Advanced Internal Rating Based Approach There are four elements which drive the Basel II ‘risk-based approach’ to the determination of the capital base. Probability of Default (PD): The first is the counterparty’s probability of default, which measures a counterparty’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. Each borrower should have a rating which translates to a PD.
Credit risk models Within ING Bank internal Basel models are used to determine the PD, EAD and LGD for regulatory and economic capital. Bank wide, ING Bank has implemented more than 100 models, including various sub models that may be applicable for a specific portfolio.
Model Life Cycle process stages: Sign-off points: Credit risk rating process In principle all risk ratings are based on a Risk Rating (PD) Model that complies with the minimum requirements detailed in the CRD, the DNB Supervisory Rules and EBA guidelines. This concerns all counterparty types and segments, including countries.
Supranational Organisations; • Institutions include all Commercial Banks, non-Bank Financial Institutions, such as 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; and • Retail Other includes all other credit obligations related to Retail SMEs, such as partnerships, one-man businesses and private individuals, such as consumer loans, car loans and credit cards.
(1) Anticipating the further legal and factual unwinding of the ING Group, NN Group and ING Bank structure, the 2013 figures shown in the Credit Risk section are including loans to ING Group and NN Group, which were previously excluded, being ‘intercompany loans’, unless stated otherwise
AIRB SA AIRB SA AIRB SA AIRB SA AIRB SA AIRB + SA
(1) For comparison purposes, we have aligned the 2012 exposure class structure for corporate and institutions with 2013.
Corporate and Residential Mortgages comprise over 66% (2012: 70%) of ING Banks’ total portfolio. In 2013 the total Corporate exposure declined, driven by a continued disintermediation and a lack of investment by corporates. The investment portfolio is mainly concentrated in the exposure class Central Governments and Central Banks and is transitioning to largely a liquidity portfolio to support liabilities as required under new regulatory regime.
Models used for exposure classes ING Bank has developed PD, EAD and LGD models for Commercial Banking and Retail Banking portfolios. PD, EAD and LGD models are subject to CRC (or in some delegated cases: MDC) approval and changes which significantly impact the results require approval from the regulator before implementation. By nature, the above described exposure classes have different, specific characteristics. To capture these specific characteristics and to have suitable valuations and analyses in place, CRM is continuously updating and developing models within each exposure class. In total, CRM makes use of more than 100 different internal models, which have the following features: • PD models: Probability of Default estimates the likelihood that a borrower defaults within a given time period based on an assessment of borrower specific information (e.g. financial information and qualitative information), payment behaviour and product related information. For the exposure classes Governments, Institutions and Corporates, with the exception of small and medium-sized entities, the models are mostly expert based scorecards based upon an assessment of borrower specific information. The small and mediumsized entities, Residential Mortgages and Retail models are country specific and are developed statistically or as a hybrid.
– No Loss – Exit without loss: ING Bank (or the borrower) liquidates collaterals and calls guarantees in order to recover the exposure or the Borrower fully repays. Thereafter the relationship is terminated. ING Bank does not experience any loss in the process.
– Loss – Exit with loss: ING Bank (or the borrower) liquidates collaterals and calls guarantees in order to recover the exposure. Thereafter the relationship is terminated. ING Bank suffers loss in the process.
– Loss – Distressed Restructuring: ING Bank restructures the loan agreement so as to recover the exposure after allowing some discount. The relationship with the borrower continues after the restructuring. ING Bank suffers some loss in the process.
• Institutions: The main model change was the new EAD model leading to a decrease in RWA. • Corporates: A new LGD model and EAD model was implemented for the Corporates Large portfolio leading to a decrease in RWA. The
For further details regarding model changes and the subsequent RWA migration in 2013 we refer to the chapter ‘Risk Weighted Migration Analysis’ in the Pillar 3 section.
Credit risk systems and data standards The acceptance, maintenance, measurement, management and reporting of credit risks at all levels of ING Bank is accomplished through promotion of single, common credit risk data standards and the integration into common credit risk tools that support standardised and transparent credit risk practices. ING has chosen to develop the credit risk tools centrally. Corporate Credit Risk Management (CCRM) together with the Bank wide Customer Domain (BCD) jointly designs and operates the tools, the process and the environment while the ING units (the users) provide the data input and various other ING departments and/or external regulators provide the rules, policies, and methodology embedded in the various tools.
The CCRM/BCD customer-centric data model conforms strongly to the three core business needs of ING Bank: • To transact efficiently with our counterparties; • To be compliant with our internal and external obligations; and • To monitor the risks we undertake.
Guiding principles regarding data elements The guiding principles are that each data element should only be input once, and should have a clear ‘home’ system or database which is leading throughout all uses of that data element. From the data ‘home’, the data may then be redistributed to other systems or databases that may require that data in an automated straight through processing (STP) method. Depending on the need, the data may be transferred in real time, near real time, daily, weekly or monthly. This frequency of underlying data transfer is independent from the data transfer that may take place for consolidation purposes. The main credit risk systems are all accessed through a portal (Vantage), which also provides global tools for the customer domain (GRID), compliance, and regulatory reporting.
The financial statements module provides the user with the ability not only to register a company’s financial statements in a common (IFRS-EU based) format, but also to project the company’s future financial position as a result of the transactions contemplated. This allows the common view on the company’s financial status to be communicated throughout ING and to form a consistent basis on decision making processes relying on financial information. This data is then aggregated and presented on the (read-only) browser-based Financial Statements component of STARpro. Financial Statements data is automatically forwarded to Risk Rater, where it is incorporated into one of the various probabilities of default rating models. Risk Rater contains two kinds of rating models: • Automated, whereby the data for a large number of counterparties is automatically processed from the source systems on a periodic
Credit risk reporting Credit risk reporting is an important element of credit risk management. Regulators and ING Bank’s management increasingly recognise the value of risk-reporting systems and accessibility of data to monitor trends as well as to keep consistency and credibility in published data. A dedicated credit risk reporting department addresses various reporting requirements as well as key reporting principles.
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(1) In 2013, geographic areas are based on the primary country of risk and no longer based on country of residence for private individuals. The 2012 figures in the above table are treated equally.
(2) The top 5 exposures within Rest of Europe are to United Kingdom, Spain, Italy, Poland and France.
Bank to establish whether the payment default was due to non-operational reasons (i.e. the deteriorated credit quality of the financial institution) or due to operational reasons. The latter does not trigger default; 3. ING Bank thinks the Borrower is unlikely to pay: The Borrower has evidenced significant financial difficulty, to the extent that it will have a negative impact on the future cash flows of the Financial Asset. The following events could be seen as examples of financial difficulty indicators, but not as default triggers per se: • a material breach of contract; • the disappearance of an active market for a certain financial asset; and • the downgrading of a Borrower’s external rating; 4. Restructuring of the credit obligation for non-commercial reasons: ING Bank has granted concessions, for economic or legal reasons relating to the Borrower’s financial difficulty, the effect of which is a reduction in ING’s expectation of future cash flows of the financial asset below current Carrying Amount.
II. Restructuring: The restructuring status applies to those Borrowers, where there are serious concerns over creditworthiness. The asset may still be performing under all its financial obligations and towards all of its creditors, but to address the deterioration specific and significant action by ING Bank is required. Borrowers with a restructuring status can be rated anywhere in the 1-19 ranges, but typically carry a risk rating 18 or 19. Strategic management responsibility for a restructuring file will move to Global Credit Restructuring, but front office remains fully involved, also as asset owner.
Neither past due nor impaired 688,834 712,020 Consumer lending past due but not impaired (1–90 days) 6,810 6,579
Non-performing loans The ING Bank loan portfolio is under constant review. Generally, all loans with past due financial obligations of more than 90 days are automatically reclassified as non-performing. For the wholesale lending portfolios there are generally reasons for declaring a loan nonperforming prior to being 90 days past due. These include, but are not limited to, ING Bank’s assessment of the customer’s perceived inability to meet its financial obligations, or the customer filing for bankruptcy or bankruptcy protection. In some cases, a material breach of financial covenants will also trigger a reclassification of a loan to the non-performing category. ING Bank identifies as non-performing loans those loans for which it is probable, based on current information and events that the principal and interest amounts contractually due will not be collected in accordance with the contractual terms of the loan agreements.
Private Individuals 4,939 4,371 Real Estate 4,302 3,723 Builders & Contractors 1,132 1,087 Transportation & Logistics 912 954 Food, Beverages & Personal Care 800 846 General Industries 730 649
The composition and order of the non-performing loan portfolio remained unchanged over the year. The largest sector remained private individuals and is a function of the large mortgage portfolio of ING Bank. The increase in this sector took place almost entirely in The Netherlands. The increase in the real estate industry was the result of deteriorating markets in Spain, The Netherlands and Portugal. The share of spanish real estate in the total ING Bank real estate portfolio, performing and non-performing, is 6%, which is unchanged compared to 2012.
The continuing economic distress in some of the regions had its impact on the development of the risk costs in 2013. The risk costs for Commercial Banking are in line with 2012. The risk costs for Retail Benelux exceeded EUR 1 billion, reflecting continued economic distress in the Benelux. The risk costs for Retail Banking International went up slightly compared to last year.
Large parts of the Investment portfolio are not administered at amortised costs (Loans & Receivables or Held-to-Maturity) and therefore out of scope for LLP. Instead, these assets are evaluated for impairment. The Global Impairment Meeting is a quarterly process that reviews all assets that are subject to an IFRS-EU impairment test.
Modified and/or refinanced loans subject to forbearance are flagged. In case of forbearance with recognition of financial loss, a provision or a partial write-off is taken, for the difference in net present value of the expected cash flows. This is in line with ING’s accounting policies under IFRS-EU (for more detail please refer to the ‘Impairments of loans and advances to customers (loan loss provisions)’ chapter in the Accounting policies section). The performance of clients with modified loans is monitored by Credit Risk Management at least on a quarterly basis.
For retail clients, loan modifications are in line with the ING Bank retail risk policy. In 2013, Retail Banking clients that are offered a loan modification, and who have accepted such modification, are (or will be in 2014) assigned a specific risk rating and PD. Each ING Bank retail unit that applies forbearance activities has established clear criteria to determine whether a client is eligible for a modification. Also, specific approval mandates are in place to approve the modifications, as well as procedures to manage the forbearance activities. These criteria, mandates and procedures are approved by local credit risk management.
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(1) Please note Collective Provisions on Forbearance assets are not included (2) Corporate Banking includes Business Lending, Pre-Settlement, Money Market and Investment outstandings. Retail Banking includes Consumer Lending outstandings.
An amount of EUR 3.7 billion of forborne assets were part of the non-performing loan portfolio. As per 2013, ING held EUR 1.7 billion of loan loss provisions against the EUR 3.7 billion of forborn assets in the NPL portfolio which is part of ING’s total reported loan loss provisions.
Credit risk mitigation ING Bank’s lending and investment businesses are subject to credit risk. As such, the creditworthiness of our customers and investments is continually monitored for their ability to meet their financial obligations to ING Bank. In addition to determining the credit quality and creditworthiness of the customer, ING Bank uses various credit risk mitigation techniques and instruments to mitigate the credit risk associated with an exposure and to reduce the losses incurred subsequent to an event of default on an obligation a customer may have towards ING Bank. The most common terminology used in ING Bank for credit risk protection is ‘cover’.
Assets The asset which has been pledged to ING Bank as collateral or security and which gives ING Bank the right to liquidate, in cases where the customer is unable to fulfil its financial obligation. As such, the proceeds can be applied towards full or partial compensation of the customer’s outstanding exposure. An asset can be tangible (such as cash, securities, receivables, inventory, plant & machinery and mortgages on real estate properties) or intangible (such as patents, trademarks, contract rights and licenses).
Third party obligation Third party obligation, indemnification or undertaking (either by contract and/or by law) is a legally binding declaration by a third party that gives ING Bank the right to expect and claim from that third party to pay an amount, if the customer fails on its obligations to ING Bank. The most common examples are guarantees (such as parent guarantees and export credit insurances) and letters of comfort.
