minimum requirements according to Basel II and Basel I will both be compared to total BIS available capital according to Basel II.
ING Bank paid dividends to ING Group of EUR 4.25 billion during the year. It received EUR 7.2 billion in capital injections from ING Group. Hybrid capital increased mainly due to the issuance of additional hybrid capital.
AFR/EC RATIOS AFR should exceed EC, and for ING Group as a whole there should be a prudent buffer. The target for the buffer at Group level is 20%. For details regarding the computation of EC see the section entitled ‘Risk management’.
(4) Dated subordinated debt issued by ING Insurance at nominal value. (5) Includes EUR 12,910 million (2007: EUR 14,199 million) Tier-2 capital and nil (2007: nil) Tier-3, offset by EUR 1,040 million (2007: EUR 2,407 million) of regulatory deductions. These deductions were based on Basel I regulation in 2007 and Basel II regulation in 2008. (6) Mainly includes 50% of the excess of the present value of future profits generated by policies in force (Value in Force) over the after-tax deferred acquisition costs.
The capitalisation of ING Group was under pressure in the second half of 2008, but thanks to the government capital injection all leverage ratios were within their targets at the end of the year. The debt/equity ratio of ING Group as at year-end 2008 was at 13.55% (2007: 9.53%). The debt/equity ratio of ING Insurance as at year-end 2008 was at 8.78% (2007: 13.63%). The Basel II ING Bank Tier-1 ratio ended at 9.32%, this is a strong increase from the Basel I Tier-1 ratio of 7.39% at December 2007.
Required capital based on Basel I floor (5) 34,369 Required capital based on Basel I floor as at 1/1/09 (5) 30,550 BIS ratio based on Basel I floor 10.22% BIS ratio based on Basel I floor as at 1/1/09 11.49% (1) Subordinated loans qualifying as Tier-1 capital have been placed by ING Groep N.V. with ING Bank N.V. (2) Includes revaluation debt securities, revaluation reserve cash flow hedge and revaluation reserves equity and real estate (see Capital base table, note 3). (3) Includes eligible lower Tier-2 loans and revaluation reserves equity and real estate revaluations removed from Tier-1 capital. (4) Based on Basel II as of 2008. (5) 90% of Basel I Risk Weighted Assets in 2008 and 80% in 2009.
ING Group ING Group reports to the Dutch Central Bank as required under the Dutch implementation of the financial conglomerates directive. The directive mainly covers risk concentrations in the group, intra-group transactions and an assessment of the capital adequacy of the Group.
In terms of measuring the capital adequacy of the Group, ING prefers to use the AFR/EC framework described earlier, particularly as there continues to be significant differences in the sectoral capital rules between banks and insurance companies and amongst insurance companies in different countries.
In the following table, we show the Group’s capital adequacy on the following basis: Insurance required capital from applying European Solvency I rules to all of ING Insurance entities globally (regardless of local • capital requirements); Bank required capital based on applying Basel II with the Basel I floor;• Group available capital using an approach similar to that used for Bank BIS capital whereby IFRS equity is adjusted for certain • revaluation reserves, minority interests are added, goodwill and certain intangibles are deducted and Group hybrids and qualifying subordinated debt of Bank and Insurance are included.
Required capital banking operations (2) 34,369 32,218 Required capital insurance operations 8,582 9,405 Total required capital 42,951 41,623
Surplus capital 18,529 18,969 Group capital ratio 143% 146% (1) Revaluation reserves debt securities, crediting to life policyholders and cashflow hedge (see Capital base table). (2) EUR 30,550 million at 1/1/2009.
Target Ratio EC vs AFR 120% 120% 100% 100% 100% 100%
EU Solvency ratio (Insurance) Year-end actual EU Solvency ratio 256% 244% Regulatory minimum EU Solvency ratio 100% 100% Target EU Solvency ratio 150% 150%
ING Insurance – short term A-1+ P-1 – long term AA– A1 AA–
ING’s long-term credit ratings are shown in the table above. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of a rating may be obtained only from the rating agency.
As disclosed in this Annual Report, shareholders’ equity and net result of ING in 2008 were significantly impacted by the turmoil and extreme volatility in the worldwide financial markets. These financial markets and the worldwide economies have deteriorated further in the first months of 2009 in several areas, especially the equity markets. Current levels continuing or further negative developments in these financial markets and/or economies in 2009 may have a material adverse impact on shareholders’ equity and net result for 2009. Any such impact cannot be reliably estimated at the date of this Annual Report.
Financial liabilities at fair value through profit and loss 65 98
References relate to the notes starting on page 241. These form an integral part of the parent company annual accounts.
