Parent company balance sheet 256 Parent company profit and loss account 257 Parent company statement of changes in equity 258 Accounting policies for the parent company balance sheet and profit and loss account 259 Notes to the parent company balance sheet 260 2.3 Other information
It is ING’s policy to pay dividends in relation to the long-term underlying development of cash earnings. Dividends can only be declared by shareholders when the Executive Board considers such dividends appropriate, taking into consideration the financial conditions then prevailing and the longer-term outlook. Given the uncertain financial environment, ING will not pay a dividend over 2009.
Notwithstanding the negative impact of the financial crisis on the overall economic climate, which clearly weakens the growth prospects for the financial services industry, the crisis also offers new opportunities for financial institutions. The substantial reduction in asset values during the financial crisis has reinforced customer demand for wealth accumulation and raised consumer awareness of the need for financial protection.
Key points > Full separation of banking and insurance; to be completed by the end of 2013 > Build future on sustainable profit, based on our sound business ethics, good corporate citizenship and customer trust > Create a leading international retail, direct and commercial bank > Insurance activities very well-positioned to capitalise on socio-economic trends 2009 marked the beginning of a new era for ING. After initiating our Back to Basics programme, we set a clear course for the future by moving towards a full separation of our banking and insurance/ investment management operations. This decisive step will turn us into a simpler and more agile organisation and enabled us to meet the restructuring requirements of the European Commission. This was needed due to the transactions with the Dutch State in October 2008 and January 2009. In addition, in December 2009, we started repaying the Dutch State.
We extended the scope of the Defence policy to include all our business activities: not just lending and proprietary assets but also ING-managed funds (index trackers excluded). Although we do not oppose the defence industry as such, ING takes a firm stand against controversial weapons and the trade in controversial arms.
an awareness campaign for all employees, our 200 most senior managers have signed up to the principles. Every single ING employee will be held accountable for adhering to them.
A dj us te d eq ui ty en d of p er io d
Risk measurement allows ING to identify portfolios generating economic value. Risk management can help identify the most economically promising areas as well as those businesses that are underperforming and in some cases need to be sold.
OPERAtIONAl RISK MANAGEMENt (ORM) ING is exposed to operational risks on a daily basis through its client relationships, product offerings, IT infrastructure and daily operations. Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the related risk of reputation loss, as well as legal risk. Effective operational risk management leads to more stable business processes (including IT systems) and lower operational risk costs. ORM uses a layered
Despite the difficult business environment, Retail Banking delivered a solid performance. Aligned with the Group’s Back to Basics programme, Retail Banking concentrated on cost reduction, derisking and deleveraging. In Europe, the launch of the newly integrated Dutch retail bank ING was successfully executed and the new service models in the Benelux progressed well. In Asia, the commitment to long-term growth options continued successfully. The Private Banking activities in Asia and Switzerland were sold.
Total underlying income declined slightly by 2.2% to EUR 7,239 million. The interest result rose 3.3% mainly driven by higher margins and volumes in Belgium. This was largely offset by the impact of lower interest margins in the Netherlands. Outside the Benelux, the interest results of ING Bank Turkey and ING Vysya Bank both improved, while in Poland it declined. Commission income decreased 13.3%, mainly as a result of lower fees on asset management-related products. Investment and other income dropped 44.8% among other things due to lower financial market products-related income in the mid-corporate segment and lower dividend income from the Asian equity investments.
CENtRAl EUROPE ANd ASIA Retail Banking is well-positioned in Poland, Romania and Turkey, as well as the important Asian markets of India, China and Thailand.
While ING is committed to growth in emerging markets, for most part of 2009 it put a pause on expansion. In all these markets ING is moving towards the direct-first model, but also investing in gradual organic growth to obtain leadership positions.
Key points > Total client balances grew by EUR 34.2 billion excluding currency and market performance effects to EUR 353.8 billion at year-end > Customer base grows to 22.9 million clients > Impairments and high-risk costs led to an underlying loss > IABF reduced the impact of losses on the Alt-A RMBS portfolio by 80% > Underlying operating expenses down 3.3% despite a sharp increase in deposit insurance premiums
Total client balances in 2009 grew by EUR 45.5 billion (or EUR 34.2 billion excluding currency and market performance effects) to EUR 353.8 billion at year-end.