General guidelines on cover valuation General guidelines for cover valuation are established to ensure consistency of the application within ING Bank. These general guidelines also require that the value of the cover need to be monitored on regular basis and in principle at least annually. Covers shall be revalued accordingly and whenever it has reason to believe that the market is subject to significant changes in conditions. The frequency of monitoring and revaluation depends on the type of covers.
A significant part (49.1%) of the ING Bank’s residential mortgage portfolio relates to mortgage loans provided in the Netherlands, followed by other main markets such as Germany (22.5%), and Belgium (10.6%). Given the size of the Dutch mortgages portfolio, below the valuation methodology employed to determine the cover values for the Dutch Residential Mortgages is provided.
Cover values including guarantees received - Consumer portfolio - 2012 (1,2)
The numbers shown are conservative as the savings pledged to the mortgage product, ‘Spaarhypotheek’ (or Mortgage with external Saving account) present in the Dutch mortgage portfolio are not taken into account in the table above.
business Lending portfolio Business Lending is an important business of ING Bank, accounting for 36.1% of the total ING Bank’s outstandings. In line with our objective to give stakeholders insight into the portfolio, we present the Business Lending portfolio per Industry breakdown in accordance with the NAICS definition and per Region and main market. Business Lending presented in this section does not include Pre-settlement and Investment & Money Market exposures, which are separately exhibited in the next sections.
The REF portfolio has not stabilised since the deterioration of the economic environment which started in 2008. As a result of this, in the recent years, ING Bank aims to be more selective in the financing of Real Estate. As this sector has proven to be significantly impacted during the crisis, the value of collaterals for this portfolio is of specific importance. The REF portfolio, which mostly focuses on the business whereby ING Bank finances or refinances income producing real estate in office, retail, residential and industrial (logistics) segments or a mix of commercial properties, presents approximately 56.4% of the Real Estate sector’s outstanding.
Cover values including guarantees received - business portfolio - 2013 (1,2)
of which Non-performing of which Total Non-performing 11,083 6,815 286 2,882 2,432 4,281 20.3% 3.7% 8.1% 15.9% 19.4% 32.5%
of which Total Non-performing 10,594 5,918 354 2,974 1,939 4,915 23.9% 3.7% 5.2% 16.7% 18.0% 32.5%
As a nature of the Investment and Money Market business, typically there is little cover given to support these exposures. 99.2% of Money Market and 94.6% of Investment exposure receives no covers. The majority of ING’s investment positions are of high quality with 93.8% of the portfolio rated between AAA to A-, based on external ratings.
• Control measures used by ING include policies, procedures, limit frameworks, buffers and stress tests. • An important element of risk management is to continuously check if the implemented risk controls are executed and complied with and monitor that the controls are effective. • Results and findings are reported to the governing departments and approval bodies.
Within ING Bank, market risk falls under the supervision of the ALCO function with ALCO Bank as the highest approval authority. ALCO Bank determines the overall risk appetite for market risk. The ALCO function is regionally organised. The business lines Retail Banking (both Benelux and International). Commercial Banking and Corporate Line are represented within the respective regional and local ALCO’s. The ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk. This ensures a correct implementation of the ING Bank risk appetite.
MRM is responsible for determining adequate policies and procedures for managing market risk and for monitoring the compliance with these guidelines. An important element of the market risk management function is the assessment of market risk in new products and businesses. Furthermore MRM maintains an adequate limit framework in line with ING Bank’s risk appetite. The businesses are responsible for adhering to the limits that ultimately are approved by ALCO Bank. Limit breaches are reported to senior management on a timely basis and the business is required to take appropriate actions to reduce the risk position.
For the trading books, the linear interest rate risk in the banking books and equity investments the VaR (measured at a 99% confidence interval, a one day holding period and under the assumption of an expected value of zero) is taken as a starting point for the economic capital calculations for market risk. To arrive at the economic capital for market risk, a simulation based model is used which includes scaling to the required confidence interval and holding period. In determining this scaling factor, several other factors are also taken into account like the occurrence of large market movements (events) and management interventions.
Real Estate 563 722 Equity Investments 880 1,730 294 ING Group Annual Report 2013
The decrease in market risk Regulatory Capital for Trading is due to position changes, relative calm (less volatile) markets combined with more volatile scenarios dropping out of the VaR calculation. This led to a decrease in the VaR and Stressed VaR component of the regulatory capital calculation, which was partially offset by an increase in IRC due to updated LGD model parameters for the sovereign bond portfolio.
Market risk in banking books ING Bank makes a distinction between trading and banking (non-trading) books. Positions in banking books can originate from the market risks inherent in commercial products that are sold to clients. Both the commercial products, and the products used to hedge market risk exposures in these products are intended to be held until maturity, or at least for the long-term. ING Bank distinguishes the following types of market risk in banking books: • Interest Rate Risk, including customer behaviour risk; • Credit Spread Risk; • Foreign Exchange (FX) Risk; • Equity Price Risk; and • Real Estate Price Risk.
An important element of the management of market risks in the banking books is the process of risk transfer. In this process the interest rate, FX and liquidity risks are transferred from the commercial books through matched funding to Bank Treasury, where it is centrally managed. The scheme below presents the transfer and management process of market risks in the banking books: Model disclosure of banking risk measures See Risk model governance and model validation section
Convexity risk is defined as the sensitivity towards interest volatility and second order changes in the interest rate. Convexity risk is a result of products that contain embedded options, like mortgages. In some cases, convexity risk is transferred from the commercial books to treasury books using swaption and cap/floor contracts.
Retail Banking Benelux –52 42 –109 34 Retail Banking International –52 20 378 –12 Corporate Line –11 17 –24 42
–100 bps +100 bps –100 bps +100 bps by business Commercial Banking 57 –30 371 –260 Retail Banking Benelux –184 –209 –289 –201 Retail Banking International 30 236 –393 136 Corporate Line 1,519 –1,506 1,710 –1,815 297ING Group Annual Report 2013 1 W h o w e are 2 R
–100 bps +100 bps –100 bps +100 bps by accounting category Amortised Cost –1,115 923 –134 –693 Fair value through equity 2,459 –2,347 1,393 –1,419 Fair value through profit and loss 78 –85 140 –28
In line with NPV-at-Risk, the bank’s overall BPV position is dominated by the long-term investment of capital, as the present value of this position is significantly impacted if interest rates move up by one basis point.
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Risk Profile Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments whose value reacts similarly to a particular security, a defined basket of securities, or a securities index. This equity exposure mainly consists of the investments in associates of EUR 707 million (2012: EUR 841 million) and equity securities held in the available-forsale (AFS) portfolio of EUR 1,645 million (2012: EUR 2,634 million). The value of equity securities held in the available-for-sale portfolio is directly linked to equity security prices with increases/decreases being recognised in the revaluation reserve, except in the case of impairment. Investments in associates are measured in accordance with the equity method of accounting and the balance sheet value and therefore not directly linked to equity security prices.
Risk profile ING Bank has two main different categories of real estate exposure on its banking books: First, the own buildings ING Bank occupies, and second - development assets, which mostly consists of former Real Estate Development and Real Estate Investment Management activities.
ING Bank’s real estate exposure in the banking books (i.e. including leverage and committed purchases) is EUR 2.6 billion. For market risk management purposes, the total real estate exposure amounts to EUR 2.5 billion since property from foreclosures (EUR 0.07 billion) and third party interest (EUR 0.04 billion) are excluded.
Main exposure arises from office buildings in own use located in Netherlands and Belgium (EUR 0.9 billion), as well as retail and residential exposures in Europe (EUR 0.7 billion).
Market Risk Management Product Control has the role to identify or challenge market data and pricing sources as well as determining the parameters that will be used in the valuation models. When using valuation techniques, identified market data and sources used for the calculations are independently challenged, reviewed and validated on a regular basis, most of it daily. In order to guarantee the highest quality and consistency in market data inputs, ING started this year migrating these activities into one single source for consistent validated market data inputs across ING. ING uses an in house developed infrastructure for this purpose and has started to upgrade this application phase-wise with enhanced validation techniques to apply to the market data obtained from external data vendors (e.g. Bloomberg, Reuters and others). ING expects to have completed the migration in 2014.
Model disclosure of trading risk measures Value at Risk MRM uses the historical simulation Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, equity prices, foreign exchange rates, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. Next to general market movements in these risk factors, VaR also takes into account market data movements for specific moves in e.g. the underlying issuer of securities. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and backtesting, and VaR with a 10-day horizon for determining regulatory capital.
Limitations VaR has some limitations. VaR 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 capital 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. Also, the use of 99% confidence level means that VaR does not take into account any losses that occur beyond this confidence level.
Risk profile The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon versus daily trading profits and losses. The overnight VaR is presented for the ING Commercial Banking trading portfolio for 2012 and 2013.
Regulatory capital According to the Dutch regulation, regulatory capital for trading portfolios can be calculated using the standardised approach or an internal model approach. ING Bank received approval from the DNB to use an internal VaR model to determine the regulatory capital for the market risk in most trading books of ING Bank. Market risk capital of CAD2 trading books is calculated according to the Basel 2.5 framework, using an internal VaR, Stressed VaR and Incremental Risk Charge model, where diversification is taken into account. On the other hand, market risk capital of CAD1 books is calculated using standardised fixed risk weights. In 2013, capital on all trading books is performed under the Internal Model Approach, except for securitisations which are calculated under the Standardised Approach. Mismatches in FX risk from the banking books are also incorporated under the Standardised Approach.
Incremental Risk Charge 438 360 Total Internal Model Approach 170 59 667 744
Foreign exchange Foreign exchange Chinese Yuan 297 US Dollar –302 US Dollar –214 Chinese Yuan 178 Romanian Leu 46 Taiwan Dollar 151 Singapore Dollar –21 Russian Ruble –37 Taiwan Dollar 19 Czech Koruna 33
(1) Basis Point Value (BPV) measures the impact on value of a 1 basis point increase in interest rates. (2) Credit Spread Sensitivity (CS01) measures the impact on value of a 1 basis point increase in credit spreads.
ING Bank incorporates funding and liquidity management in its business strategy. In order to optimise its funding and liquidity risk management ING Bank has developed a funding and liquidity risk framework aimed at maximising liquidity access and minimising funding risks and costs. The main objective of ING’s funding and liquidity risk management is to maintain sufficient liquidity to ensure safe and sound operations under normal market circumstances and in times of crisis. Funding and liquidity risk includes three types of risk, two under normal, and one under stress conditions: 1. Business as usual situation: • Structural funding & liquidity risk: The potential negative impact on an organisation’s income or cash position due to mismatches between expected liquidity tenors of assets and liabilities • Customer behaviour funding & liquidity risk: The potential negative impact on an organisation’s income or cash position due to liquidity options embedded in assets and liabilities that include a client behaviour risk 2. Stress situation: • Stress funding & liquidity risk: The risk an organisation may become unable to meet its financial obligations when due, because insufficient cash is available or cannot be generated in time at a reasonable costs by attracting new unsecured funding or rolling over existing funding, or selling / repo-ing assets, potentially resulting in default.
The Management Board Bank defines the funding and liquidity strategy, target funding and liquidity position and the risk appetite based on recommendations from Bank Treasury, Capital Management, Market Risk Management and Finance. Liquidity risk management within ING Bank falls under the supervision of the ALCO function, with ALCO Bank as the highest approval authority overseeing the execution of the overall strategy set by the Board.
The identification of liquidity risks is primarily a responsibility of the 1st line business management function. The 2nd line Market Risk Management function is responsible for defining the governance with regard to funding and liquidity management. Next to this, Market Risk Management sets the standards for the funding and liquidity risk approach (identify, assess, control, monitor and report) and determines adequate policies and procedures for managing and monitoring liquidity risk in view of compliance with guidelines and limits.
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• Funding: The Bank Treasury function will set and update the funding strategy and funding planning, taking into account diversification in sources and tenor of funding.