Result of group companies after taxation –569 9,299 Other results after taxation –160 –58 Net result –729 9,241
Parent company statement of changes in equity of ING Group for the years ended 31 December amounts in millions of euros Share capital Share premium
Unrealised revaluations after taxation –1,636 1 –1,635 Realised gains/losses transferred to profit and loss –3,414 –3,414 Transfer to insurance liabilities/DAC 1,132 1,132 Change in cash flow hedge reserve –925 –925 Unrealised revaluations from net investment hedges 500 500 Employee stock option and share plans 104 104 Exchange rate differences –1,153 –1,153 Other 21 –21 Total amount recognised directly in equity –5,475 84 –5,391
Unrealised revaluations after taxation –19,042 324 –18,718 Realised gains/losses transferred to profit and loss 2,476 2,476 Transfer to insurance liabilities/DAC 2,193 2,193 Change in cash flow hedge reserve 746 746 Unrealised revaluations from net investment hedges 388 388 Issuance costs incurred –20 –20 Employee stock option and share plans –76 –76 Cancellation of shares Exchange rate differences –951 –1 –952 Total amount recognised directly in equity –14,190 –1 228 –13,963
Issue of non-voting equity securities 10,000 10,000 Dividend –213 –3,387 –3,600 Purchases/sales of treasury shares –44 –1,986 –2,030 Exercise of warrants and options 5 443 448
Changes in balance sheet values due to changes in the Revaluation reserve of the associates are reflected in the Share of associates reserve, which forms part of Shareholders’ equity. Changes in balance sheet values due to the results of these associates, accounted for in accordance with ING Group accounting policies, are included in the profit and loss account. Other changes in the balance sheet value of these associates, other than those due to changes in share capital, are included in Share of associates reserve in Other reserves.
Notes to the parent company balance sheet of ING Group amounts in millions of euros, unless stated otherwise 1 INVESTMENTS IN WHOLLY OWNED SUBSIDIARIES
ING Bank N.V. 22,890 24,038 ING Verzekeringen N.V. 11,884 17,900 Other –76 –74
Changes in ING Groep N.V. shares held by group companies 1,442 –1,005 Closing balance 34,698 41,864 2 OTHER ASSETS
Receivables from group companies 13,322 10,591 Other receivables, prepayments and accruals 288 112 3 EQUITY
Notes to the parent company balance sheet of ING Group (continued)
The total amount of non-distributable reserves is EUR 11,121 million (2007: EUR 7,003 million).
See Note 12 ‘Shareholders’ equity (parent)/Non-voting equity securities’ in the consolidated annual accounts for additional information, including restrictions with respect to dividend and repayment of capital.
Opinion with respect to the consolidated annual accounts In our opinion, the consolidated annual accounts give a true and fair view of the financial position of ING Groep N.V. as at 31 December 2008, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
Opinion with respect to the parent company annual accounts In our opinion, the parent company annual accounts give a true and fair view of the financial position of ING Groep N.V. as at 31 December 2008, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
PROPOSED APPROPRIATION OF RESULT The result is appropriated pursuant to Article 37 of the Articles of Association of ING Groep N.V., the relevant stipulations of which state that the part of the result remaining after the Executive Board, with the approval of the Supervisory Board, has determined the appropriation to reserves, shall be at the disposal of the General Meeting of Shareholders.
It is proposed to declare a dividend of EUR 0.74 per ordinary share of EUR 0.24.
Factors such as interest rates, securities prices, credit (including liquidity) spreads, exchange rates, consumer spending, business investment, real estate and private equity valuations, government spending, inflation, the volatility and strength of the capital markets, and terrorism all impact the business and economic environment and, ultimately, the amount and profitability of business we conduct in a specific geographic region. For example, in an economic downturn, such as the one currently taking place, characterised by higher unemployment, lower family income, lower corporate earnings, higher corporate and private debt defaults, lower business investment and consumer spending, the demand for banking and insurance products is adversely affected and our reserves and provisions are likely to increase, resulting in lower earnings. Securities prices, real estate valuations and private equity valuations may 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 no 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, such as the one currently taking place, 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.
In case one or more of the factors mentioned above adversely affects the profitability of our business this might also result, among others, in the following: the unlocking of deferred acquisition costs impacting earnings; and/or• reserve inadequacies which could ultimately be realised through profit and loss and shareholders equity; and/or• the write down of tax assets impacting net results; and or• impairment expenses related to goodwill and other intangible assets, impacting net results.•
Management believes that if ongoing market volatility adversely impacts the performance of the reporting units Retail Banking - Central Europe and Insurance Americas - United States, compared with what was assumed in the year-end 2008 goodwill impairment test, the book value (including goodwill) of these reporting units may exceed the related fair values, which would result in impairments. See Note 9 ‘Intangible assets’ in the consolidated financial statements.
Shareholders’ equity and net result of ING in 2008 were significantly impacted by the turmoil and the extreme volatility in the worldwide financial markets. The financial markets and worldwide economies have deteriorated further in the first months of 2009 in several areas, especially the equity markets. Current levels continuing or a further negative development in financial markets and/or economies in 2009 may have a material adverse impact on shareholders’ equity and net result in future periods, including as a result of the potential consequences listed above. See ‘Subsequent events’ in the consolidated financial statements.