ING is bringing together all its retail banking activities. As a result, ING Direct became part of the newly-formed Retail Banking Direct & International division on 1 January 2010.
ING Real Estate reported an underlying loss before tax of EUR 1,389 million compared with a loss of EUR 297 million in 2008.
General Lending & PCM 26% 1,235 Structured Finance 24% 1,122 Leasing & Commercial Finance 9% 403 Financial Markets 41% 1,923
CENtRAl ANd RESt OF EUROPE The customer needs towards protection products was clear in Central and Rest of Europe. The market turmoil had an adverse impact on in-force business in Central and Rest of Europe where lapses and surrenders increased in the first half of 2009, stabilising later in the year. There were severe regulatory changes for pension currencies against the euro and EUR 53 million was due to a change in the allocation method for corporate expenses. The remaining expense reduction was realised through cost containment efforts. In 2009, an internal staff reduction of 1,366 full-time equivalents was achieved. Furthermore, significant reductions were achieved in the cost categories in external staff, accommodation and marketing. Material expenses related to restructuring initiatives were not included in underlying operating expenses, but presented as special items.
During 2009, Individual Life generated 20% of its new sales through its Specialty Markets channel which drives sales through non-traditional channels including internet ‘quote shops’, email, and via the web. As part of this strategy, ING rolled out a webbased tool, ING for Life® (www.ingforlife.com) which enables people to easily evaluate their life insurance needs, and to obtain a quote or even to be connected to a licensed life insurance agent, if desired.
Although the transformation programme was the focal point in 2009 and despite the impact of the challenging market circumstances on ING, HR continued to run all regular baseline activities. The ING International Graduate Programme (IIGP) was run for the fourth year in a row with 179 early career talents participating. The extensive talent review process was completed with the solid involvement of divisional HR, and recruitment for select positions continued. Our Business School provided ongoing development opportunities for our talents and leaders with special focus on the transformation programme. Our International Mobility function diligently managed international movements of our workforce and reduced associated costs. Our global governance model further improved the collaboration between divisional and corporate HR.
With a view to the above, the Executive Board and the Supervisory Board announced in the 2009 annual General Meeting that they would consider the steps to be taken with respect to the position of ING Trust Office. In connection therewith, it was communicated that, in particular against the backdrop of the financial crisis, more time is needed to consider the position of ING Trust Office, as the trust structure can be important to proper decision making in the near future and also to the long-term interest of ING Group. In accordance with this announcement, the Executive Board and the Supervisory Board considered the position of ING Trust Office in the build-up to the 2010 annual General Meeting. In connection therewith, they have taken the following into consideration: The Executive Board and the Supervisory Board have established that a number of fundamental changes was set in motion by the financial crisis.
In general, the balance between the various interests which are involved in financial institutions have been re-evaluated. This concerns not only the balance between long-term interests and short-term interests, but also the balance between shareholders’ interests and the interests of other stakeholders. It is unmistakable and indisputable that, according to prevalent opinion, “good governance” with financial institutions entails that the long-term interests and the interests of the other stakeholders are emphasised more than in the past.
The Board of ING Trust Office reports on its activities through an annual report, which has been included on pages 69-71.
ExECUtIvE BOARd APPOINtMENt ANd dISMISSAl Members of the Executive Board are appointed by the General Meeting from a binding list to be drawn up by the Supervisory Board. Pursuant to the Dutch Civil Code, this list is to mention at least two candidates for each vacancy, and if not, the list will be non-binding. With respect to the second candidate, ING Group’s policy is to propose retired senior managers or other high ranking officers who, in view of the forthcoming abolition of this requirement, do not have to meet the requirements of the Executive Board Profile. The list will be non-binding pursuant to a resolution of the General Meeting adopted by an absolute majority of the votes cast which majority represents more than one-third of the issued share capital.