Based on the above, ING Bank has defined the following funding and liquidity risk management risk appetite statements: • The structural mismatch in expected liquidity tenors of ING Bank’s assets and liabilities per significant currency is manageable. • Home/host regulatory liquidity limits should be pro-actively complied with. • The time-to-survive in a funding stress situation should extend over multiple quarters. • Funding of all longer-term assets and investments should be done by stable and longer-term liabilities. • Geographical dependencies with respect to intra-group funding are to be limited or decreased. • Diversification should be in place of funding profile, across funds providers, instrument types, geographic markets, tenors and currencies. Also refer to Note 48 in which ‘Assets by contractual maturity’ are shown.
In the table below, the various funding sources are presented in the funding mix.
Stress testing Stress testing allows a bank to examine the effect of exceptional but plausible future events on the liquidity position of the bank and provides insight into which entities, business lines or portfolios are vulnerable to which type of risks or in which type of scenarios. Liquidity stress testing is an important tool in identifying, assessing, measuring and controlling funding and liquidity risks, providing a complementary and forward-looking perspective to other liquidity and funding risk management tools
ING Bank believes that fully embedding controls preserves and enhances the trust of its customers, staff and shareholders and so is essential to building sustainable businesses. ING Bank’s Business Principles set the foundation for the high ethical standards ING Bank expects of all business activities. ING Bank’s Business Principles require all staff to conduct themselves, not only within the spirit and letter of laws and regulations, but also with integrity, whilst being open and clear, respectful, and responsible.
Processes are in place to identify key threats, vulnerabilities and the associated risks which might cause adverse events. Event identification is performed proactively and precedes a risk assessment. Different techniques for event identification exist within ING Bank, e.g. Risk & Control Self-Assessments, scenario analysis, external events inventories, internal incident analyses (e.g. lessons learned based on information from incident reporting), key risk indicators and threat scans.
Operational risk Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the related risk of reputation loss, as well as legal risk but strategic risks are not included. Effective operational risk management leads to more stable business processes (including IT systems) and lower costs.
In the Netherlands the risk of criminal skimming activities of debit cards has been significantly mitigated in 2013. This is due to the introduction of Geo-blocking, which prevents criminals using data from skimmed cards, in combination with the EMV chip, the global standard for credit and debit payment cards. ING Bank continues to stringently monitor possible new fraud methodologies that can emerge following the introduction of new payment methods and products.
ING Bank categorises compliance risk into four conduct-related integrity risk areas: client conduct, personal conduct, organisational conduct and financial conduct. ING Bank has a Whistleblower Policy which encourages staff to speak up if they know or suspect a breach of external regulations, internal policies or Business Principles.
Regulatory measures and law enforcement agencies investigations Agreement with U.S. Authorities On 12 June 2012, ING Bank entered into a Settlement Agreement with U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Deferred Prosecution Agreements with the Department of Justice, the United States Attorney’s Office for the District of Columbia and the District Attorney of the County of New York (together the ‘U.S. Authorities’) in relation to the investigation by those agencies into compliance with U.S. economic sanctions and U.S. dollar payment practices until 2007.
Each of these components is calculated separately, and combined to one business risk figure via the variance-covariance methodology.
Risk ManageMent nn gRoup introduction Risk taking is integral to the business model for insurance, investment management, and banking organisations such as NN. NN has developed and implemented a risk management structure that is designed to identify, assess, control and monitor the risks associated with its business. Through its risk management practices, NN seeks to meet its obligations to policyholders and other customers and creditors, manage its capital efficiently, and comply with applicable laws and regulations.
oRganisationaL Risk ManageMent stRuCtuRe Management Board and its (sub)committees The Management Board is responsible for defining, installing, and monitoring the risk management organisation in order to ensure its control systems are effective. The Management Board or its subcommittees approve all risk management policies as well as the quantitative and qualitative elements of NN’s risk appetite. The Management Board reports and discusses these topics with the Risk Committee, which is a sub-committee of the Supervisory Board, on a quarterly basis.
• third line of defence: corporate audit services (Cas). CAS provides an independent assessment of the standard of internal control with respect to NN’s business and support processes, including governance, risk management and internal controls.
• information and communication. Communication of information is a key part of NN’s risk management framework. Risk management officers, departments, and committees within NN are informed regularly of NN’s position compared to its strategic objectives and its risk appetite to enable them to monitor developments and to timely take appropriate decisions. Comprehensive reports on NN’s financial and insurance risks, and on its non-financial risks, are prepared and discussed every quarter. These reports analyse, amongst others, developments in financial markets and their impact on NN’s capital position, the effectiveness of NN’s hedge positions, and any incidents that may have occurred.
• Monitoring. The effectiveness of NN’s risk management itself is also monitored. Regular monitoring ensures that risk management is maintained at all organisational levels of NN and is carried out by all three lines of defence.
Risk ManageMent poLiCies, stanDaRDs anD pRoCesses NN has a comprehensive set of risk management policies, standards and processes in place. These policies, standards and processes are regularly updated to align with industry practices and changes in NN’s business profile, and to comply with applicable laws and regulations. Key areas of risk management for which NN has established policies, standards and processes are set out below.
Risk appetite framework NN’s risk appetite framework determines which risks NN wishes to take, to avoid, to retain and/or to remove. The risk appetite framework consists of qualitative and quantitative statements as to risk preferences, risk tolerances, risk limits and risk controls. The risk appetite framework is based on three key quantitative measures that aim to: • ensure cash capital is sufficient following a 1 in 20 annual risk sensitivity; NN quantifies this using regulatory capital sensitivities and potential capital management actions.
• Managing investments. NN has an appetite for investments that will provide an appropriate risk and return for NN’s policyholders and shareholders. • Managing operations. Under this category, NN stipulates requirements for managing reputation, business continuity, processes and controls, as well as providing a safe and engaging work environment for a competent workforce.
iFRs reserve adequacy test All of NN’s operating insurance entities need to ensure that their IFRS insurance reserves are tested for adequacy taking into account the insurance premium rate levels and the uncertainty of future returns on investments. The reserve adequacy test is executed by evaluating insurance liabilities on current best estimate actuarial assumptions plus a risk margin to ensure that the reserves remain adequate based on these assumptions. The assumed investment earnings are a combination of the run-off of portfolio yields on existing assets, anticipated new premiums and reinvestment rates in relation to maturing assets.
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Risk pRoFiLe Main types of risks The following principle types of risk are associated with NN’s business: • insurance risk. Insurance risks are the risks related to the events insured by NN and comprise actuarial and underwriting risks such as mortality, longevity, morbidity, and non-life insurance risks, which result from the pricing and acceptance of insurance contracts. • Business risk. Business risks are the risks related to the management and development of the insurance portfolio but excludes risks directly connected to insured events. Business risk includes policyholder behaviour risks and expense risks. Business risks can occur because of internal, industry, or wider market factors.
– Separate account businesses. The separate account businesses are those in which the policyholder bears the market and credit risk. NN’s earnings from the separate account businesses are primarily driven by fee income. However, in the case of variable annuities and the guaranteed separate account pension business in the Netherlands, NN retains risk associated with the guarantees provided to its policyholders. Businesses in this category are (i) the variable annuities (Va) portfolio, (ii) the group pension business in the Netherlands for which guarantees are provided, and (iii) other separate account business, primarily the unit linked business.
• operational risk. Operational risk is a non-financial risk that includes direct or indirect losses resulting from inadequate or failed internal processes (including as a result of fraud and other misconduct), systems failure (including information technology and communications systems), human error, and certain external events.
NN’s internal model uses, among others, statistics, observed historical market data, insurance policy terms and conditions, and NN’s own judgment, expertise and experience, and includes assumptions as to the levels and timing of payment of premiums, benefits, claims, expenses, interest rates, credit spreads, investment portfolio performance (including equity market and debt market returns), longevity, 316 ING Group Annual Report 2013
mortality, morbidity and product persistency, and customer behaviour (including with respect to surrenders or extensions). NN follows strict governance, periodically revisiting these assumptions and regularly challenging them. NN also models risk to regulatory capital and IFRS results using models. As such, NN’s economic capital calculations and risk sensitivities should be considered as estimates.
The table below sets out NN’s economic capital by risk category as at 31 December 2013 and 2012, respectively.
The overall economic capital for NN decreased by over EUR 1.7 billion from 2012 to 2013 primarily because NN sold most of the Asian business units. This is further explained in the ‘Economic capital for entities outside NN’s internal model’ section.
impact of scope change on economic capital for 2012 The 2012 economic capital numbers have been updated to reflect the change in scope from Insurance Europe as reported in the 2012 Annual Report to numbers comparable to those reported for 2013.
solvency ii In 2013 NN continued the internal model pre-application process with regulators in order to ensure the model is approved as an internal model under the Solvency II regulations and is fit for local use in all of its regulated entities. Over the course of 2014, NN intends to move its economic capital calculations to full Solvency Capital Requirements (sCR), in accordance with the current draft of the Solvency II Directive. Differences in the calculation of SCR compared to current calculations of economic capital can arise from Omnibus II Directives, in particular related to long term guaranteed business. NN’s economic capital ratio, calculated as available financial resources/economic capital will be adjusted to own funds/SCR.
The table below provides a summary of the largest expected differences in the calculation methodology of available and required capital from the current internal methodology to Solvency II, as interpreted by NN. Several of the Solvency II items have not yet been defined well enough to provide a reliable estimate of the impact, but each one could potentially be material.
Current Available financial resources Solvency II Own funds Current Economic capital
Risk mitigation Proper pricing, underwriting, claims management, and diversification are the main risk mitigating actions for insurance risks.
Netherlands Non-Life and ING Re reinsure windstorm catastrophe risks. As windstorm risk diversifies well with other risks taken by NN, from 2014 NN has increased its tolerance level for this risk and decreased the re-insurance cover for windstorm catastrophe risk; • tolerance limits for life insurance risks are set per insured life and significant mortality events affecting multiple lives such as pandemics; • reinsurance is used to manage risk levels (such as morbidity reinsurance in the COLI business in Japan Life). Reinsurance creates credit risk which is managed in line with the reinsurance credit risk policy of NN, and; • NN participates in industry pools in various countries to mitigate the risk from terrorism.
Business Risk Business risks are the risks related to the management and development of the insurance portfolio but excludes risks directly connected to insured events. Business risk includes policyholder behaviour risks and expense risks. Business risks can occur because of internal, industry, or wider market factors.
Risk profile Policyholder behaviour risk Policyholder behaviour risk is the risk that policyholders use options available in the insurance contracts in a way that is different from that expected by NN. Depending on the terms and conditions of the insurance policy and the laws and regulations applicable to the policy, policyholders could have the option to surrender, change premiums, change investment fund selections, extend their contracts, take out policy loans, make choices about how to continue their annuity and pension savings contracts after the accumulation phase, or even change contract details. As a result, over the life of an insurance policy, a policyholder may seek to change the terms of that policy, and NN may consult with the relevant customer with a view to verifying that the relevant policy remains suitable for the policyholder, sometimes resulting in changes to the relevant insurance policy. Policyholder behaviour therefore affects the profitability of the insurance contracts. The risk that policyholders maintain their contracts longer than NN has assumed is specific to the variable annuity business when guarantees are higher than the value of the underlying policyholder funds, the pension business in the Netherlands, and the older higher interest rate guaranteed savings business in Europe. The risk that policyholders hold their contracts for a shorter period than NN has assumed relates to the life business in Japan and the unit linked businesses in the Central and Eastern European businesses
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Over 80% of the expense risk capital is driven by Netherlands Life. The economic capital amount related to expense risk in Netherlands Life is sensitive to the level of interest rates, and the decrease in the expense risk capital was primarily attributable to the increase of the discount curve in 2013, together with a decrease in overall expenses.
NN invests in private equity through its holding of Parcom Capital Management. Parcom Capital Management is a captive mid-market private equity firm active in the Netherlands, France and Germany.