In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects. Similarly, our access to funds may be limited if regulatory authorities or rating agencies take negative actions against us. If our internal sources of liquidity prove to be insufficient, there is a risk that external funding sources might not be available or available at unfavourable terms.
In our life and non-life insurance and reinsurance businesses, we are subject to losses from natural and man-made catastrophic events. Such events include, without limitation, weather and other natural catastrophes such as hurricanes, floods, earthquakes and epidemics, as well as events such as terrorist attacks. The frequency and severity of such events, and the losses associated with them, are inherently unpredictable and can not always be adequately reserved for. Furthermore, we are subject to actuarial and underwriting risks such as, for instance, mortality, morbidity, and adverse home claims development which result from the pricing and acceptance of insurance contracts. In accordance with industry practices, modelling of natural catastrophes are performed and risk mitigation measures are made. In case claims occur, reserves are established based on estimates using actuarial projection techniques. The process of estimating is based on information available at the time the reserves are originally established and includes updates when more information becomes available. Although we continually review the adequacy of the established claim reserves, and based on current information, we believe our claim reserves are sufficient, there can be no assurances that our actual claims experience will not exceed our estimated claim reserves. If actual claim amounts exceed the estimated claim reserves, our earnings may be reduced and our net results may be adversely affected. In addition, because unforeseeable and/or catastrophic events can lead to an abrupt interruption of activities, our banking and insurance operations may be subject to losses resulting from such disruptions. Losses can relate to property, financial assets, trading positions, insurance and pension benefits to employees and also to key personnel. If our business continuity plans are not able to be put into action or do not take such events into account, losses may further increase.
We are subject to detailed banking, insurance, asset management and other financial services laws and government regulation in each of the jurisdictions in which we conduct business. Regulatory agencies have broad administrative power over many aspects of the financial services business, which may include liquidity, capital adequacy and permitted investments, ethical issues, money laundering, privacy, record keeping, and marketing and selling practices. Banking, insurance and other financial services laws, regulations and policies currently governing us and our subsidiaries may also change at any time in ways which have an adverse effect on our business, and it is difficult to predict the timing or form of any future regulatory or enforcement initiatives in respect thereof. Also, bank regulators and other supervisory authorities in the EU, the US and elsewhere continue to scrutinise payment processing and other transactions under regulations governing such matters as money-laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures. Regulation is becoming increasingly more extensive and complex and regulators are focusing increased scrutiny on the industries in which we operate, often requiring additional Company resources. These regulations can serve to limit our activities, including through our net capital, customer protection and market conduct requirements, and restrictions on businesses in which we can operate or invest. If we fail to address, or appear to fail to address, appropriately any of these matters, our reputation could be harmed and we could be subject to additional legal risk, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to enforcement actions, fines and penalties.
Despite our efforts to maintain effective compliance procedures and to comply with applicable laws and regulations, there are a number of risks in areas where applicable regulations may be unclear, subject to multiple interpretation or conflict with one another, where regulators revise their previous guidance or courts overturn previous rulings, or we fail to meet applicable standards. Regulators and other authorities have the power to bring administrative or judicial proceedings against us, which could result, amongst other things, in suspension or revocation of our licenses, cease and desist orders, fines, civil penalties, criminal penalties or other disciplinary action which could materially harm our results of operations and financial condition.
RISKS RELATED TO THE COMPANY Ongoing turbulence and volatility in the financial markets have adversely affected us, and may continue to do so. We currently do not expect these conditions to improve in the short term.
sophisticated and competitive and have sought alliances, mergers or strategic relationships with our competitors. The Netherlands and the United States are our largest markets for both our banking and insurance operations. Our main competitors in the banking sector in the Netherlands are ABN AMRO Bank/Fortis and Rabobank. Our main competitors in the insurance sector in the Netherlands are Achmea, Fortis and Aegon. Our main competitors in the United States are insurance companies such as Lincoln National, Hartford, Aegon Americas, AXA, Met Life, Prudential, Nationwide and Principal Financial. Increasing competition in these or any of our other markets may significantly impact our results if we are unable to match the products and services offered by our competitors. Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms or have declared bankruptcy. In 2008, this trend accelerated considerably, as several major financial institutions consolidated, were forced to merge or received substantial government assistance. These developments could result in our competitors gaining greater access to capital and liquidity, expanding their ranges of products and services, or gaining geographic diversity. We may experience pricing pressures as a result of these factors in the event that some of our competitors seek to increase market share by reducing prices.
Because we do business with many counterparties, the inability of these counterparties to meet their financial obligations could have an adverse effect on our results of operations.
Because we use assumptions about factors to determine the insurance provisions, deferred acquisition costs (DAC) and value of business added (VOBA), the use of different assumptions about these factors may have an adverse impact on our results of operations.