John Hele left ING on 31 March 2009. He has been succeeded as chief financial officer by Patrick Flynn, who was appointed to the Executive Board on 27 April 2009.
PROFIlE OF MEMBERS OF thE ExECUtIvE BOARd The Supervisory Board has drawn up a profile to be used as a basis for selecting members of the Executive Board. This Executive Board profile was submitted for discussion to the General Meeting in 2005. It is available on the website of ING Group (www.ing.com) and at the ING Group head office.
FUNCtION OF thE SUPERvISORy BOARd The function of the Supervisory Board is to supervise the policy of the Executive Board and the general course of events of ING Group and its business, as well as to provide advice to the Executive Board. In line with Dutch company law, the Corporate Governance Code and the Articles of Association, the Supervisory Board Charter requires all members of the Supervisory Board, including the State Nominees, to act in accordance with the interests of ING Group and the business connected with it, taking into account the relevant interests of all the stakeholders of ING Group, to perform their duties without mandate and independent of any interest in the business of ING Group, and to refrain from supporting one interest without regard to the other interests involved.
ClAUS dIEtER hOFFMANN (Born 1942, German nationality, male; appointed in 2003, term expires in 2011) Former chief financial officer of Robert Bosch GmbH. Managing partner of H+H Senior Advisors, Stuttgart. Other business activities: chairman of the Supervisory Board of EnBW AG (listed company). Member of the Supervisory Board of de Boer Structures Holding B.V. Member of the Supervisory Board of C.A. Leuze GmbH & Co. KG. Chairman of the Charlottenklinik Foundation (hospital). Chairman of the Board of Trustees (Vereinigung der Freunde) of Stuttgart University.
On 16 November 2009, the Board held a meeting to prepare for the EGM. During the same meeting the Board also discussed, among other things, an amendment of the Articles of Association, which amendment came into effect on 19 November 2009 and as a result of which the age limit for members of the Board was deleted and the Articles of Association were aligned with an amended to the Euronext Rulebook, Book II.
In 2009, ING Trust Office obtained external legal advice on several issues relevant for the performing of its activities.
The new remuneration policy for the Executive Board will be put forward for adoption at the 2010 annual General Meeting. If adopted, it will become effective as of compensation year 2010. The general principles underlying the adjustments to the remuneration policy for the Executive Board will also be applied in the remuneration of members of the Management Boards and other senior managers throughout the organisation.
A comparison of the (application of the) current Executive Board remuneration policy versus the (application of the) proposed new Executive Board remuneration policy is further described on page 79.
total direct compensation Total direct compensation levels will be based on benchmark data in the international context in which we operate. We aim for compensation levels to be set at market median levels. Total compensation levels will be determined in line with the relevant market.
In addition to the base salary and incentive plan participation, senior management and Executive Board members enjoy benefits similar to most other comparable employees of ING Group. These include benefits such as the use of company cars, contributions to company savings plans and, if applicable, expatriate allowances.
Compensation in cash of former members of the Executive Board who are not included in the above table amounted to nil in 2009 and 2008, and to EUR 729 thousand in 2007.
fair market value at grant in thousands of euros 2009 2008 2007
(3) Tineke Bahlmann is a member of the Supervisory Board as of April 2009. The compensation figure for 2009 reflects the partial year as member of the Supervisory Board.