Price changes in equity holdings and equity-related derivatives are directly reflected in Available Financial Resources, the IFRS balance sheet and in the regulatory available capital in the jurisdictions in which NN has general account equity holdings. Only value movements of derivatives and impairments of equity holdings are reflected in the IFRS result before tax.
general account real estate assets by sector Revalued through P&L Not revalued through P&L
general account liabilities’ annual undiscounted cash flows (net of expenses and commissions) (1)
Risk measurement The Economic capital for general account interest rate risk increased from EUR 194 million at year-end 2012 to EUR 262 million at year-end 2013. This economic capital is small relative to the general account insurance provisions, due to effective ALM and interest rate hedges. The increase in capital is modest for the total balance sheet size and reflects a small reduction in asset duration.
• economic capital. To determine economic capital, general account fixed income assets are held at market value, thereby creating credit spread sensitivities. Just as in the available regulatory capital (Netherlands), the long duration of NN’s fixed income assets amplifies the impact of credit spread sensitivities for economic capital. The discount rate to value the insurance liabilities consists of the swap rate plus an illiquidity premium. NN uses the spreads of a covered bond index to determine the illiquidity premium at a given point in time. The fact that the bonds are fully collateralised means that there is limited credit risk in relation to these bonds. Any spread movements in the covered bond index therefore represent illiquidity related to demand and supply characteristics and/or market sentiment at any point in time. As NN does not invest in the covered bond index to back the general account liabilities, there can be mismatches between illiquidity experienced on NN’s own assets and the illiquidity depicted by the covered bond index.
Food, Beverages & Personal Care 622 675 1% 1% Other Corporate and Financial Bonds 2,040 2,961 3% 4%
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The table below sets out NN’s holdings of asset-backed securities by market value of asset type and the percentage of NN’s total general account asset-backed securities portfolio as at 31 December 2013 and 2012, respectively.
Credit quality: nn mortgage loan portfolio, outstandings Netherlands Life NN Bank
If a payment of interest or principal is more than one day late, the loan is considered ‘past-due’. If the arrear still exists after 90 days, the loan is categorised as non-performing loan. It keeps this status until the arrear is resolved. Of the mortgage loans that are past-due, 68% have been past-due for 1-30 days.
Risk mitigation The FX risk at the local entity level is mitigated by limiting investment to the local currency assets. The exceptions are Japan Life, where USD and EUR assets are held to diversify the portfolio and the FX risk is managed through rolling FX forward contracts and in the large general account portfolio of Netherlands Life. The FX risk at the holding level is managed using FX forward contracts.
Variable annuity business overview, 2013 number of policies account Value (1)
The sponsor employer selects the investments based on a basket of equity and fixed income instruments and real estate and pays a fee for the guarantee. The value of the guarantee that NN provides is sensitive to interest rates, movements in the underlying funds and the volatility of those funds.
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opeRationaL Risk Risk profile Operational risk is a non-financial risk that includes direct or indirect losses resulting from inadequate or failed internal processes (including as a result of fraud and other misconduct), systems failure (including information technology and communications systems), human error, and certain external events.
Mitigation of operational risks can be preventive in nature (e.g. training and education of employees, preventive controls, etc.) or can be implemented upon discovery of a risk (e.g. enforcement of controls, disciplinary measures against employees). Risk mitigating actions or controls are based on a balance between the expected cost of implementation and the expected benefits.
NN separates compliance risk into four risk areas: client conduct, personal conduct, organisational conduct, and financial services conduct. In addition to effective reporting systems, NN has a whistle blower procedure which protects and encourages staff to speak up if they know of or suspect a breach of external regulations, internal policies or business principles. NN also has policies and procedures regarding anti-money laundering, sanctions and anti-terrorist financing, gifts and entertainment, anti-bribery, customer suitability, Chinese walls and confidential and inside information, as well as a code of conduct for its personnel.
eConoMiC CapitaL FoR entities outsiDe nn’s inteRnaL MoDeL NN has several businesses which are not included in the internal model as the internal model has been developed for insurance operations. NN determines the economic capital for these businesses using an approach consistent with the way these businesses are included in the AFR calculations as described in the Capital Management section.
Pension fund business in Europe 178 157 NN Bank 271 34 ING Investment Management 191 223 Other non-modelled entities 236 417 Asia discontinued 112 1,504
The Pension Fund businesses in Central Europe have been included on the basis of their local required capital using sectoral rules. NN Bank has been included in 2013 using 12% of risk weighted assets. At year-end 2012 NN Bank was not of meaningful size and its economic capital was based on its IFRS equity. The IIM entities and the other non-regulated business units have been included at their amount of IFRS equity adjusted for intangibles. The discontinued insurance operations in Asia have been included in the economic capital using 150% of the Solvency I requirement. The economic capital reduced significantly due to the 2013 closing of the sale of the life insurance businesses in Hong Kong, Macau, India, South Korea and Thailand as well as the closing of the sale of the investment management businesses in South Korea and China. At 31 December 2013, the life insurance Joint Venture in China and the investment management entities in Taiwan and India are the only remaining discontinued Asian businesses. The economic capital of these businesses is added without taking into account diversification benefits.
ReguLatoRY CapitaL anD iFRs ResuLt BeFoRe taX sensitiVities The following two sections will provide the sensitivities of regulatory capital and IFRS result before tax, which are also important risks monitored by management and can be different from economic sensitivities. The following table sets out the shocks to parameters used to assess the sensitivities.
This is measured by the impact of a 10% drop in real estate prices only for the minority holdings and direct for all real estate re-valued through P&L. Other holdings will be included in case of possible impairments caused by the drop in prices. As rental income is already included in planned annual earnings, no offset (to the -10% shock) is taken into account for rental income.
Same shock as applied for the regulatory capital sensitivities. Note that both the 2013 and 2012 sensitivity have been based on the assumption that the accounting policy change for the Japan Closed Block VA GMDB business as of 1-1-2014 has already been implemented.
(1) In 2012, NN did not report regulatory capital sensitivities Therefore, the 2012 regulatory capital sensitivities are high level estimates based on internal risk management reports.
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The credit spread sensitivity is the largest risk to cash capital and is primarily caused by Netherlands Life given the long term assets in the Netherlands Life portfolio and the spread risk to the liability discounted at the swap rate (see Market and Credit Spread Risk: General Account Business—Credit spread risk). Also, Netherlands Non-Life, Spain Life, Greece Life and Japan Life are exposed to credit spread risk on their regulatory balance sheet as assets are valued at market value.
Apart from the estimated sensitivities set out above, NN is exposed to volatility and basis risk with regards to the separate account guaranteed group pension business in Netherlands Life. Netherlands Life is also exposed to changes in assumptions with regards to longevity, expenses and policyholder behaviour as the present value impact on the policyholder liabilities of such assumption changes will be immediately reflected in the available regulatory capital.
• Regulatory Capital framework – Insurance and Investment Management legal entities have to comply with local statutory capital frameworks that are under supervision of local regulators. Most of these frameworks for insurance businesses in Europe are based on Solvency I principles and are expected to migrate to Solvency II starting in 2016.
The payment of EUR 1.125 billion is the second tranche of a series of four tranches that are part of the amended EC Restructuring Plan which was announced on 19 November 2012. The third tranche is scheduled to be paid in March 2014 and the final tranche is scheduled to be paid ultimately in May 2015.
pRoCesses FoR Managing CapitaL In addition to measuring capital adequacy, Capital Management also ensures that sufficient capital is available through setting targets and limits relevant to the above mentioned metrics for ING Group, ING Bank, and NN Group and ensuring adherence to the set limits and targets through planning and executing capital management transactions. The ongoing assessment and monitoring of capital adequacy is embedded in Capital Management’s capital planning process. Following the annual budgeting process, each year a capital plan is prepared for the Group as a whole and each of its material businesses. This plan is updated on a quarterly basis and it is assessed to what extent additional management actions are required. At all times maintaining sufficient financial flexibility should be preserved to meet important financial objectives. At the foundation of the capital plan are ING’s risk appetite statements that determine target setting. These constraints are being cascaded to the different businesses in line with our risk management strategy.
(2012: EUR –338 million) for Real estate for own use and EUR 125 million (2012: EUR 28 million) for own credit risk. The Dutch banking regulator requires this deduction to be made from Tier 1 capital. This deduction is added back to Tier 2 capital.
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(5) Includes revaluation debt securities, revaluation reserve cash flow hedge and the revaluation reserves excluded from Tier 1 as described in ING’s Capital base table.
(1) Hybrids issued by ING Group at notional value. (2) Hybrids issued by NN Group at notional value capped at 25% of EU required capital. As from 1 January 2013 the hybrid issued by NN Group N.V. with notional amount of EUR 476 million does not qualify anymore for IGD Capital based on regulations from DNB. (3) The actual required regulatory adjustments for IGD capital and the EU required capital may be different from the estimate since the statutory results are not final until filed with the regulators.
(4) The IGD Solvency I ratio reported in the 2012 Annual Report of 245% is restated due to the change in accounting policy for employee benefits as disclosed in the section ‘Changes in accounting policies in 2013’ on page 98.
Shareholder’s equity (parent) 14,227 26,423 Revaluation reserve debt securities –2,804 –9,282 Revaluation reserve crediting to life policyholders 2,579 5,673 Revaluation reserve cash flow hedge –2,726 –3,548 Goodwill –264 –351 Minority interests 68 217 Capital base for financial leverage (a) 11,080 19,132
Hybrids issued by ING (1) 2,401 2,451 Hybrids issued by NN Group (2) 491 496 Total hybrids (b) 2,892 2,947
Financial leverage ratio (e)v= (d) / {(a) + (d)} 26% 31%
(1) Comparable capital ratio for ING Life Japan is at March 31st, 2013, as the financial year for ING Life Japan runs from April 1st until March 31st. (2) The 2013 capital ratios are not final until filed with the regulators.
NN Life’s capitalisation improved due to a EUR 0.6 billion capital injection, higher performance of the equity portfolio, lower credit spreads, but offset by the change in valuation curve from ECB AAA curve to DNB Swap curve. Following the subordinated loan to NN Life and the impact of the pension agreement in the first quarter of 2014, the estimated pro-forma solvency I ratio for NN Life is 234%.
The capital ratio of ING Re increased mainly due to a capital injection of EUR 0.6 billion to strengthen its capitalisation from an economic basis, favourable market developments and a decrease in required capital. Required capital decreased mainly due to lower value of the guarantees for the reinsured Japan VA business and the termination of the Stop-Loss contract with Poland.
ING Life Japan’s capital ratio improved due to profits in the period from 1 April until 31 Dec 2013, growth of business volume driven by continuous good sales for COLI business and lower required capital, reflecting decreasing SPVA minimum guarantee reserve, which is led by favourable market developments and the increased SPVA lapse.
aFR and eC positions amounts in billions of euros 2013 2012
Quantitative disclosures on capital measurements and ratios Group Bank NN Group
Core tier 1 ratio (Bank) Year-end actual Tier 1 ratio 11.72% 11.97% Regulatory minimum Tier 1 ratio 2.00% 2.00% Target minimum Tier 1 ratio 10.00% 10.00%
tier 1 ratio (Bank) Year-end actual Tier 1 ratio 13.53% 14.40% Regulatory minimum Tier 1 ratio 4.00% 4.00% Target minimum Tier 1 ratio 11.50% 10.00%
Debt/equity ratio (group) Debt/Equity ratio 8.44% 11.23% Target maximum Debt/Equity ratio 15.00% 15.00%
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Parent company statement of changes in equity of ING Groep N.V.
The comparative amounts for 2012 are restated for the change in accounting policy as disclosed in the section ‘Change in accounting policies in 2013’ in the Note 1 ‘Accounting policies’ of the consolidated annual accounts.
On 30 September 2013, ING U.S., Inc. (‘ING U.S.’) was transferred to ING Groep N.V. by way of a dividend in kind. As a result, ING U.S. is now a direct subsidiary of ING Groep N.V. As the transfer was performed at carrying value, the transaction did not impact ING Group’s Net result from continuing and discontinued operations nor ING Group’s Total Equity.
