ING Direct 2009 Annual Report Download - page 26

The improvements in the markets were also visible through the
decrease in volatility during 2009, as well as the decrease in credit
spreads. Short-term interest rates continued to decrease, both in
the US and Europe. At the same time long-term interest rates in
Europe decreased slightly from their 2008 level, and in the US
the long-term interest rates increased during 2009.
RISK MITIGATING ACTIONS
Anticipating a further downturn in the markets in 2009, ING took
additional actions to reduce risk across major asset classes. First,
the derisking activities that started in 2008, were continued and
increased during 2009. Second, deleveraging 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, 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 due to reclassifications out of this category
to loans and advances. 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 to
revaluation reserve changes. The combination of a reduced
balance sheet and improved IFRS equity made the Bank asset
leverage ratio 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. 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 derisking
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
Assets Back-up Facility (IABF). See the section ‘ING and the financial
environment’ for more information on the IABF term sheet.
Additional mitigation of the RWA migration was done by further
reducing the Residential Mortgage Backed Securities (RMBS)
portfolio, for example via the sale of US Prime RMBS securities
during the fourth quarter. These and other management actions
resulted in a RWA reduction during 2009 of EUR 11 billion, going
from EUR 343 billion at year-end 2008 to EUR 332 billion at
year-end 2009.
ING continued to derisk its product offering in 2009. This was
accomplished through the redesign of products (mainly the US
variable annuity products), and by removing products from our
product range in line with the Back to Basic programme.
management; Risk Management and Finance, which provide
high-level policies, limits and risk oversight, as well as day-to-day
transaction approval; and Corporate Audit Services, the internal
audit department within ING Group, which provides an
independent assessment of the design and effectiveness of
internal controls at all levels of ING Group.
FINANCIAL RISK DASHBOARD
The risk appetite, or the willingness of the Group to take risks, is
measured through three key metrics: Earnings at Risk and Capital
at Risk which are measured in the Financial Risk Dashboard, and
Economic Capital. Business line managers aim to maximise value
relative to these measures, while Risk Management monitors and
controls the risk profile against the Group’s risk appetite. The
metrics enable the Executive Board to identify risk concentrations
and potential risk-mitigating actions. They provide an overview of
risks inherent in all the banking and insurance businesses and
facilitate monitoring the adherence of risk-taking with respect to
the Group’s risk appetite. It thereby allows ING to take strategic
decisions using comparable risk measures and to maximise efficient
capital allocation. The crisis demonstrated the importance and
value of the metrics since they were used as a tool to inform the
Executive Board of the impact of potential risk-mitigating actions
on the Group-wide risk profile, however the crisis also highlighted
some of the shortcomings of the methodology. Effort was put into
aligning Earnings at Risk more with accounting principles.
In 2009, as part of the lessons learned, ING has redefined its
risk appetite framework. The updated framework is more
closely aligned with Capital Management targets. The crisis also
demonstrated that capital requirements and especially changes in
capital requirements can become a bottleneck. In order to address
the risk of changes to capital requirements as a result of changing
market circumstances ING has developed some new metrics, such
as ‘Risk-Weighted Assets at Risk’ (RWA@Risk) to improve the
manageability of risk-weighted assets for ING Bank, and ‘local
solvency at risk’ for ING Insurance. The revised framework has
been implemented in 2010, and will be further rolled out.
NON-FINANCIAL RISK DASHBOARD
Since 2008 the Non-Financial Risk Dashboard (NFRD) is a standard
report on the agenda for both the Executive Board and the Audit
Committee and (as of 2009) the Risk Committee meetings. The
NFRD was introduced to keep focus on the key risk exposures when
looking at the risk faced by business units. NFRD delivers
comprehensive and integrated risk information on Operational,
Compliance and Legal Risks, using a consistent approach and risk
language at all levels in the organisation.
MARKET DEVELOPMENTS IN 2009
2009 was the year in which some markets rebounded from the
2007-2008 crisis, while other markets stabilised or even further
deteriorated. Equity markets improved but the US housing market
further deteriorated in the first half of 2009, though improved
slightly in the second half of the year. Overall, the US housing prices
declined slightly compared to year-end 2008, which meant that
prices for real estate and prices for asset classes with real estate
underlying remain impacted by the continued turmoil.
Risk management (continued)
1.2 Report of the Executive Board
ING Group Annual Report 2009
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