Average interest rate Repayments amounts in thousands of euros 2009 2008 2007
Investments and advances: – group companies –5 –1,725 –3,215 – associates –181 –1,034 –1,221 – available-for-sale investments –165,771 –228,291 –284,006 – held-to-maturity investments –314 – real estate investments –130 –905 –876 – property and equipment –640 –708 –575 – assets subject to operating leases –1,034 –1,401 –1,393 – investments for risk of policyholders –65,362 –64,735 –54,438 – other investments –338 –881 –316 Disposals and redemptions: – group companies 2,643 1,590 1,012
The following new or revised standards, interpretations and amendments to standards and interpretations became effective in 2009: Amendment to IFRS 2 ‘Share-based Payments – Vesting Conditions and Cancellations’• IFRS 8 ‘Operating Segments’;• IAS 1 ‘Presentation of Financial Statements’;• IAS 23 ‘Borrowing Costs’;• Amendments to IAS 32 ‘Financial Instruments: Presentation’ and IAS 1 ‘Presentation of Financial Statements – Puttable Financial • Instruments and Obligations Arising on Liquidation’; Amendments to IFRS 1 ‘First-time Adoption of IFRS’ and IAS 27 ‘Consolidated and Separate Financial Statements – Determining the • cost of an Investment in the Separate Financial Statements’; IFRIC 13 ‘Customer Loyalty Programmes’;• IFRIC 15 ‘Agreements for the Construction of Real Estate’;• IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’;• 2008 Annual Improvements to IFRS;• Amendment to IFRS 7 ‘Improving Disclosures about Financial Instruments’;• Amendments to IFRIC 9 and IAS 39 – ‘Embedded Derivatives’.•
Investments for risk of policyholders are investments against insurance liabilities for which all changes in fair value of invested assets are offset by similar changes in insurance liabilities. Transaction costs on initial recognition are expensed as incurred. Interest income from debt securities and loans and receivables classified as at fair value through profit and loss is recognised in Interest income from banking operations and Investment income in the profit and loss account, using the effective interest method.
Some credit protection contracts that take the legal form of a derivative, such as certain credit default swaps, are accounted for as financial guarantees.
PURChASE ACCOUNtING, GOOdWIll ANd OthER INtANGIBlE ASSEtS Goodwill ING Group’s acquisitions are accounted for under the purchase method of accounting, whereby the cost of the acquisitions is allocated to the fair value of the assets, liabilities and contingent liabilities acquired. The initial accounting for the fair value of the net assets of the companies acquired during the year may be determined only provisionally as the determination of the fair value could be complex and the time between the acquisition and the preparation of the Annual Accounts could be limited. The initial accounting shall be completed within a year of acquisition. Goodwill, being the difference between the cost of the acquisition (including assumed debt) and the Group’s interest in the fair value of the acquired assets, liabilities and contingent liabilities as at the date of acquisition, is capitalised as an intangible asset. The results of the operations of the acquired companies are included in the profit and loss account from the date control is obtained.
The as yet unamortised interest rate rebates on periodic and single premium contracts are deducted from the Provision for life insurance. Interest rate rebates granted during the year are capitalised and amortised in conformity with the anticipated recovery pattern and are recognised in the profit and loss account.
Due to the rights issue in 2009, the 2008 and 2007 earnings per share figures have been restated. Reference is made to Note 49 ‘Earnings per ordinary share’ for a further explanation on the nature and the effect of this restatement.
Accumulated impairments of EUR 59 million (2008: EUR 50 million) have been recognised.
ING Real Estate Asia Retail Fund 28 121 850 412 57 72
Additions to Goodwill in 2009 mainly relate to the consolidation of 3W Holding B.V. (EUR 26 million) and to the extension of ING Group’s Interhyp AG share of EUR 7 million.
Accrued interest and rents includes EUR 6,956 million (2008: EUR 7,980 million) accrued interest on assets measured at amortised cost under the IAS 39 classification Loans and receivables.
Share buy-back programme (2007/2008) In May 2007, ING Group announced a plan to adopt a buy-back programme under which it planned to purchase (depositary receipts for) ordinary shares with a total value of EUR 5 billion over a period of 12 months, beginning in June 2007. On 23 May 2008 this programme was terminated as ING Group had almost reached the legal limit then in force for the acquisition of its own shares (10% of the issued share capital). In total, 183.2 million (depositary receipts for) ordinary shares were repurchased under this programme at an average price of EUR 26.77 and a total consideration of EUR 4.9 billion (98% of the total amount of the share buy back programme as announced). Repurchased ordinary shares and depositary receipts are included in the table ‘Changes in treasury shares’.