No changes occurred in the issued share capital and share premium in 2012.
Changes in other reserves and unappropriated result 2012 Retained earnings Treasury shares Other reserves Total Other reserves Unappropriated result Total
Notes to the parent company annual accounts of ING Groep N.V. continued 350 ING Group Annual Report 2013
The total amount of non-distributable reserves is EUR 8,091 million (2012: EUR 13,340 million).
Other amounts owed and accrued liabilities are payable within one year.
REMUNERATION OF SENIOR MANAGEMENT, EXECUTIVE BOARD AND SUPERVISORY BOARD The information on share-based payment plans and remuneration of the members of the Executive Board and the Supervisory Board is included in the Consolidated annual accounts (page 227 up to and including page 229).
For 2013, the Executive Board, with the approval of the Supervisory Board, has determined to appropriate the entire result to reserves, so that no dividend will be paid. In 2013, no interim dividend was paid.
In case one or more of the factors mentioned above adversely affects the profitability of our business, this might also result, among other things, in the following: • changes in the treatment of deferred acquisition costs (‘DAC’); • reserve inadequacies, which could ultimately be realised through profit and loss and shareholders’ equity; • the write-down of tax assets impacting net results and or equity; • impairment expenses related to goodwill and other intangible assets, impacting net results; • movements in risk weighted assets for the determination of required capital; • changes in credit valuation adjustments and debt valuation adjustments; and/or • additional costs related to maintenance of higher liquidity buffers.
Shareholders’ equity and our net result may be significantly impacted by turmoil and volatility in the worldwide financial markets. Negative developments in financial markets and/or economies 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 ‘—Continued risk of resurgence of turbulence and ongoing volatility in the financial markets and the economy generally have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations’ below.
The default of a major market participant could disrupt the markets. Within the financial services industry, the severe distress or default of any one institution (including sovereigns) could lead to defaults by, or the severe distress of, other market participants. Such distress of, or default by, an influential financial institution could disrupt securities markets or clearance and settlement systems and lead to a chain of defaults by other financial institutions because the commercial and financial soundness of many financial institutions may be closely related as a result of credit, trading, clearing or other relationships. Even the perceived lack of creditworthiness of a sovereign or financial institution (or a default by any such entity) may lead to market-wide liquidity problems and losses or defaults by us or by other institutions. This risk is sometimes referred to as ‘systemic risk’ and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with whom we interact on a daily basis and financial instruments of sovereigns in which we invest. Systemic risk could have a material adverse effect on our ability to raise new funding and on our business, financial condition, results of operations, liquidity and/or prospects. In addition, such distress or failure could impact future product sales as a potential result of reduced confidence in the financial services industry.
Risk factors continued 357ING Group Annual Report 2013 1 W h o w e are 2 R
In addition, we are subject to actuarial and underwriting risks such as mortality, longevity, morbidity, and adverse claims development which result from the pricing and acceptance of insurance contracts. In accordance with industry practices, modelling of natural catastrophes is performed and risk mitigation measures are taken. 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, there can be no assurance that our actual claim amount will not exceed our estimated claim reserves. If actual claim amounts exceed the estimated claim reserves, our earnings may be reduced and our financial condition and net results may be adversely affected.
In light of current conditions in the global financial markets and the global economy, regulators around the world have increased their focus on the regulation of the financial services industry. Most of the principal markets where we conduct our business have adopted, or are currently in the implementation phase of, major legislative and/or regulatory initiatives in response to the financial crisis. Governmental and regulatory authorities in the Netherlands, the United Kingdom, the U.S. and elsewhere have implemented, or are in the process of implementing measures to increase regulatory control in their respective financial markets and financial services sectors, including, among others, in the areas of prudential rules, liquidity and capital requirements, executive compensation, crisis and contingency management, bank levies and financial reporting. Additionally, governmental and regulatory authorities in the Netherlands as well as in a multitude of jurisdictions where we conduct our business continue to consider new mechanisms to limit the occurrence and/or severity of future economic crises (including proposals to restrict the size of financial institutions operating in their jurisdictions and/or the scope of operations of such institutions).
The final text of the Level I Framework Directive includes rules regarding, among other things, own funds, capital requirements, investments and group supervision. Following adoption of this Level I Framework Directive, the EC and European Insurance and Occupational Pensions Authority (‘EIOPA’), formerly CEIOPS, have initiated the development of detailed rules following the Lamfalussy process. Under this process, Directives related to financial institutions are developed on the basis of a four-level approach intended to complement the principles of the Level I Framework Directive. Level 2 measures will be issued by the EC (delegated acts and/or implementing technical standards proposed by EIOPA), and Level 3 guidance will be issued by EIOPA.
Theoretical Solvency Criterion regulation in the Netherlands (also known as Solvency 1.5) In anticipation of the more risk-based approach under Solvency II, the Dutch legislator has, inter alia, subjected Dutch life insurance companies to the Theoretical Solvency Criterion (‘TSC’) (also known as Solvency 1.5), which reflects a minimum solvency margin required in certain stress scenarios. The TSC is calculated on an annual basis, and the scenario analysis is based on specific risks, including interest rate risk, equity risk, spread risk, property risk, longevity risk and mortality risk. The TSC applies to NN’s life insurance business in the Netherlands. If the solvency position of the relevant NN life insurance entity is below the TSC, DNB is entitled to require that a declaration of no objection be obtained from DNB before making any distributions of capital (including dividends) and reserves to the Company. In determining whether to give that approval, DNB must be satisfied that the life insurance company will have sufficient available regulatory capital for at least the following 12 months. Available regulatory capital is determined on a market-based basis under the Dutch Financial Supervision Act and is therefore subject to fluctuations. There is a risk that the entities that conduct NN’s life insurance business may not meet the TSC and that DNB may not permit those entities to distribute dividends or reserves to the Company. This could affect the Company’s ability to meet its obligations to its creditors. In addition, the TSC may make it more difficult for NN to attract capital than those of its peers that are not subject to such similar requirements under their local laws. DNB has used, and may use, its discretionary powers to give instructions on the application of the Company’s funds to strengthen the capital position of its Dutch regulated subsidiaries to levels above minimum regulatory capital requirements, which has affected, and will affect, the ability of the Company to meet its obligations to its creditors. The TSC is also relatively new legislation and there is uncertainty as to how it will be interpreted and implemented by DNB, with the risk that DNB interprets and implements the requirements in a manner that is more onerous for NN Group than NN Group currently anticipates.
• Dodd-Frank also includes various securities law reforms that may affect the Group’s business practices and the liabilities and/or exposures associated therewith, including a provision intended to authorise the SEC to impose on broker-dealers fiduciary duties to their customers, as applies to investment advisers under existing law, which new standard could potentially expose certain of ING’s U.S. broker-dealers to increased risk of SEC enforcement actions and liability. In 2011, the SEC staff released a study on this issue, and members of the SEC’s Investor Advisory Committee voted in November 2013 to recommend the proposal implementing a uniform fiduciary standard for most brokers and registered investment advisers to the SEC.
Although the full impact of Dodd-Frank cannot be determined until the various studies mandated by the law are conducted and regulations are adopted and implemented, many of the legislation’s requirements could have profound and/or adverse consequences for the financial services industry, including for us. Dodd-Frank could make it more expensive for us to conduct business, require us to make changes to our business model or satisfy increased capital requirements, subject us to greater regulatory scrutiny or to potential increases in whistleblower claims in light of the increased awards available to whistleblowers under Dodd-Frank and have a material effect on our results of operations or financial condition.
Foreign Account Tax Compliance Act Under the Foreign Account Tax Compliance Act (‘FATCA’), U.S. federal tax legislation passed in 2010, a 30% withholding tax will be imposed on ‘withholdable payments’ made to non-U.S. financial institutions (including non-U.S. investment funds and certain other non-U.S. financial entities) that fail (or, in some cases, that have 50% affiliates which are also non-U.S. financial institutions that fail) to provide certain information regarding their U.S. accountholders and/or certain U.S. investors (such U.S. accountholders and U.S. investors, ‘U.S. accountholders’) to the U.S. Internal Revenue Service (‘IRS’). For non-U.S. financial institutions that fail to comply, this withholding will generally apply without regard to whether the beneficial owner of a withholdable payment is a U.S. person or would otherwise be entitled to an exemption from U.S. federal withholding tax. ‘Withholdable payments’ generally include, among other items, payments of U.S.source interest and dividends and the gross proceeds from the sale or other disposition of property that may produce U.S.-source interest and dividends. Furthermore, FATCA may also impose withholding on non-U.S. source payments by non-U.S. financial institutions that comply with FATCA to non-U.S. financial institutions that fail to comply with FATCA. This withholding will take effect on a ‘phased’ schedule, starting in July 2014 with withholding on non-U.S. source payments by non-U.S. financial institutions to start no earlier than January 2017. In general, non-publicly traded debt and equity interests in investment vehicles will be treated as ‘accounts’ and subject to these reporting requirements. In addition, certain insurance policies and annuities are considered accounts for these purposes.
ING Bank has set up an all-encompassing recovery planning process to enhance its readiness and decisiveness to tackle financial crises on its own strength. ING Bank’s recovery plan has been submitted to and approved by the DNB in November 2012 and is updated at least annually. Furthermore during 2013, ING Bank submitted information on the basis of which the Dutch Resolution Authorities will be able to develop a Resolution Plan.
Financial Stability Board In addition to the adoption of the foregoing measures, regulators and lawmakers around the world are actively reviewing the causes of the financial crisis and exploring steps to avoid similar problems in the future. In many respects, this work is being led by the FSB, consisting of representatives of national financial authorities of the G20 nations. The G20 and the FSB have issued a series of papers and recommendations intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated. These proposals address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance, including executive compensation, and a host of related issues associated with responses to the financial crisis. The lawmakers and regulatory authorities in a number of jurisdictions in which the Group’s subsidiaries conduct business have already begun introducing legislative and regulatory changes consistent with G20 and FSB recommendations, and the potential impact of such changes on our business, results of operations and financial condition remains unclear.
In February 2013, the EC adopted a proposal setting out the details of the financial transaction tax, which mirrors the scope of its original proposal of September 2011, to be levied on transactions in financial instruments by financial institutions if at least one of the parties to the transaction is located in the financial transaction tax zone (‘FTT-zone’), currently limited to 11 participating Member States (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain). The initial proposal foresaw the financial transaction tax for the 11 participating Member States entering into effect on 1 January 2014, which would have then required us to pay a tax on transactions in financial instruments with parties (including Group affiliates) located in such FTT-zone. However, in November 2013, it was agreed among the representatives of the 11 Member States that the tax would not come into force until 2015 as participating governments remain divided on key details of the levy. The actual implementation date would thus depend on the future approval by the European Council and consultation of other EU institutions, and the subsequent transposition into local law. Depending on its final form, the introduction of an FTT in the Netherlands or outside the Netherlands could have substantial adverse effect on ING’s business and results.
As a result of the ongoing and unprecedented volatility in the global financial markets since 2007, we incurred in past years substantial negative revaluations and impairments on our investment portfolio, which have impacted our shareholders’ equity and earnings. During 2011, 2012 and 2013, the revaluation reserve position improved substantially, positively impacting shareholders’ equity. Although we believe that, as of December 31, 2013, reserves for insurance liabilities were generally adequate at the Group, inadequacies in certain product areas have developed. The aforementioned developments in the global financial markets and, in particular, decreasing interest rates resulted in a decrease in our overall reserves adequacy and may further continue to produce reserves inadequacies in the future, potentially leading to reserve strengthening.