We use assumptions in order to model client behaviour for the risk calculations in our banking and insurance books. Assumptions are used to determine insurance liabilities, the price sensitivity of savings and current accounts and to estimate the embedded optional risk in the mortgage and investment portfolios. The realisation or use of different assumptions to determine the client behaviour could have material adverse effect on the calculated risk figures and ultimately future results.
Because we also operate in markets with less developed judiciary and dispute resolution systems, in the event of disputes in these markets, the quality and the effectiveness of such systems could have an adverse effect on our operations and net results. In the less developed markets in which we operate, judiciary and dispute resolution systems may be less developed. As a result in case of a breach of contract we may have difficulties in making and enforcing claims against contractual counterparties and, if claims are made against us, we might encounter difficulties in mounting a defence against such allegations. If we become party to legal proceedings in a market with an insufficiently developed judiciary system, it could have an adverse effect on our operations and net result.
Because we are a financial services company and we are continually developing new financial products, we might be faced with claims that could have an adverse effect on our operations and net result if clients’ expectations are not met.
Our Bank assets are risk weighted. Downgrades of these assets could result in a higher risk weighting which may result in higher capital requirements and thus a need to deleverage. This may impact net earnings and the return on capital, and may have an adverse impact on our competitive position.
A sustained increase in the inflation rate in our principal markets would have multiple impacts on ING and may negatively affect our business, solvency position and results of operations. For example, a sustained increase in the inflation rate may result in an increase in market interest rates which may (i) decrease the value of certain fixed income securities we hold in our investment portfolios resulting in reduced levels of unrealised capital gains available to us which could negatively impact our solvency position and net income, (ii) result in increased surrenders of certain life & savings products, particularly, those with fixed rates below market rates, and (iii) require us, as an issuer of securities, to pay higher interest rates on debt securities we issue in the financial markets from time to time to finance our operations which would increase our interest expenses and reduce our results of operations. A significant and sustained increase in inflation has historically also been associated with decreased prices for equity securities and sluggish performance of equity markets generally. A sustained decline in equity markets may (i) result in impairment charges to equity securities that we hold in our investment portfolios and reduced levels of unrealised capital gains available to us which would reduce our net income and negatively impact our solvency position, (ii) negatively impact performance, future sales and surrenders of our unit-linked products where underlying investments are often allocated to equity funds, and (iii) 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. In addition, in the context of certain property & casualty risks underwritten by our insurance subsidiaries (particularly ‘long-tail’ risks), a sustained increase in inflation with a resulting increase in market interest rates may result in (i) claims inflation (i.e., an increase in the amount ultimately paid to settle claims several years after the policy coverage period or event giving rise to the claim), coupled with (ii) an underestimation of corresponding claims reserves at the time of establishment due to a failure to fully anticipate increased inflation and its effect on the amounts ultimately payable to policyholders, and, consequently, (iii) actual claims payments significantly exceeding associated insurance reserves which would negatively impact our results of operations. In addition, a failure to accurately anticipate higher inflation and factor it into our product pricing assumptions may result in a systemic mis-pricing of our products resulting in underwriting losses which would negatively impact our results of operations.
In such a way that all interests are balanced and safeguarded as effectively as possible. The Trust may, but has no obligation to, consult with the holders of bearer receipts or ADSs in exercising its voting rights in respect of any Ordinary shares for which it is entitled to vote. These arrangements differ from practices in other jurisdictions, and accordingly may affect the rights of the holders of bearer receipts or ADSs and their power to affect the Company’s business and operations.
The share price of our bearer receipts and ADSs has been, and may continue to be, volatile which may impact the value of our bearer receipts or ADSs you hold.
ING Bank applies the Risk Adjusted Return on Capital framework (RAROC). This method consistently measures the performance of different activities and has a clear link to shareholder-value creation. The use of RAROC increases focus on risks versus return in the decision-making process, and consequently stimulates the use of scarce capital in the most efficient way. Risk-adjusted pricing tools are also used as a basis for the pricing of certain transactions and as an important determinant in the credit-approval procedures.
Total banking operations including divestments and special items 1.2% 19.9% –0.3% 23.1%
Netherlands, Belgium, Poland and Romania from Wholesale Banking to Retail Banking.
INTRODUCTION This Pillar 3 section includes information that Basel II requires to be made publicly available (unless it has already been provided in the risk management section). The information relates to ING Bank N.V. and all of its subsidiaries. The information contained in this section has not been audited by the Group’s external auditors.
This section relates to Pillar 3, market discipline, and as such provides information on several topics. Some of the required information have already been given elsewhere in the annual report, e.g. in the risk management section and in the capital management section. This section provides additional information, as well as references to the relevant sections.
The Pillar 3 information mostly relates to credit risk, but also to market risk, operational risk and Securitisations. The requirements are mainly for underlying exposure, risk weighted assets and regulatory capital. As such it relates primarily to the first Basel II pillar, the minimum capital requirement. The second pillar concerns the banks internally used economic capital, and the supervisors review of that capital and the underlying models. Economic Capital, and consequently Pillar 2, is disclosed extensively in the risk management section. As such, the text of this Pillar 3 section should be read in conjunction with statements made in the risk management section and capital management section of the annual accounts, where there is a comprehensive discussion of risk management and capital management.