ING Bank N.V. 6,822 5,800 ING Verzekeringen N.V. 3,267 4,471 2.1 Consolidated annual accounts
To the extent that the assuming reinsurers are unable to meet their obligations, the Group remains liable to its policyholders for the portion reinsured. Consequently, provisions are made for receivables on reinsurance contracts which are deemed uncollectible. The life reinsurance market is highly concentrated and, therefore, diversification of exposure is inherently difficult. To minimise its exposure to significant losses from reinsurer insolvencies, the Group evaluates the financial condition of its reinsurers, monitors concentrations of credit risk arising from similar geographical regions, activities or economic characteristics of the reinsurer and maintains collateral. Reference is also made to the ‘Risk management’ section.
Changes in the composition of the group –1,454 –643 –11 –93 –1,465 –736
Savings accounts 304,104 263,637 Credit balances on customer accounts 110,087 174,141 Corporate deposits 53,272 80,230
The Group provides other post-employment employee benefits to certain employees and former employees. These are primarily postemployment healthcare benefits and discounts on ING products provided to employees and former employees.
To qualify for hedge accounting under IFRS-EU, strict criteria must be met. Certain hedges that are economically effective from a risk management perspective do not qualify for hedge accounting under IFRS-EU. The fair value changes of derivatives relating to such non qualifying hedges are taken to the profit and loss account. However, in certain cases, the Group mitigates the resultant profit and loss account volatility by designating hedged assets and liabilities at fair value through profit and loss. If hedge accounting is applied under IFRS-EU, it is possible that during the hedge a hedge relationship no longer qualifies for hedge accounting and hedge accounting cannot be continued, even if the hedge remains economically effective. As a result, the volatility arising from undertaking economic hedging in the profit and loss account may be higher than would be expected from an economic point of view.
25 MAxIMUM CREdIt ExPOSURE ING Group’s maximum credit exposure as at 31 December 2009 and 2008 is represented as follows: Maximum credit exposure
Other contingent liabilities include acceptances of bills and are of a short-term nature. Other contingent liabilities also include contingent liabilities resulting from the normal operations of the Real Estate business including obligations under development and construction contracts. None of the items included in Other contingent liabilities are individually significant.
In October 2009 ING reached an agreement to sell its Asian Private Banking business for a consideration of USD 1,463 million (approximately EUR 1,000 million). The Asia franchise offers private banking services in 11 markets, including Hong Kong, the Philippines and Singapore. The transaction generates a profit for ING of approximately EUR 300 million. The sale was completed in January 2010. The Asian Private Banking business is included in the segment Retail Banking.
Revised IFRS 7 (effective 2009) IFRS 7 ‘Financial Instruments: Disclosures’ was revised in March 2009 when the IASB published the amendment: ‘Improving Disclosures about Financial Instruments’. The revised IFRS 7 is applicable as of the 2009 Annual Accounts and requires a disclosure of assets and liabilities at fair value in a three-level hierarchy. ING Group already provided a disclosure of a three-level hierarchy in its previous years’ financial statements as of 2007. Although ING Group’s previous disclosure is conceptually in line with the new requirements in IFRS 7, the specific requirements of IFRS 7 result in a number of differences. As a result, certain financial instruments that were previously classified in the category ‘Reference to published price quotations in active markets’ (the equivalent of Level 1 in IFRS 7) are classified in Level 2 as of 2009. The 2008 comparatives have been adjusted accordingly, resulting in a reclassification in the 2008 comparatives from Level 1 to Level 2. This mainly relates to derivatives (trading and non-trading) for EUR 38.6 billion (assets) and EUR 38.0 billion (liabilities) and to debt securities (available-for-sale investments, designated at fair value through profit and loss and investments /liabilities for risk of policyholders) for EUR 28.9 billion (assets) and EUR 1.8 billion (liabilities).
Valuation for these securities is inherently complex and subjective. Although each security in the portfolio is priced based on an external price, without modification by ING Group, and management is confident that it has selected the most appropriate price in the current market circumstances, the valuation of these portfolios would have been different had different prices been selected. The sensitivity of the valuation in this respect is illustrated as follows: had the valuation been based on the highest available market price for each security in these portfolios, the overall valuation would • have been approximately 2.8% higher than the valuation applied by ING Group (31 December 2008: approximately 7.6% higher); had the valuation been based on the lowest available market price for each security in these portfolios, the overall valuation would • have been approximately 1.6% lower than the valuation applied by ING Group (31 December 2008: approximately 18.3% lower); had the valuation been based on the weighted average available market price for these portfolios, the overall valuation would have • been approximately 0.6% higher than the valuation applied by ING Group (31 December 2008: approximately 6.3% lower).