The aforementioned impacts have arisen primarily as a result of valuation and impairment issues arising in connection with our investments in real estate (both in and outside the U.S.) and private equity, exposures to European sovereign debt and to U.S. mortgage-related structured investment products, including sub-prime and ‘Alt-A’ residential and commercial mortgage-backed securities, collateralised debt obligations and collateralised loan obligations, monoline insurer guarantees, private equity and other investments. In many cases, the markets for investments and instruments have been and remain highly illiquid, and issues relating to counterparty credit ratings and other factors have exacerbated pricing and valuation uncertainties. Valuation of such investments and instruments is a complex process involving the consideration of market transactions, pricing models, management judgment and other factors, and is also impacted by external factors, such as underlying mortgage default rates, interest rates, rating agency actions and property valuations. Although we continue to monitor our exposures, there can be no assurance that we will not experience further negative impacts to our shareholders’ equity or profit and loss accounts in future periods.
Risk factors continued 365ING Group Annual Report 2013 1 W h o w e are 2 R
The inability of counterparties to meet their financial obligations could have a material adverse effect on our results of operations. General Third parties that owe us money, securities or other assets may not pay or perform under their obligations. These parties include the issuers and guarantors (including sovereigns) of securities we hold, borrowers under loans originated, reinsurers, customers, trading counterparties, securities lending and repurchase counterparties, counterparties under swaps, credit default and other derivative contracts, clearing agents, exchanges, clearing houses and other financial intermediaries. Defaults by one or more of these parties on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other factors, or even rumours about potential defaults by one or more of these parties or regarding a severe distress of the financial services industry generally, could have a material adverse effect on our results of operations, financial condition and liquidity. In light of experiences with significant constraints on liquidity and the high cost of funds in the interbank lending market, and given the high level of interdependence between financial institutions, we are and will continue to be subject to the risk of deterioration of the commercial and financial soundness, or perceived soundness, of sovereigns and other financial services institutions. This is particularly relevant to our franchise as an important and large counterparty in equity, fixed income and foreign exchange markets, including related derivatives, which would be then exposed to concentration risk.
(5) result in decreased fee income associated with a decline in the variable annuity balances invested in fixed income funds.
Because we use assumptions to model client behaviour for the purpose of our market risk calculations, the difference between the realisation and the assumptions may have an adverse impact on the risk figures and future results. 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 interest rate risk profile of savings and current accounts and to estimate the embedded option risk in the mortgage and investment portfolios. The realisation or use of different assumptions to determine client behaviour could have material adverse effect on the calculated risk figures and, ultimately, future results.
Holders of NN’s products where the customer bears all or part of the investment risk, or consumer protection organisations on their behalf, have filed claims or proceedings against NN and may continue to do so. A negative outcome of such claims and proceedings brought by customers or organisations acting on their behalf, actions taken by regulators or governmental authorities against NN or other insurers in respect of unit-linked products, settlements or any other actions for the benefit of customers by other insurers and sector-wide measures could substantially affect NN’s insurance business and, as a result, may have a material adverse effect on NN’s and ING’s business, reputation, revenues, results of operations, solvency and financial condition. In addition, claims and proceedings may be brought against NN in respect of other products with one or more similar product characteristics sold, issued or advised on by NN in and outside the Netherlands. In this risk factor NN means NN Group N.V. and its subsidiaries. Since the end of 2006, unit-linked products (commonly referred to in Dutch as ‘beleggingsverzekeringen’) have received negative attention in the Dutch media, from the Dutch Parliament, the AFM and consumer protection organisations. Costs of unit-linked products sold in the past are perceived as too high and Dutch insurers are in general being accused of being less transparent in their offering of such unitlinked products. The criticism on unit-linked products led to the introduction of compensation schemes by Dutch insurance companies that have offered unit-linked products. In 2008 ING’s Dutch insurance subsidiaries reached an outline agreement with two main consumer protection organisations to offer compensation to their unit-linked policyholders where individual unit-linked policies had a cost charge in excess of an agreed maximum and to offer similar compensation for certain hybrid insurance products. At 31 December 2008 costs of the settlements were valued at EUR 365 million for which adequate provisions have been established and of which a substantial portion has been paid out. The remaining unpaid part of the provision as per 31 December 2013 is solely available to cover costs relating to the settlements agreed in 2008. A full agreement on implementation was reached in 2010 with one of the two main consumer protection organisations, with the second main consumer protection organisation signing its agreement in June 2012. In addition, ING’s Dutch insurance subsidiaries announced additional measures (flankerend beleid) that comply with the ‘Best in Class’ criteria as formulated on 24 November 2011 by the Dutch Minister of Finance. In December 2011 this resulted in an additional agreement on these measures with the two main consumer protection organisations. In 2012 almost all unit-linked policyholders were informed about the compensation. The agreements with the two consumer protection organisations are not binding on policyholders. Consequently, neither the implementation of the compensation schemes nor the additional measures offered by NN prevent individual policyholders from initiating legal proceedings against INGs Dutch insurance subsidiaries and making claims for damages.
Reinsurance may not be available, affordable or adequate to protect us against losses. We may also decide to reduce, eliminate or decline primary insurance or reinsurance coverage. As part of our overall risk and capacity management strategy, we purchase reinsurance for certain risks underwritten by our various insurance business segments. Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could adversely affect our ability to write future business.
Adverse publicity, claims and allegations, litigation and regulatory investigations and sanctions may have a material adverse effect on our business, revenues, results of operations, financial condition and/or prospects. We are subject to litigation, arbitration and other claims and allegations in the ordinary course of business, including in connection with our activities as financial services provider, insurer, employer, investor and taxpayer. Adverse publicity and damage to our reputation arising from our failure or perceived failure to comply with legal and regulatory requirements, financial reporting irregularities involving other large and well-known companies, possible findings of government authorities in various jurisdictions which are investigating several rate-setting processes, increasing regulatory and law enforcement scrutiny of ‘know your customer’ anti-money laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures and anti-terrorist-financing procedures and their effectiveness, regulatory investigations of the mutual fund, banking and insurance industries, and litigation that arises from the failure or perceived failure by us to comply with legal, regulatory and compliance requirements could result in adverse publicity and reputational harm, lead to increased regulatory supervision, affect our ability to attract and retain customers and maintain access to the capital markets, result in cease and desist orders, claims, enforcement actions, fines and civil and criminal penalties, other disciplinary action or have other material adverse effects on us in ways that are not predictable. Some claims and allegations may be brought by or on behalf of a class and claimants may seek large or indeterminate amounts of damages, including compensatory, liquidated, treble and punitive damages. See ‘—ING is exposed to the risk of mis-selling claims’. Our reserves for litigation liabilities may prove to be inadequate. Claims and allegations, should they become public, need not be well founded, true or successful to have a negative impact on our reputation. In addition, press reports and other public statements that assert some form of wrongdoing could result in inquiries or investigations by regulators, legislators and law enforcement officials, and responding to these inquiries and investigations, regardless of their ultimate outcome, is time-consuming and expensive. Adverse publicity, claims and allegations, litigation and regulatory investigations and sanctions may have a material adverse effect on our business, revenues, results of operations, financial condition and/or prospects in any given period. For additional information with respect to specific proceedings, see note 54 to the consolidated financial statements of ING Group.
There can be no assurance that we will be able to implement the Restructuring Plan successfully or complete the remaining planned divestments on favourable terms or at all, particularly in light of market developments in general as well as the fact that other financial institutions may place similar assets for sale during the same time period and may seek to dispose of assets in the same manner. Any failure to successfully implement the Restructuring Plan may result in EC enforcement actions or EC procedures and may have a material adverse impact on the assets, profitability, capital adequacy and business operations of the Group. Moreover, in connection with the implementation of the Restructuring Plan, including any proposed divestments, we or potential buyers may need to obtain various approvals, including of shareholders, works councils and regulatory and competition authorities, and we and potential buyers may face difficulties in obtaining these approvals in a timely manner or at all. In addition, the implementation of the Restructuring Plan may strain relations with our employees, and specific proposals in connection with the implementation may be opposed by labour unions or works councils. Furthermore, following the announcement of the Initial Restructuring Plan, for example, several of our subsidiaries were downgraded or put on credit watch by rating agencies. See ‘Risks Related to the Group’s Business, Operations, and Regulatory Environment — Ratings are important to our business for a number of reasons. A downgrade or a potential downgrade in our financial strength or our credit ratings could have an adverse impact on our operations and net results’.
take enforcement actions against ING or require additional restructuring measures. A divestment of more than 50% of ING’s interest as mentioned in this paragraph also means that ING Group (a) no longer has a majority of representatives on the boards of these businesses and (b) has deconsolidated these businesses from ING Group’s financial statements in line with IFRS accounting rules.
The limitations required by the EC on our ability to compete and to make acquisitions or redeem certain debt instruments could materially impact the Group. As part of our Restructuring Plan, we have undertaken with the EC to accept certain limitations on our ability to compete in certain retail, private and direct banking markets in the EU and on our ability to acquire (i) financial institutions and (ii) businesses, insofar as this would delay our repayment of the remaining Core Tier 1 Securities held by the Dutch State. These restrictions in principle apply until the earlier of (1) 18 November 2015, and (2) the date upon which more than 50% of ING´s interest in its insurance and investment management businesses has been divested. We were also required to agree to limitations on our ability to call Tier-2 capital and Tier-1 hybrid debt instruments, which remain subject to authorisations by the EC on a case-by-case basis until the earlier of 18 November 2014 or the repayment of the remaining Core Tier 1 Securities (including the relevant accrued interest on Core Tier 1 coupons and exit premium fees). If the EC does not approve the calling of Tier-2 capital and Tier-1 hybrid debt instruments in the future, this may have adverse consequences for us, result in additional payments on these instruments and limit our ability to seek refinancing on more favourable terms. ING is furthermore restricted to a maximum ratio for mortgage production at ING Retail Banking Netherlands in relation to the mortgage production of Nationale-Nederlanden Bank until ING has divested more than 50% of its interest in NN Group c.q. Nationale-Nederlanden Bank or until year-end 2015. A divestment of more than 50% of ING’s interest as mentioned in this paragraph also means that ING Group (a) no longer has a majority of representatives on the boards of these businesses and (b) has deconsolidated these businesses from ING Group’s financial statements in line with IFRS accounting rules. The limitations described above will impose significant restrictions on our banking business operations and on our ability to take advantage of market conditions and growth opportunities. Such restrictions could adversely affect our ability to maintain or grow market share in key markets, as well as our results of operations.
Upon the implementation of the Restructuring Plan, we will be less diversified and may experience competitive and other disadvantages. Following completion of the planned divestments under the Restructuring Plan, we expect to become a significantly smaller, regional financial institution focused on retail, direct and commercial banking in the Benelux region and certain other parts of Europe, as well as selected markets outside Europe. Although we will remain focused on banking operations, we may become a smaller bank than that represented by our current banking operations. In the highly competitive Benelux market and the other markets in which we operate, our competitors may be larger, more diversified and better capitalised and have greater geographical reach than us, which could have a material adverse effect on our ability to compete, as well as on our profitability. The divested businesses may also compete with the retained businesses, on their own or as part of the purchasers’ enlarged businesses. For example, Nationale-Nederlanden Bank is already competing before its planned divestment with our retail banking business in the Netherlands, as Nationale-Nederlanden Bank has been ring-fenced from ING Bank’s operations for this purpose. In addition, the restrictions on our ability to be a price leader and make acquisitions and on our compensation policies could further hinder our capacity to compete with competitors not burdened with such restrictions, which could have a material adverse effect on our results of operations. There can be no assurance that the implementation of the Restructuring Plan will not have a material adverse effect on the market share, business and growth opportunities and results of operations for our remaining core banking businesses.
Risk factors continued 377ING Group Annual Report 2013 1 W h o w e are 2 R
‘Risks Related to the Restructuring Plan — The implementation of the Restructuring Plan and the divestments anticipated in connection with that plan will significantly alter the size and structure of the Group and involve significant costs and uncertainties that could materially impact the Group’; • initiatives that we are contemplating may require consultation with various regulators as well as employees and labour representatives, and such consultations may influence the timing, costs and extent of expected savings; • the loss of skilled employees in connection with the initiatives; and • projected savings may fall short of targets.
