ING Direct 2009 Annual Report Download - page 201

Risk Management in 2009
Impact on Real Estate
By the end of 2009 ING Group’s total exposure to Real Estate was EUR 13.1 billion (2008: EUR 15.5 billion) of which EUR 7.7 billion
(2008: EUR 9.8 billion) is in the accounting class fair value through profit and loss. In 2009, ING recorded EUR 2,156 million
pre-tax negative revaluations and impairments. ING’s Real Estate portfolio has high occupancy rates and is diversified over sectors and
regions, but is clearly affected by the ongoing negative Real Estate markets throughout the world.
Impact on Equity securities – available-for-sale
Direct equity exposure at 31 December 2009 was EUR 6.5 billion (listed) and EUR 2.4 billion (non-listed). During 2009 ING recognised
EUR 409 million of pre-tax impairments on equity exposure. ING generally decides to impair a listed equity security based on two broad
guidelines: when the fair value of the security is below 75% of the cost price or when the market price of the security is below the cost
price for longer than six months.
Impact on counterparty risk
The impact on counterparties for 2009 is limited mainly to the collapse of the DSB Bank in the Netherlands. The DSB Bank was covered
by the Dutch Deposit Guarantee scheme, and as such ING Group as a participant in the scheme is obliged to contribute to cover the
claims from deposit holders. Under the scheme deposits upto an amount of EUR 100,000 per person, meeting definitions of the scheme,
are guaranteed.
Impact on monolines
ING has an exposure of EUR 1.1 billion to monolines at the end of 2009 (2008: EUR 2.2 billion). This position decreased during the year
primarily due to sales.
Impact on Liquidity profile
Due to the financial crisis liquidity became scarce and central banks around the world provided funding to prevent the interbank market
drying up. Throughout the year ING’s liquidity position remained within internally set limits. ING Bank has a favourable funding profile as
the majority of the funding stems from client deposits.
Impact on loan loss provisioning
ING’s loan book consists mainly of corporate loans and mortgages. The loan book continues to perform well despite increases in risk cost
over the year. The additions to ING Bank loan loss provisions were EUR 2,973 million or 102 basis points of average credit risk weighted
assets (compared to net additions of EUR 1,280 million or 48 basis points in 2008). During the first half of 2009, the larger part of the risk
costs were visible in the Commercial Bank; in the Structured Finance and Real Estate portfolios. During the second half of 2009, risk costs
in the Commercial Bank came down due to less incidents and closing of several restructurings. The risk costs in the second half of 2009
were negatively impacted, however, by the distress in the Mid Corporate and SME sector in the home markets Netherlands and Belgium.
The risk costs in the mortgage portfolio in the home markets were moderate as there were no material increases in arrears and default
levels during 2009. ING Direct risk costs were impacted by the US housing market.
Ongoing changes in the regulatory environment
After the turmoil in the financial markets over the last couple of years and the need for governments to provide aid to financial institutions,
financial institutions have been under more scrutiny from the public, supervisors and regulators. During 2009 several proposals were made
to change regulations governing financial institutions. These revised regulations are intended to make sure that a crisis in the financial
system can be avoided in the future. To accomplish this regulations focus primarily at the following issues:
More stringently aligning risk taking with the capital position of the financial institutions (revised Basel II for Banks). The revised Basel II •
proposal narrows the definition of core Tier 1 and Tier 1 capital, and introduces a new definition for a leverage ratio that should become
part of Pillar 1 of the Basel framework. The Basel Committee has also issued a proposal for new liquidity requirements.
Apart from the above mentioned proposals, another aim is to reduce ‘pro-cyclicality’, to avoid that banks would be required to increase •
their capital in bad times when it is most scarce. Lastly, there is the proposal to introduce additional capital requirements for
counterparty credit risk.
The Basel II proposals are still in consultation phase, and the benchmarks and limits remain to be specified after a series of quantitative •
impact studies have been performed.
Separate from but in line with the revised Basel II proposal, on a country level local regulators are becoming more stringent on the •
maximum credit risk bank subsidiaries and branches are allowed to run on their parents. This leads to a new phenomenon of so-called
trapped pools of liquidity, i.e. excess liquidity in a country can not merely be transferred (unsecured) to a central Treasury in another
country.
Solvency II: In 2009 the Solvency II Framework Directive was formally approved by the European Commission and European Parliament, •
with a specified deadline for implementation of October 2012. ING has always been a firm supporter of the Solvency II initiative, being
an economic, risk-based solvency system that is based on commonly agreed principles, empirical insights and the economic reality in the
financial markets. The detailed legislative implementing measures are currently under development. However industry participants have
significant concerns on several aspects of the current proposals, which would be detrimental to consumers, the insurance industry, and
the European economy. ING is committed to work actively together with all stakeholders to develop pragmatic solutions that would
result in Solvency II meeting its original intent.
2.1 Consolidated annual accounts
Risk management (continued)
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