ING Group transferred part of its life insurance business to Scottish Re in 2004 by means of a co-insurance contract. A loss amounting to EUR 160 million was recognised in Underwriting expenditure in 2004 on this transaction. This loss represented the reduction of the related deferred acquisition costs. In addition, an amount of EUR 240 million is being amortised over the life of the underlying business, starting in 2005 and gradually decreasing in subsequent years as the business tails off. The amount amortised in 2009 was EUR 13 million (2008: EUR 12 million; 2007: EUR 15 million). The cumulative amortisation as at 31 December 2009 was EUR 107 million (2008: EUR 96 million; 2007: EUR 81 million). On 23 January 2009, Hannover Re and Scottish Re announced that Hannover Re has agreed to assume the ING individual life reinsurance business originally transferred to Scottish Re in 2004.
Depreciation of property and equipment 365 353 321 84 95 98 449 448 419
The effective tax rate in 2009 was lower than the weighted average statutory tax rate, resulting in a lower tax benefit for the pre-tax loss. This is caused by the fact that a reduction of the carrying value of deferred tax assets and non-deductible expenses exceeded tax exempt income and releases from tax provisions.
The increase in credit risk was mainly caused by rating migration. The higher equity risk is primarily due to the recovery of the markets: higher values of equity investments mean higher exposures as well. The increase in business risk for the Bank resulted from the reclassification of client behaviour risk from interest rate risk to business risk. Client behaviour risk is related to retail portfolios; examples are outflow risk from savings portfolios and prepayment model risk for mortgages. Although the reclassification initially led to lower interest rate risk for the bank, that decrease was off-set by the inclusion of the interest rate risk for investments of core equity.
The table above represents the economic sector breakdown of credit risk outstandings (including impaired amounts) for loans and positions that have been classified as problem loans and for which provisions have been made. Against this portfolio, ING holds specific and collective provisions of EUR 2,115 million and EUR 1,246 million, respectively (2008 EUR 1,067 million and EUR 799 million respectively), representing the difference between the amortised cost of the portfolio and the estimated recoverable amount discounted at the effective rate of interest. In addition, there is EUR 1,005 million in provisions against the performing portfolio.
Market risk management for the fixed income and equity markets is split into two components: general market risk and specific market risk. The general market risk component estimates the VaR resulting from general market-value movements (e.g. interest rate movements). The specific market risk component estimates the VaR resulting from market-value movements that relate to e.g. the underlying issuer of securities in the portfolios. This specific risk relates to all value movements not related to general market movements.
By Currency Euro –262 –220 US dollar –193 80 Pound sterling –26 5 Other 46 –7 Total –435 –142
ING Bank’s real estate exposure not revalued through P&L has decreased. Main changes as a result of impairments (EUR 620 million) and net investments (EUR 290 million) are observed in Europe and Australia, partly offset by the AUD appreciation.
Insurance Americas is the largest user of Economic Capital. Improved modelling of interest rate guarantees embedded in liabilities and credit spread risk on assets has increased EC exposure. Asia Pacific exposure dropped partially due to divested business units in Australia and New Zealand. Economic Capital in Asia/Pacific and Europe has now an equal balance for financial and non-financial risks, while capital in Americas is still primarily driven by interest rate, credit spread and client fund related equity risk. The Corporate Line risk relates mostly to foreign exchange translation risk related to the potential loss of market value surplus in non-EUR denominated business units.