Whenever the overall return on the (remaining) Core Tier 1 Securities issued to the Dutch State is expected to be lower than 10% p.a. and/or in the event that ING does not repay the remaining Core Tier 1 Securities in accordance with the repayment schedule that was submitted to the EC as part of the Amended Restructuring Plan, the EC may consider the imposition of additional behavioural constraints. As stated in the decision of the EC of 12 November 2008 (in State Aid N 528/2008 — The Netherlands), the Core Tier 1 state-aid measure must be (re)notified to the EC by the Dutch authorities if the overall return on the Core Tier 1 Securities of at least 10% p.a. is not expected to be achieved. In such a case, the EC may require additional (behavioural) constraints as a condition of the compatibility of the measure.
If ING is unable to repay the remaining Core Tier 1 Securities according to the above-mentioned deadlines and other terms agreed with the EC, this could result in the EC imposing additional (behavioural) constraints on us or taking any enforcement action against us.
Risk factors continued 379ING Group Annual Report 2013 1 W h o w e are 2 R
Enhanced Disclosure Task Force recommendations on financial disclosure ING is a member of the ‘Enhanced Disclosure Task Force’ (EDTF), a private sector group established by the Financial Stability Board (‘FSB’) and composed of members representing both the users and preparers of financial reports, that published in the course of 2012 recommends for more comprehensive and consistent disclosures. For 2013 ING Bank reaffirms its commitment to the EDTF report by implementing additional recommendations, next to CRR/CRD IV disclosure requirements. Below an overview is given on where ING Bank has implemented the EDTF recommendations.
General 1 Index to aid navigation through risk related information 245 - 246 2 Risk terminology, risk measures and key parameters 411 - 418 3 Describe and discuss top and emerging risks 239 - 243, 259 - 260 4 Discuss regulatory developments, Once the applicable rules are finalised, outline plans to meet each new key regulatory ratio 258 - 259 Leverage Ratio, LCR and NSFR will be disclosed when applicable standards are finalised.
Capital adequacy and risk-weighted assets 9 Minimum Pillar 1 capital requirements, including buffers, or minimum internal ratio 338 - 342, 382 10 Summarise composition of capital based on Basel Committee templates 383 - 384
Additional quantitative information will be addressed in future disclosures 11 Flow statement of regulatory capital movements since the prior reporting, including changes in common equity tier 1, tier 1 and tier 2 capital 12 Qualitatively and quantitatively discuss capital planning within a more general discussion of management’s strategic planning 13 Analyse how risk-weighted assets relate to business activities 387 14 Capital requirements for credit risk per Basel asset class and major portfolios 392 15 Tabulate credit risk in the banking book per Basel asset classes and major portfolios 16 Flow statement to display movements in RWAs for the reporting period 385 - 386 Flow statement for market and operational RWA will be included in future disclosures.
Credit risk 26 Understanding the bank’s credit risk profile, including significant risk concentration 387 - 391 27 Policies for identifying impaired or non-performing loans and forbearance 110 - 111, 279 - 283 28 Flow statements of non-performing or impaired loans, stock of loan losses and forbearance 29 Quantitative and qualitative analysis of counterparty credit risk 401 - 403 30 Qualitative and quantitative information on credit risk mitigation, including collateral, netting arrangements and guarantees
Approaches applied by ING Bank On 1 January 2008, ING Bank adopted the Advanced Internal Ratings Based (AIRB) approach for the majority of its significant portfolios that contain credit risk in accordance with the approvals granted by DNB (Dutch Central Bank), and various local regulators, as required. However, there remains a small portion of the portfolio that is subject to the Standardised Approach (SA). Unlike many regulators, DNB requires institutions to aim for at least 85% (RWA weighted) of their portfolio on AIRB to qualify for the AIRB status. The majority of SA portfolios at ING Bank relate to subsidiaries where the home regulator does not have a robust AIRB framework or requirement. ING continues to explore opportunities to transition additional portfolios from SA to AIRB. ING Bank does not have any portfolios that use the Foundation Internal Ratings Based (FIRB) Approach.
Market risk Standardised approach 37 28 Internal models approach - trading book 667 744 Total Market risk 704 772
Operational risk Advanced measurement approach 2,823 2,836 Total Basel II required Regulatory Capital 22,600 22,292
In 2007, in order to prevent large short-term effects on capital requirements, the regulators introduced transition rules (the ‘capital floor’) for institutions implementing the Basel II capital adequacy reporting. For 2013 and 2012 the capital requirement was not allowed to fall below 80% of the capital requirements calculated under Basel I regulations. The additional capital requirements according to the transition rules are EUR 4,312 million for 2013 (EUR 6,475 million in 2012).
The table below reflects own funds according to the CRD and Dutch legislation, both using the Basel II rules (as specified in the CRD III) and the Basel III rules (as specified in the CRR/CRD IV). As Basel III will be phased in gradually during 2014-2019, the table shows the Basel III positions both according to the 2019 end state rules and to the 2014 rules. This makes clear which items phase in directly, which gradually and which not yet in 2014.
ING Bank’s capital consists of Tier 1 capital (referred to as ‘original own funds’ in CRD III) and Tier 2 capital (referred to as ‘additional own funds’ in CRD III) net after deductions. Tier 1 capital consists of both core Tier 1 capital (referred to as ‘Common equity tier 1’ in CRR/CRD IV) and other Tier 1 capital, also referred to as hybrid capital. Tier 2 capital consists mostly of subordinated loans.
Available capital - Core Tier 1 (Basel III Common equity) 33,110 33,354 32,612 32,791 30,145 31,665
Revaluation reserve equity securities 1,038 1,385 830 1,108 Revaluation reserve real estate 325 338 260 271 Non-hedged subordinated loans 83 125 66 100 Deduct participation Bank of Beijing –754 –1.028 –603 –822 Tier 2 deductions (1) –1,082 –991 –865 –792 Minority interests, counting as Tier 2 capital 22 16 111 80 Available tier 3 funds
Required capital based on Basel I floor 26,913 28,767 26,913 28,767 26,913 28,767 BIS ratio based on Basel I floor 13.8% 13.1% 13.7% 13.0% 13.1% 12.8%
The amounts presented in this section relate to amounts used for Credit Risk Management purposes, which follow ING Bank’s interpretation of the definitions as prescribed under the Basel II accords. Therefore, the numbers can be different from the accounting numbers as reported in the annual accounts under IFRS-EU.
RISK WEIGHTED ASSETS MIGRATION ANALYSIS The table below explains the changes in RWA during the reporting period and provides additional information by linking the impact on RWA of changes in portfolio composition, model changes and shifts in the risk environment. The table reconciles movements in RWA for the period for each RWA risk type of ING Bank for the SA and AIRB portfolio including securitisations.
Methodology and policy (4) –0.6 –3.3 Foreign exchange movements –4.1 0.0 Other 0.6 –2.4 Total movement 12.4 –43.0
Additional Pillar 3 information continued 385ING Group Annual Report 2013 1 W h o w e are 2 R
• The divestments in 2013 were mainly related to the sale of ING Direct UK to Barclays and the sale of primarily the commercial activities of WestlandUtrecht Bank portfolio to Nationale-Nederlanden Bank, which released EUR 2.4 billion and EUR 1.8 billion RWA respectively. Under the amended terms of the restructuring plan, the commercial operations of WestlandUtrecht Bank are to be combined with the retail banking activities of Dutch insurer Nationale-Nederlanden, which is to be divested as part of NN Group. WestlandUtrecht Bank’s mortgage portfolio is largely retained by ING Bank. The unwinding of the Illiquid Assets Back-up Facility (IABF) additionally reduced RWA by EUR 1.8 billion.
• The deterioration of the book quality increased RWA by EUR 8.8 billion and was mainly a result of the reflection of the deteriorated market circumstances in the regulatory capital models applied. As the market circumstances keep on deteriorating, the downturn factor has been adjusted accordingly for the impacted portfolio’s which are mainly the Dutch and Belgian Mortgage portfolios and the Small and Medium sized business. The downturn has also impacted the Cover Values negatively which resulted in higher Loss Given Default (LGD) for mainly the before mentioned Mortgage portfolios.
• The overly cautious approach applied to off balance commitment calculations, which is a factor of the READ, has now been brought more in line with the actual experience for the best rated Corporates and Institutions portfolios, resulting in a significant READ decrease and reduced RWA. A long track record of a minimal amount of guarantees and LC’s which have been called, was the basis for this change. The before mentioned change and multiple smaller changes resulted in a decrease of EUR 0.6 billion due to Methodology and Policy changes.
Additional Pillar 3 information continued 387ING Group Annual Report 2013 1 W h o w e are 2 R
The growth in the Sovereign portfolio was heavily impacted by increased retail customer liabilities. In preparation of the Basel III liquidity requirements, increased customer deposits require larger levels of high quality liquid assets. The primary source of high quality liquid assets is sovereign bonds which showed the most significant increase.
In addition, ING Bank has intensified its payments and cash management offering which often requires additional revolving credit facilities. Since these facilities are often linked to payment services, there can be volatility in these figures depending on usage at any balance sheet date.
Bond investments especially in Southern Europe were actively de-risked. Australian Bond Investments also showed a decrease. Growth was experienced in Money-Market exposure which tends to have a shorter tenor. Overall, this resulted in an improved average risk profile of the Institutions portfolio.
Additional Pillar 3 information continued 390 ING Group Annual Report 2013
Non-performing loans increased by EUR 0.7 billion which is primarily a result of the deteriorated risk profile of the Dutch Residential Mortgages portfolio as a result of the current economic circumstances. There are approximately EUR 500 million of Dutch mortgage loans that have been modified to temporarily support customers undergoing hardship. These loans are shown as impaired for the purposes of these tables but are included as performing in the Loan Loss Provisioning and Forbearance processes.
Additional Pillar 3 information continued 391ING Group Annual Report 2013 1 W h o w e are 2 R
Includes both AIRB and SA portfolios. (1) Netherlands includes Domestic Bank NL and WestlandUtrecht Bank.
The LTV for the Dutch Mortgage portfolio deteriorated from 89% to 91% as a result of the house prices in the Netherlands for the first 3 quarters of the year, even though the redemptions and new production have a positive effect on the LTV. In the 4th quarter of the year, a turnaround is noticeable as the LTV improved from 92% to 91% mainly as a result of the sale of part of the WestlandUtrecht Bank portfolio. The stabilized house prices in December have also contributed to the improved LTV.
Additional Pillar 3 information continued 392 ING Group Annual Report 2013
Due to the model redevelopments undertaken during the course of the year to reflect continued economic deterioration and due to negative risk migration seen in several portfolios, RWA density and risk weights increased compared to 2012. In terms of RWA density, the most significant movement was in the Sovereigns and the Corporates which was driven by model redevelopments implemented for these exposure classes.
Exposures (EAD) before and after risk mitigation and (EAD) after conversion factors 2013 2012
Risk Weight Buckets * Includes the SA portfolio only; excludes securitisations, equities and ONCOA. * Exposure after conversion factors is the net exposure or READ as commonly referenced. It is lower than the other exposures in the table mainly because it does not take into account uncommitted limits. This column is provided for reference purposes only.
Additional Pillar 3 information continued 394 ING Group Annual Report 2013
Disclosures of model outcomes The table next, shows the PD, LGD, READ, RWA and RWA density per exposure class. This should be read in conjunction with the table ‘changes in risk parameters since last reporting date in the following paragraph.
Changes in AIRB risk parameters 2013 compared to 2012 in %
Additional Pillar 3 information continued 396 ING Group Annual Report 2013
The table below provides a backtesting of the PD models per exposure class. In order to better quantify the backtesting, ING has analysed the 31 December 2013 portfolio. The average PD of 31 December 2012 per portfolio is split per Basel II exposure class. The 31 December 2012 portfolio is followed through 2013 to determine the observed default rate. The models are based on long series of historical data. In the back-test the model based PD values are compared against the defaults observed in 2013. This back-test is only representative of the year end 2012 portfolio and can be influenced by small sample sizes or incidents. Nonetheless, the back-test gives a comparison of the predicted PD versus the observed default rate. In the next table, the default rate is based on the weighted average READ of the defaulted portfolio whereas the models are developed on an obligor basis.