RISK MANAGEMENT AT ING BANK ING has a group risk management function that is embedded at all levels of the organisation and operates through a comprehensive risk governance framework.
The primary responsibility of the Bank risk management function lies with the Chief Risk Officer (CRO), who is a member of the Executive Board. The CRO is responsible for the management and control of risk on a consolidated level to ensure that ING’s bank risk profile is consistent with its financial resources and the risk appetite defined by the Executive Board.
The CRO has several direct reports who are all responsible for a specific risk management function within ING Bank.
Equity portfolios in the banking book under the simple risk weight approach 194 Other Non-Credit Obligation Assets (ONCOA) 2,166 Total credit risk 23,066
In order to prevent large short term effects on capital requirements, the regulators introduced transition rules (the ‘capital floor’) for institutions implementing the new capital adequacy reporting. For 2008 and 2009 the capital requirements should be no less than 90% and 80% respectively of the capital requirements calculated under Basel I regulations. The additional capital requirements according to the transition rules are EUR 6,899 million.
Credit Risk is the risk of loss from the default by debtors or counterparties. Credit risks arise in ING Bank’s lending, money market, pre-settlement and investment activities, as well as in its trading activities. Credit risk management is supported by dedicated credit risk information systems and internal rating methodologies for debtors and counterparties.
PILLAR 3 CREDIT RISK IN PRACTICE The Basel II Accord not only changes the way ING reports its credit risk for regulatory purposes; it also affects the daily operations and practices of all types of risk management at all levels within ING Bank. It has no effect on ING Insurance or Asset Management operations.
THE IRB METHOD IN SHORT There are four elements which drive the Basel II ‘risk-based approach’ to the determination of the capital base. For each of these elements, ING has developed a series of statistical, expert and hybrid models based on ING’s historical experience and other market observations.
Probability of Default (PD):• The first is the borrower’s, counterparty’s, or issuer’s (collectively referred to as the ‘obligor’) probability of default, which measures an obligor’s creditworthiness in terms of likelihood to go into default. The result of this calculation attempts to measure the senior, unsecured standalone creditworthiness of an organisation without consideration of structural elements of the underlying transactions, such as collateral, pricing, or maturity.
Maturity (M): • The fourth element is the time to the maturity of the underlying financial obligation. Basel II caps the maturity element at five years, despite the fact that many obligations extend longer than five years.
Unexpected Loss (UL): • Additionally, ING must also maintain a capital buffer against unexpected losses in order to protect itself against credit losses associated with unusual market events outside of the statistical norms.
CREDIT RISK MODELS ING considers a well-balanced and controlled set of rules around model development, maintenance and validation to be an essential component for professional risk measurement and risk management. In 2006, ING developed and implemented a Credit Risk Model Governance framework, which consists of a set of extensive guidelines and requirements to which all stakeholders must adhere when developing, implementing and maintaining PD, LGD and EAD models.
Independent Model Validation is one of the cornerstones of this framework. It consists of the process of determining that a model is appropriate for its intended use. It is an ongoing process whereby the reliability of the model is verified at different stages during its lifecycle: at conception, before approval, periodically after implementation, and when significant changes are made to the model. The validation process contains a mix of developmental evidence, process verification and outcome analysis.
EXPOSURE CLASSES The Basel II Accord has developed the concept of ‘Exposure Classes’. These are essentially groupings of credit risks associated with a common obligor type or product type. For the AIRB Approach, most of the exposure classes have subcategories. ING has applied the following definitions to determine Exposure Classes: Governments include Sovereign Government entities, Central Banks and Basel II recognised Local/Regional Authorities as well as Supranational Organisations; Institutions include all Commercial Banks, non-Bank Financial Institutions, such as Leasing Companies, Funds and Fund Managers, and Insurance Companies, as well as local and regional government entities not classified as governments; Corporates includes all legal entities, that are not considered to be Governments, Institutions or Retail Other; Residential Mortgages include all mortgage loans for residential properties that are not part of a securitisation; Retail Other includes all other credit obligations related to Retail SMEs, such as partnerships, one-man businesses and private individuals, such as consumer loans, car loans and credit cards.
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.
The figures presented in this table are EAD based on the country of the residence of the obligor. As such, these figures do not represent the risk associated with a country transfer risk event, such as a restriction on the convertibility of local currency into internationally tradable currencies. Nor do these figures represent the economic exposure that is present in a given country. The figures above are the most significant exposures. Smaller exposures are all group under Other, where none of the individual underlying exposures are more than 16.5 billion. Figures associated with ING’s transfer risk positions and economic country risk exposure can be found in risk management section, including their corresponding definitions.
The figures presented above are based on the Basel II defined EAD, and differ from the industry distribution figures that are presented in the annual accounts. Note that all other sectors have exposures that are less than 16.5 billion.