ING INSURANCE – MARKEt RISKS ING Insurance is exposed to market risk to the extent to which the market value of surplus can be adversely impacted due to movements in financial markets; these include interest rates, equity prices, implied volatilities of options, foreign exchange rates and Real Estate prices. Changes in financial market prices impact the market value of ING’s current asset portfolio and hedging derivatives directly as well as the calculated market value of ING’s insurance liabilities. The following table provides information on Economic Capital split by risk category: Economic Capital insurance market risks
Real Estate Exposure recorded as fair value through P&l 2008 Residential Office Retail Industrial Other Total
In addition to effective reporting systems, ING has a Whistleblower procedure which encourages staff to speak up if they know of or suspect a breach of external regulations or internal policies or Business Principles.
Compliance Risk Management Policies and tools The responsibility of the Compliance Risk Management function is, in accordance with the Charter and Framework, to proactively: Identify, assess, monitor and report on the Compliance Risks faced by ING;• Assist, support and advise management in fulfilling its responsibilities to manage Compliance Risks;• Advise any employee or officer with respect to their (personal) obligations to manage Compliance Risks.•
Principal assumptions of EaR and CaR measurement CaR and EaR figures should always be viewed in the context of principal assumptions made to enable both comparability and updated measurement of ING Group’s risk profile: Risk dynamics are based on historic observation; historical events are used as a proxy for future risk estimates e.g. price changes, • defaults, dependencies of markets; Point-in-time risk profile of in-force business is presented; in general risk measurement does not include future volumes and margins; • Discretionary management interventions are not explicitly modelled unless their measurement can be based on historical performance • tracking (e.g. regular or planned actions); Correlation factors between risk types used for diversification are based on best estimate assumptions supported by statistical analysis • of historical data, ING risk expert judgement, external benchmark studies and common logic; Behavioural assumptions for clients are included in risk measurement where applicable e.g. variable savings, embedded mortgage • options or lapse ratios.
The Economic Capital for ING Bank involves the aggregation of the underlying Economic Capitals of five risk types, namely credit, transfer, market, operational and business risks (latter two also referred to as other risks). These risk types are aggregated to provide a total diversified ING Bank Economic Capital by applying the variance-covariance approach with a 5 x 5 inter-risk correlation matrix.
Based on the market data from GMDB, ING calibrates two economic scenario generators: Risk Neutral Economic Scenario Generator (RN ESG): capable of generating multiple equity indices and exchange rates, consistent with a • multi-currency dynamic term structure model. Scenarios are used in the cash flow projection to determine replicating portfolios. RN ESG scenarios are consistent with observed market prices of equity, FX and interest options; Real World Economic Scenario Generator (RW ESG): capable of jointly simulating all risk types, i.e. all market risks, credit risk, business • risk, operational risk, life risk, morbidity risk and P&C risk. Diversification between risks is taken into account through a Gaussian copula, allowing for different marginal probability distributions at the risk driver level. RW ESG scenarios are consistent with historical time series of the market risk drivers using 5 years of weekly data observations. The volatilities are scaled from weekly to quarterly and the weekly correlations are used directly as estimates of quarterly correlations.
The inputs are used to calibrate marginal distributions for these risk types. These distributions, in combination with the Gaussian copula, are then used in the Economic Capital Calculation to measure diversification between market and non-market risks.
PROCESSES FOR MANAGING CAPItAl In addition to measuring capital adequacy, Capital Management also ensures that sufficient capital is available through setting targets and limits relevant to the above mentioned metrics for ING Bank, ING Insurance and ING Group and ensuring adherence to the set limits and targets through planning and executing capital management transactions. The process is supplemented by stress testing and scenario analysis. The ongoing assessment and monitoring of capital adequacy is embedded in Capital Management’s capital planning process and results in a quarterly Capital Adequacy Assessment Report which is presented to both the ING Group Finance and Risk Committee and the ING Group Executive and Supervisory Boards. The main objective of the assessment is to ensure that ING Group as a whole has sufficient capital relative to its risk profile both in the short and the medium term.
ING INSURANCE European Union directives require insurance companies established in member states of the European Union to maintain minimum capital positions. The ING Insurance companies outside the EU have to comply with their respective local requirements. ING Insurance’s companies comply with local regulatory requirements. The table below shows the global required capital of ING Insurance measured on the basis of the European Union requirement. This requirement is compared with ING Insurance consolidated available capital.