Includes the AIRB portfolio only; excludes securitisations, equities and ONCOA. * Average PD 2012 includes performing loans only.
Includes the AIRB portfolio only; excludes securitisations, equities and ONCOA. * Expected loss rate 2012 includes performing loans only.
Both of the backtests show that the expectations are quite in line with the observed default rate and the observed loss rate. For the exposure classes Retail Other and the Residential mortgages portfolio, the default rates and the loss rates exceed the predicted values as a result of the challenging economic circumstances in mainly the Netherlands and Belgium portfolio.
CREDIT QUALITY This section focusses on non-performing loans, which are loans where there is a reasonable probability that ING Bank may end up with a loss, unless ING Bank intervenes with specific and significant actions. In other words, in this category, an account or portfolio requires a more intensified approach, which may include renegotiations of terms and conditions and/or business/financial restructuring. This section should be read in conjunction with the Risk Management paragraph sections on: Risk Appetite Framework and Credit Quality.
Large parts of the Investment portfolio are not administered at amortised costs (Loans & Receivables or Held-to-Maturity) and therefore out of scope for Loan Loss Provisions. Instead, these assets are evaluated for impairment. The Global Impairment Meeting is a quarterly process that reviews all assets that are subject to an IFRS impairment test.
The rise in the level of provisions over the year reflected the continued weak economic climate in which ING operates and the conservative treatment of some of the portfolios. Provisions for Real Estate showed a significant rise due to challenging commercial real estate markets in Netherlands and Spain. Weakness was also seen in the small and medium enterprises and residential mortgages sectors in the Netherlands.
Past due loans by economic sector ING Bank considers past due loans to be those loans where any payment of interest of principal is more than one day past due. The methodology is principally applied to loans to private individuals, such as residential mortgage loans, car loans and other consumer loans. For business loans (Sovereigns, Institutions, Corporates), ING Bank has adopted a policy to classify the obligor as a non-performing loan as quickly as possible upon the occurrence of a payment default. Therefore, the concept of past due loans does not exist for these types of obligors and hence the reason why the business exposure classes are not included.
Cumulative provisions by geographic area The table below is based on the country of residence of the obligor. The Cumulative Provision table should be read in conjunction with the corresponding tables below related to ‘Past due loans by geographic area’ as well as information and statements made in the Risk Management paragraph.
Past due loans by geographic area (based on outstandings) Residential mortgages
Additional Pillar 3 information continued 400 ING Group Annual Report 2013
DERIVATIVES AND SECURITIES FINANCING As part of its normal derivatives trading activities and securities financing, ING Bank enters into master agreements such as ISDA master agreements and Global Master Repurchase Agreements (GMRAs). Under the terms contained in sections related to Minimum Threshold Amounts and Minimum Transfer Amounts of Credit Support Annexes (CSA) or other similar clauses, both ING Bank and it counterparties may agree to pledge additional collateral to each other in the event that either party is downgraded by one of the established rating agencies. ING Bank has determined that under prevailing market conditions, a one notch downgrade would only have a limited effect on the amount of additional collateral that ING Bank would be required to pledge under these agreements. However, the actual amount that ING Bank may be required to pledge in the future may vary based on ING Bank’s portfolio composition of both derivatives and securities pledged in securities financing transactions, market circumstances, the number of downgrade notches as well as the terms and conditions of future CSAs or other similar agreements entered into.
Over-the-counter and exchange traded derivatives This section provides a quantitative and qualitative analysis of ING’s Credit Risk that arises from its derivatives transactions. This quantifies notional derivatives exposure, including whether derivatives are over-the-counter (OTC) or traded on recognised exchanges (ETD). Where the derivatives are OTC, the table shows how much is settled by central counterparties and how much is not, and provides a description of the collateral agreements in place.
Additional Pillar 3 information continued 402 ING Group Annual Report 2013
CREDIT RISK MITIGATION For the determination of the Credit Risk applicable amount for Pre-Settlement deals, ING Bank first matches the trades with similar characteristics to determine their eligibility for offsetting. This offsetting effect is called ‘compensation’. Subsequently, ING Bank reduces the amount by any legal netting that may be permitted under various types of Master Agreements (such as ISDAs and GMRAs). Lastly, the amount is further reduced by any collateral that is held by ING Bank under CSAs or other similar agreements.
For the other risk types and especially lending, covers are received which is intended to reduce the losses incurred subsequent to an event of default on an obligation a customer may have towards ING Bank. These are subdivided into four groups; called collateral values mortgages, cover values cash, cover value guarantees and other physical covers.
eligible of which Pre Settlement 6,403 3,524 3,470 2,658 of which Pre Settlement 115,334 39,127 30,015 35,757 of which Pre Settlement 8,226 6,896 6,679 9,238 of which Pre Settlement of which Pre Settlement 60 58 58 86 Securitisations 8,349 of which Pre Settlement 198 198 198 284 of which Pre Settlement 130,220 49,803 40,419 48,024 * Excludes ONCOA.
Additional Pillar 3 information continued 403ING Group Annual Report 2013 1 W h o w e are 2 R
The figures above represent the notional amount of credit risk default swaps that ING Bank has entered into for the purpose of hedging. The credit risk on the counterparties associated with credit default swap protection bought is included in the Pre-Settlement risk calculations for the given counterparty, and not in the figures above. In addition, ING engages in CDS trading both in credit protection bought and credit protection sold. These figures essentially cancel each other. However as they are part of the trading book, these figures are provided in the Market Risk section. For credit default protection sold, ING Bank incurs synthetic issuer risk, on which capital is calculated, depending on its purpose, either hedging under the banking book or trading.
Additional Pillar 3 information continued 404 ING Group Annual Report 2013
Valuation and accounting policies ING Bank’s activities regarding securitisations are described in Note 57 ’Structured entities’ in the annual accounts. The applicable accounting policies are included in the section ‘Accounting policies for the consolidated annual accounts of ING Bank’ in the annual accounts. The most relevant accounting policies for ING Bank’s own originated securitisation programmes are ‘Derecognition of financial assets’ and ‘Consolidation’. Where ING Bank acts as investor in securitisation positions, the most relevant accounting policy is ‘Classification of financial instruments’.
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Securitisations Product Type Residential Mortgage Backed Securities 5,273 5,874 –10.2% Asset Backed Securities 2,088 2,399 –13.0%
Interest Rate Derivatives 177 262 –32.6% Synthetic Investment Bonds (2) 0 1,439 –100.0%
The investment positions in securitisations are mainly originated in Spain, US and UK (75% of total portfolio). The majority of INGs’ positions are of high quality with 94% of the portfolio externally rated AAA, AA or A. The main vintages in the underlying mortgages are between 2004-2007. All securitisations are subject to rigorous testing using various stress scenarios. Securitisation positions with underperforming collateral have been sold in order to mitigate RWA increases, the main driver for the reductions in the lowest bands compared to last year are driven by the unwinding of the Illiquid Assets Back-up Facility (IABF) as announced on 1 November 2013. Additionally, impaired positions have shown signs of improvement compared to last year, over the year ING’s impairment charges due to underperforming securitisations have declined significantly, impairment charges related to investment securitisation positions for 2013 were minimal. Performance of the underlying assets is monitored on a quarterly basis through analysis of the relevant performance metrics (Delinquencies, Prepayments, Roll-Rates, Severities etc.), the review is performed for every vintage and loan type bucket.
Exposures securitised 2013 Cut-off Date Initial Pool Outstandings Credit Events Past due Assets Losses
Additional Pillar 3 information continued 408 ING Group Annual Report 2013
Capital Elements Reserve Property revaluation reserve • • –111 Cash flow hedge reserve • –1,369 Available-for-sale reserve Debt securities • • –1,268 –1,176 Equity securities • • –145 –124 Currency translations reserve • • • –679 P&L All items impacting P&L, excluding DVA • • • –296 –182 –98 –187 –154 DVA own issued debt/structured notes • –222 DVA derivatives • • 6 22 –7
Revaluation Reserve Impact The revaluation reserve for real estate, debt securities and equity securities are not part of Basel II equity, but will be part of Basel III equity. The revaluation reserve for cash flow hedges is not part of Basel II equity and will also not be part of Basel III equity. The revaluation reserve for foreign exchange is part of Basel II equity and will also be part of Basel III equity. The interest rate sensitivity shown for debt securities is the unhedged interest rate sensitivity, i.e. debt securities in hedge accounting relations are excluded.
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To protect the Bank and its depositors against liquidity risks the Bank maintains a liquidity buffer, which is based on the Bank’s liquidity needs across all entities under stressed conditions. ALCO Bank ensures that sufficient liquidity is maintained, in accordance with Bank and regulatory rules and standards, including a buffer of unencumbered, high quality liquid assets.
Cash and holdings at central bank 6,099 10,587 Securities issued or guaranteed by sovereigns, central banks 74,334 68,959 and multilateral development bank Liquid assets eligible at central banks (not included in above) 92,871 106,620 Other liquid assets 6,700 11,078
Additional Pillar 3 information continued 410 ING Group Annual Report 2013
ACCIDENT (CALENDER) YEAR All claims relating to events (insured losses) that occurred in a certain (calendar) year are grouped together, irrespective of when they are actually reported or paid and regardless of the year in which the insurance cover commenced. Accident year information matches claims incurred in a year with the premium earned in that year.
ASSOCIATE An entity over which the Group has significant influence, generally accompanying a shareholding of between 20% and 50% of the voting rights, and that is not a subsidiary nor a joint venture.
CENTRAL CLEARING PARTIES OR CENTRAL COUNTERPARTIES (CCP) A legal entity that interposes itself between two trade counterparties in a bilateral transaction. The parties legally assign their trades to the CCP (usually through novation), and the CCP becomes the counterparty to each, assuming all rights and responsibilities. Thus, from the point of view of the original counterparties, the counterparty credit risk exposure is shifted from the other original counterparty to the CCP.
CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk exist when changes in economic, industry or geographical factors similarly affect groups of counterparties whose aggregate exposure is significant in relation to ING Group’s total exposure.
COST OF CAPITAL The costs related to owning capital. These can be split into the cost of equity, hybrids and debt, taking a target leverage into account.
EFFECTIVE INTEREST METHOD A method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or interest expense over the relevant period.
EXPECTED LOSS (EL) Statistical average loss that is expected within a one-year horizon due to customers or counterparties defaulting. EL is calculated as Probability of Default x Loss Given Default x Exposure at Default. Collective provisions are taken to cover for Expected Losses.
LIQUIDITY COVERAGE RATIO (LCR) Regulatory measure for the liquidity of banks which compares the amount of liquid assets with a potential outflow over a one month period. The measure is introduced under Basel III. LCR is defined as: stock of liquid assets / assumed 30-days cash outflow.
MARKET RISK Market risk is the risk that movements in market variables, such as interest rates, equity prices, implied volatilities, foreign exchange rates, real estate prices negatively impact the earnings or market value.
MARKED TO MARKET (MTM) Valuing a security, portfolio or account against its market value instead of its carrying value.
NET ASSET VALUE Used in the equity method of accounting. The initial net asset value of the investment is determined by the fair value of the assets and liabilities of the investee. After the initial valuation of assets and liabilities of the investee at fair value, the assets and liabilities of the investee are valued in accordance with the accounting policies of the investor. The profit and loss account reflects the investor’s share in the results of operations of the investee.
REGULATORY CAPITAL (RC) The minimum amount of capital that a bank is required to hold in order to absorb unexpected losses. RC is calculated using regulatory approved internal models.
RESERVE ADEQUACY TEST To ensure reserves remain adequate over time, the insurance liabilities (future claims and premium income) are tested against the projected investment yields. For many insurance portfolios stochastic testing is done taking the 90th percentile of the results as the required level at which adequacy should be ensured.
TRANSFER RISK Probability of loss due to currency conversion (exchange) restrictions imposed by a foreign government that make it impossible to move money out of the country.