1 The threshold amount varies per business unit, but generally is EUR 0 in the international units, and EUR 1 million in the ‘home markets’.
Outstandings by Tenor Bucket (based on credit risk outstandings) per 31/12
Basel II does not include a cash flow methodology that would look at future portfolio runoff. This table, therefore, presents figures that are based on credit risk outstandings, and not EAD. Credit Risk outstandings include amounts associated with both on and off balance sheet products, but exclude amounts related to unused limits. For derivatives and securities financing, the mark-to-market plus add-on methodology is applied, but the add-ons are generally less conservative than the add-ons applied under the Basel II definitions.
Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA. Excludes revaluations made directly through the equity account.
Above presentation of the cumulative provisions is based on country of the residence of the obligor. Countries not shown in above table have cumulative provisions of less than EUR 50 million, and are grouped under Other.
Commercial Banks 106 106 Food, Beverages & Personal Care 149 36 185
Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA. Excludes revaluations made directly to the equity account.
The tables above should be read in conjunction with the corresponding tables below related to cumulative provisions by geographic area and cumulative provisions by economic sector as well as information and statements in the annual accounts.
ING 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 has adopted a policy to classify the obligor as a problem 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 certain exposure classes show no figures).
The figures above are based on credit risk outstandings, and not EAD. Credit Risk outstandings include amounts associated with both on and off balance sheet products, but exclude amounts related to unused limits. For derivatives and securities financing, the mark-tomarket plus add-on methodology is applied, but the add-ons are generally less conservative than the add-ons applied under the Basel II definitions.
At 31 December 2008, the loan loss provision shortfall was EUR 1,360 million. The cumulative amount of loan loss shortfall will generally increase in periods where loan loss provisions are decreasing on a portfolio basis, and will decrease in periods where loan loss provisions are increasing.
Risk buckets used: Includes only the SA Portfolios; excludes securitisations, equities and ONCOA. Excludes revaluations made directly through the equity account.
Regional governments and local authorities In many countries, exposures to provincial, regional and municipal governments are treated as exposures to the central government in whose jurisdiction they are established.
35% Risk Weighting Exposures secured by mortgages on residential real estate are assigned a risk weight of 35%. The risk weight is only reduced for the part of the exposure that is fully secured.
200% Risk Weighting The 200% risk weighting must be applied to collective investment undertakings which contain high risk equity investments.
Risk Ratings from Rating Models: Risk Rating processes take on several forms as described below: Rating Models requiring manual interference:• these are Models that require manual interference from the User who has to answer Rating Model based questions for each individual legal organisation in order to arrive at a Risk Rating. If not reviewed, the Risk Rating will expire 18 months after the previous review. These models are typically used for Governments, Institutions and larger Corporates; and Automated Rating Models:• these are Models that do not require manual interference. Instead, data is automatically gathered and used to determine the Risk Rating (this process is detailed further in the sections that describe ING’s Data Management and IT processes). These models are typically used for small businesses, consumer loans, and residential mortgage exposures. Risk Ratings from Appeals:• Rating Model outcomes that are perceived to be inaccurate can be appealed through the relevant Rating Appeal Process, where this exists. The Rating Appeal Process applies to all Rating Models that require manual interference. It does not apply to automated Rating Models developed for consumer lending and residential mortgage business.
Non-Rating Model based Ratings:• this pertains to Risk Ratings not calculated by means of an approved Rating Model, but manually calculated or set on the basis of an approved subjective methodology. These are generally only used for problem loan classifications (18-22) which are owned by the relevant global or regional credit restructuring unit; and for the securitisation portfolios, whereby the external ratings of the tranche in which ING has invested are leading.
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 assets 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.
These figures represent the potential exposure that may be drawn by ING’s obligors under committed facilities. In most cases, the obligors have the right to make use of these facilities unless an event of default has occurred, or another defined event within the associated credit risk agreement has occurred. In most cases, the obligor pays a commitment fee to ING on the unused portion of these facilities. Pre-Settlement, Money Market and Investment limits are generally not committed.
If all of the unused commitments were called upon at the same time, ING’s credit risks (in terms of outstandings) would increase by 12%. As part of its Exposure at Default (EAD) models, ING 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.
Includes both AIRB and SA portfolios; Excludes securitisations, equities and ONCOA.
Amount after compensation, netting and collateral 2,790 22,309 14,633 155 39,887
ING actively participates in the credit risk derivative (CDS) trading market, as a net purchaser of credit risk protection from other counterparties. ING has purchased a small amount of credit risk protection for hedging purposes, usually in order to reduce concentration on certain ‘legal one obligor groups’ without having to reduce ING’s relationship banking activities. ING does not actively sell credit default swaps for hedging or investment purposes. Although Basel II rules permit a reduction of credit risk capital under certain circumstances where ING has purchased CDS protection, ING does not currently make use of this provision in determining its Basel II capital base.