ING Group long term – A stable A1 negative A stable
ING Group Annual Report 2009 261 2.2 Parent company annual accounts
Rights issue –64 Cancelled –4,904 –183,158,017 Share-based payments –27 –22 –1,058,658 –1,250,394 4 SUBORdINAtEd lOANS
The number of debentures held by group companies as at 31 December 2009 was 114,760 with a balance sheet value of EUR 11 million (2008: 49,540 with a balance sheet value of EUR 4 million).
In the course of 2008 and 2009, governments around the world, including the Dutch government, implemented unprecedented measures to provide assistance to financial institutions, in certain cases requiring (indirect) influence on or changes to governance and remuneration practices. In certain cases governments nationalised companies or parts thereof. The measures adopted in the Netherlands include both liquidity provision and capital reinforcement, and a Dutch Credit Guarantee Scheme. The liquidity and capital reinforcement measures expired on 10 October 2009, while the Credit Guarantee Scheme of the Netherlands is scheduled to run through 30 June 2010. To date, we have been able to benefit from these measures, but our participation in these measures has resulted in certain material restrictions on us, including those agreed to with the European Commission (‘EC’) as part of our Restructuring Plan. See ‘Risks Related to the Group - Our agreements with the Dutch State impose certain restrictions regarding the issuance or repurchase of our shares and the compensation of certain senior management positions’, ‘Risks Related to the Group - 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’. The Restructuring Plan as well as any potential future transactions with the Dutch State or any other government, if any, or actions by such government regarding ING could adversely impact the position or rights of shareholders, bondholders, customers or creditors and our results, operations, solvency, liquidity and governance.
PORtFOlIOS UNdER thE AIRB APPROACh RISK RAtING MEthOdOlOGy In principle all Risk Ratings are based on a Risk Rating (PD) Model that complies with the minimum requirements detailed the CRD, the DNB Supervisory Rules and CEBS guidelines. This concerns all Obligor Types and Segments, including Countries.
Counterparty credit risk outstandings from securities financing (SA and AIRB) Central
The previous four tables are calculated using the mark-to-market plus (Regulatory) add-on methodology used for calculating Basel II RWA for determining the gross exposures. In order to determine the amount of credit risk applicable, ING first matches the trades with similar characteristics to determine their eligibility for offsetting. This offsetting effect is called ‘compensation’. Subsequently, ING reduces the amount by any legal netting that may be permitted under various types of Master Agreements, such as ISDAs, GMRAs, GMSLAs, etc. Lastly, the amount is further reduced by any collateral that is held by ING under CSAs or other similar agreements.
ING as Originator ING originates own securitisation transactions for economic and regulatory capital purposes, as well as liquidity and funding purposes.
Outstandings EAD on 31 December of assets that were performing on the Cut-off date. Credit Events Aggregate outstandings of assets subject to a credit event reported in the twelve months period ending on the Cut-off date. Past Due Assets Outstandings on the Cut-off date of assets that are past due, but not in credit event on that date, as more fully detailed in the quarterly reports. Past due for residential mortgage transactions means ‘more than 1 monthly payment in arrears’. Past due for SME deals means ‘reference entities that are rated 20-22’ .
By line of business ING Commercial Banking –44 –132 ING Retail Banking –115 –101 ING Direct –281 5 ING Bank Corporate Line 5 46 Total –435 –182
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.
COllAtERAlISEd lOAN OBlIGAtION (ClO) A type of CDO which is backed primarily by leveraged bank loans.
INvEStMENt RISK Investment risk is the credit default and risk rating migration risk that is associated with ING Group’s investments in bonds, commercial paper, securitisations, and other similar publicly traded securities. Investment risk arises when ING purchases a (synthetic) bond with the intent to hold the bond for a longer period of time (generally through maturity).
PRIvAtE PlACEMENt A placement in which newly issued shares or debentures come into possession of a limited group of subscribers who are prepared to buy the new securities.
tIER 1 CAPItAl Also referred to as the core capital of ING Bank. It comprises paid up share capital, reserves excluding revaluation reserves, retained earnings, minority interests and hybrid Tier 1.