ING Direct 2009 Annual Report Download - page 198

Risk Management in 2009
RISK MANAGEMENT IN 2009
Taking measured risks is part of ING Group’s business. As a financial services company active in banking, investments, life insurance and
retirement services ING Group is naturally exposed to a variety of risks. To ensure measured risk-taking ING Group has integrated risk
management in its daily business activities and strategic planning. Risk Management assists with the formulation of risk appetite,
strategies, policies and limits and provides a review, oversight and support function throughout the Group on risk-related issues. The main
financial risks ING Group is exposed to are credit risk (including transfer risk), market risk (including interest rate, equity, real estate, and
foreign exchange risks), insurance risk and liquidity risk. In addition, ING Group is exposed to non-financial risks, e.g. operational and
compliance risks. The way ING Group manages these risks on a day-to-day basis is described in this risk management section.
During 2009 the focus remained on risk mitigation and de-leveraging. However, a number of upgrades to methodologies were realised as
well, and based on the experiences from the past two years more effort was put in stress testing. Besides the regularly performed stress
tests, stress testing was also used for the mid-term planning. Furthermore, the economic capital model for credit risk is being updated
to bring it more in line with the regulatory capital framework, which excludes diversification benefits. The updated model will be
implemented in 2010. The risk appetite framework was revised as well and better aligned with the capital management targets for the
capital ratios. Lastly, the most notable change in terms of risk governance during 2009 was the creation of the Risk Committee. The Risk
Committee is a sub-committee of the Supervisory Board, dedicated to risk governance, risk policies and risk appetite setting.
MARKET DEVELOPMENTS 2009
After the turmoil on the financial markets during 2008, the financial markets improved considerably during 2009, with the exception of
direct and indirect Real Estate investments. The volatility levels came down sharply, with volatility levels at year end 2009 similar to the
levels in the first half of 2008. Throughout the world the prices of most major asset classes recovered strongly. Equity markets went up
significantly: year on year the S&P 500 increased 23% and the Dutch Amsterdam Exchange Index (AEX) increased 36%. Real Estate prices
remained under pressure, however. At 31 December 2009 the S&P Case-Shiller Index, the most prominent Real Estate index in the United
States, was 3% lower than at the end of 2008. In December 2009, the price index of Dutch owner-occupied residential real estate, as
reported by Statistics Netherlands (CBS) and the Dutch Land Registry Office (‘Kadaster’), was 5.3% lower than in December 2008. This
decline pertained to all types of residential real estate and to all Dutch provinces. Furthermore, after the credit spread widening during
2008, the credit spreads in the financial and corporate sector narrowed in 2009, both in the US and in Europe. Both in the US and Europe
short term interest rates decreased further during 2009, with the exception of the 3 month T-bill which remained at a near zero level. Long
term interest rates increased in the US, but in Europe they decreased slightly compared to year end 2008.
Risk mitigation
Anticipating a further downturn in the markets in 2009, ING took additional actions to reduce risk across major asset classes. First, the
de-risking activities that started in 2008, were continued and increased during 2009. Second, de-leveraging helped reduce risk via
reduction of the bank balance sheet. Finally, the Back to Basics initiative further reduced risk through the sale of businesses in order to
focus more on ING’s core activities and markets.
The activities for the bank balance sheet reduction were already started in 2008 (EUR 41 billion), but during 2009 the bank balance sheet
was further reduced by EUR 153 billion, and as such the reduction target of EUR 108 billion was reached. Balance sheet reduction was also
notable in the Available-for-Sale (AFS) portfolio which reduced by EUR 45 billion in 2009. The reduction was realised through maturing
bonds and pre-payments, but also reclassifications out of this category to loans and receivables. For ING Bank EUR 22.8 billion of AFS
exposure was reclassified to loans and receivables. EUR 13.3 billion of this reclassification is related to ABS securities, and EUR 9.5 billion
relates to covered bond exposures. This reclassification was done in January 2009. In January 2009 ING entered into an Illiquid Assets
Back-Up Facility with the Dutch State. This agreement resulted in a de-recognition of AFS exposure of EUR 15.2 billion. At the beginning
of the second quarter ING Insurance reclassified EUR 6.1 billion of AFS exposure to loans and advances. This reclassification is related to
ABS securities.
In ING Direct the investment portfolio was reduced and more emphasis was placed on own originated assets. Next to the fact that ING’s
revaluation reserve improved significantly during 2009, ING is now also less sensitive for revaluation reserve changes. The combination
of a reduced balance sheet and improved IFRS equity made the Bank asset leverage improve from 35.3 at 31 December 2008 to 27.8
at 31 December 2009.
Focus during the year was also on containment of risk weighted assets (RWA). Credit migration due to downgrades of counterparties
resulted in higher risk weights for assets, leading to higher required capital. In order to mitigate the RWA increase several de-risking steps
were taken. The first major step was taken at the start of the year when ING and the Dutch state entered into the Illiquid Asset Back-Up
Facility (IABF) term sheet. The IABF covers ING’s Alt-A residential mortgage backed securities (RMBS) portfolio. Through this transaction the
Dutch State became the economic owner of 80% of the Alt-A RMBS portfolio. This transaction was concluded at 90% of the par value
per year end 2008. Par value of the portfolio was approximately EUR 30 billion at that point in time. ING remains exposed to 20% of the
result of the Alt-A RMBS portfolios, as well as the legal owner of 100% of the securities. As such the transaction significantly reduced the
uncertainty regarding the impact on ING of any future losses in the portfolio. In addition, as a result of the IABF, 80% of the Alt-A RMBS
portfolios was derecognised from ING’s balance sheet under IFRS. Therefore, 80% of the negative revaluation reserve on the securities
was reversed, resulting in an increase of EUR 4.6 billion in Shareholders’ equity. The transaction also reduced ING’s risk weighted assets
by approximately EUR 13 billion.
Risk Management in 2009
2.1 Consolidated annual accounts
ING Group Annual Report 2009
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Risk management
amounts in millions of euros, unless stated otherwise