It includes qualitative and quantitative disclosures addressing both the exposure securitised as well as securitisations positions held. While quantitative disclosures are limited to those securitisations that are used for the purpose of calculating the regulatory capital requirements under the CRD, qualitative information have a broader scope and give a view on ING Bank’s entire securitisation activity.
Valuation and accounting policies ING’s activities regarding securitisations are described in Note 27 ‘Special Purpose Entities’ in the annual accounts. The applicable accounting policies are included in the section ‘Accounting policies for the consolidated balance sheet and profit and loss account of ING Group/Bank’ in the annual accounts. The most relevant accounting policies for ING’s own originated securitisation programmes are ‘derecognition of financial assets’ and ‘consolidation’. Where ING acts as investor in securitisation positions, the most relevant accounting policy is ‘classfication of financial instruments’.
ING uses the Internal Assessment Approach (IAA) for the support facilities it provides to Asset Backed Commercial Paper (ABCP) conduit Mont Blanc Capital Corp., based on externally published rating agency methodologies.
Risk weight band 1 <= 10% 64,678 Risk weight band 2 >10% and >= 18% 11,381 Risk weight band 3 >18% and >= 35% 1,008 Risk weight band 4 >35% and >= 75% 764 Risk weight band 5 >75% 933 Risk weight 1250% 1,336 Total 80,100 2.4 Additional information
Economic and Regulatory Capital• Seven synthetic securitisations of mortgages, small and medium enterprise (SME) and corporate exposures have been issued since ING began actively undertaking the securitisation of its own assets in 2003. Upon the closer alignment of transfer and regulatory capital solvency rules at year end 2007, the most senior tranches of ING’s own securitisations have been called and are now retained by ING. ING also retains the first loss tranches. The mezzanine tranches are still transferred to third parties.
Liquidity/Funding• Although the most senior tranches in securitisations are no longer efficient to release regulatory capital under Basel II, they may still be used to obtain funding and improve liquidity. To be eligible as collateral for central banks securitised exposures must be sold to a Special Purpose Vehicle (SPV) which, in turn, issues securitisation notes (‘traditional securitisations’) in two tranches, one subordinated tranche and one senior tranche, rated AAA by a rating agency. The AAA tranche can then be used by ING as collateral in the money market for secured borrowings.
ING Bank has created a number of these securitisations with a 31 December 2008 position of approximately EUR 70 billion of AAA rated notes. The underlying exposures are residential mortgages in the Netherlands, Canada, Germany and Australia.
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.
The determination of impairments and losses occurs at least every quarter at the cut-off date applicable to each specific transaction. Figures as of 31 December 2008 are used whenever available.
Notes: Cut-Off Date Most recent date in respect of which determination and allocation of losses have been made pursuant to the legal documentation of the transaction. Information on the performance of ING’s securitised exposures is published regularly.
ING as Sponsor In the normal course of business, ING Bank structures financing transactions for its clients by assisting them in obtaining sources of liquidity by selling the clients’ receivables or other financial assets to an SPV. The transactions are funded by the ING Administered Multi Seller Asset Backed Commercial Paper (ABCP) conduit Mont Blanc Capital Corp (rated A-1+/P-1). Despite the conditions in the international money markets Mont Blanc Capital Corp continues to fund itself externally in the ABCP markets.
The types of asset currently in the Mont Blanc Conduit are trade receivables, consumer finance receivables, credit card receivables, auto loans, RMBS, wrapped future cash flow transactions and CDOs/CLOs.
EQUITY IN THE BANKING BOOK Total exposure under the Simple Risk Weight Approach at the 31 December 2008 is EUR 1,042 million resulting in EUR 194 million of capital requirement.
Above table shows the unrealised gains and losses for the equity holdings. Please refer to the Market Risk segment in the Risk management section for a description of the equity holdings and accounting methodology.
OTHER NON CREDIT OBLIGATION ASSETS Other Non Credit Obligation Assets (ONCOA) represent assets of non credit obligation character that are not included in the SA or A-IRB calculations. Capital requirement for ONCOA as of 31 December 2008 is EUR 2,166 million.
MARKET RISK The general description of market risk in ING Bank can be found in the Risk management section, where the organisation, measurement and management of market risk is explained. Further, contrary to the Risk management section where several banking books are governed by the trading risk process, for Pillar 3 non-trading exposures are excluded from the trading governance. As a result the figures for both trading and non-trading books differ from the risk paragraph.
Over the reporting Period 2008 31 Dec 2008 High Mean Low Period-end
OPERATIONAL RISK The Operational Risk Capital model of ING is based on a Loss Distribution Approach (LDA). The Loss Distribution is based on both external and internal loss data exceeding EUR 1 million. The model is adjusted for the scorecard results, taking into account the specific quality of control in a business line and the occurrence of large incidents (‘bonus/malus’). This provides an incentive to local (operational risk) management to better manage operational risk. The capital calculation meets industry standards and was approved in April 2008 by DNB. Originally, the model was designed for Economic Capital (99.95% confidence level) and the Financial Risk Dashboard (90% confidence level). From 2008 onwards, the model is used for regulatory capital reporting purposes as well (AMA approach). Insurance reduction because of risk mitigation by insurance has not been applied to the AMA capital of 2008.
By Currency Euro –2,140 US Dollar –238 Pound Sterling –41 Other –11 Total –2,430
The Earnings at Risk and the Net Present Value at Risk are based on a 1% instantaneous upward shock.
ASSET AND LIABILITY COMMITTEE (ALCO) Manages the balance sheet of ING, especially with regard to strategic non-trading risk. These risks comprise interest rate exposures, equity risk, real estate risk, liquidity, solvency and foreign exchange risk and fluctuations.
ASSET BACKED COMMERCIAL PAPER (ABCP) A type of commercial paper that is collateralised by other financial assets.
CERTIFICATES OF DEPOSIT Short-term negotiable bearer debt instruments issued by banks.
DELTA HEDGE Minimises the exposure of the employee option scheme by holding an appropriate number of (depositary receipts for) ordinary shares. The exposure is reassessed every quarter and, if necessary, ordinary shares are bought from the market (or employees).
CONCENTRATIONS Of credit risk exist when changes in economic, industry or geographical factors similarly affect groups of counterparties whose aggregate exposure is material in relation to ING Group’s total exposure.
CONTINGENT LIABILITIES Possible obligations that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events but is not recognised because: it is not probable that an outflow of resources embodying economic • benefits will be required to settle the obligation; or the amount of the obligation cannot be measured with • sufficient reliability.
COUNTRY RISK The risk that a foreign government will not fulfil its obligations or obstructs the remittance of funds by debtors, either for financial reasons (transfer risk) or for other reasons (e.g. political risk).
HELD-TO-MATURITY INVESTMENTS Non-derivative financial assets with fixed or determinable payments and fixed maturity that ING Group has the positive intention and ability to hold to maturity other than: a. those that ING Group upon initial recognition designates as at fair value through profit and loss; b. those that ING Group designates as available for sale; and c. those that meet the definition of loans and receivables.
INVESTMENT RISK Investment risk is the credit default and migration risk that is associated with ING’s investments in bonds, commercial paper, securitisations, and other similar publicly traded securities.
FINANCIAL ASSET Any asset that is: cash;• an equity instrument of another company;• a contractual right to;•
FINANCIAL LIABILITY Any liability that is a contractual obligation: to deliver cash or another financial asset to another company; or• to exchange financial instruments with another company under • conditions that are potentially unfavourable; or certain contracts that will or may be settled in ING’s own • equity instruments.
FORWARD CONTRACTS Commitments to exchange currencies or to buy or sell other financial instruments at specified future dates.
LENDING RISK Lending risk arises when ING grants a loan to a customer, or issues guarantees on behalf of a customer. This is the most common risk category, and includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured at the notional amount of the financial obligation that the customer has to repay to ING, excluding any accrued and unpaid interest, or discount/premium amortisations.
MINORITY INTERESTS The part of the profit or loss and net assets of a subsidiary attributable to an interest which is not owned, directly or indirectly, by the parent company.
RECOGNITION The process of incorporating in the balance sheet or profit and loss account an item that meets the definition of an element and satisfies the following criteria for recognition: it is probable that any future economic benefit associated with the item • will flow to or from the enterprise; and the item has a cost or value that can be measured reliably.•
PLAN ASSETS Comprise assets held by a long-term employee benefit fund and qualifying insurance policies. Assets held by a long-term employee benefit fund are assets (other than non-transferable financial instruments issued by the reporting enterprise) that: are held by an entity (a fund) that is legally separate from the reporting • enterprise and exists solely to pay or fund employee benefits; and are available to be used only to pay or fund employee benefits, are not • available to the reporting enterprise’s own creditors (even in bankruptcy), and cannot be returned to the reporting enterprise, unless either the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting enterprise or the assets are returned to the reporting enterprise to reimburse it for employee benefits already paid.
PRE-SETTLEMENT RISK Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk (potential or expected risk) is the cost of ING replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps, and securities financing transactions. Where there is a mutual exchange of value, the amount of outstanding is generally based on the replacement value (mark-to-market) plus potential future volatility concept, using an historical 7 year time horizon and a 99% confidence level.
TIER-1 RATIO Reflecting the Tier-1 capital of ING Bank as a percentage of its total risk weighted assets. The minimum set by the Dutch central bank is 4%.
TREASURY SHARES An entity’s own equity instruments, held by the entity or other members of the consolidated group.
This Annual Report contains the Reports of the Executive Board and Supervisory Board as well as the Annual Accounts and Other information for the financial year 2008 in their original language (English).
The trademark of the Forest Stewardship Council (FSC) indicates that the wood used to make this review comes from a forest that is well-managed according to strict environmental, social and economic standards.