ING Direct 2008 Annual Report Download - page 163

Valuation technique supported by market inputs
This category includes financial instruments whose fair value is determined using a valuation technique (a model), where inputs in
the model are taken from an active market or are market observable. If certain inputs in the model are not market observable, but all
significant inputs are, the instrument is still classified in this category, provided that the impact of those elements on the overall valuation
is insignificant. Included in this category are items whose value is derived from quoted prices of similar instruments, but for which the
prices are (more than insignificantly) modified based on other market observable external data.
Valuation technique not supported by market inputs
This category includes financial assets/liabilities whose fair value is determined using a valuation technique (model) for which more than
an insignificant level of the input in terms of the overall valuation are not market observable. This category also includes financial assets
and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive.
The total amount of changes in fair value estimated using a valuation technique not supported by market inputs recognised in net result
in 2008 was EUR –261 million (2007: EUR 74 million).
Sensitivities of fair values
Reasonably likely changes in the assumptions used in the valuation techniques not supported by recent market transactions would not
have a significant impact on equity and net result, other than explained below for investments in asset backed securities in the United
States.
Assets classified in Valuation technique not supported by market inputs consist mainly (approximately 87%) of investments in asset
backed securities in the United States. These assets are valued using external price sources that are obtained from third party pricing
services and brokers. As at 31 December 2007, these assets were classified in Reference to published price quotations in active markets
as valuation was based on independent quotes and trading in the relevant markets was active at that time. During 2008, the trading
volumes in the relevant markets reduced significantly and these have now become inactive. The dispersion between prices for the same
security from different price sources increased significantly. As a result, an amount of EUR 25 billion of asset backed securities in the
United States was reclassified from Reference to published price quotations in active markets to Valuation technique not supported
by market inputs in the third quarter of 2008. In order to ensure that the most accurate and relevant sources available are used in
determining the fair value of these securities, the valuation process was further enhanced during 2008 by using information from more
pricing sources and enhancing the process of selecting the most appropriate price.
Generally up to four different pricing services are utilised. Management carefully reviews the prices obtained in conjunction with other
information available, including, where relevant, trades in the market, quotes from brokers and internal evaluations. If the dispersion
between different prices for the same securities is limited, a hierarchy exists that ensures consistent selection of the most appropriate
price. If the dispersion between different prices for the same security is significant, additional processes are applied to select the most
appropriate price, including an internally developed price validation matrix and a process to challenge the price source.
As a result of the low trading volumes in the market and the widened disparity between prices for the same security from different price
sources, 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 the 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 significantly 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 and every security in these portfolios, the overall valuation •
would have been approximately 10% higher than the valuation applied by the ING Group;
had the valuation been based on the lowest available market price for each and every security in these portfolios, the overall valuation •
would have been approximately 15% lower than the valuation applied by the ING Group;
had the valuation been based on the weighted average available market price for these portfolios, the overall valuation would have •
been approximately 5% lower than the valuation applied by the ING Group.
These are indicators of sensitivity and not alternatives for fair value under IFRS-EU.
Reference is made to the ‘Risk management’ section with regard to the exposure of these asset backed securities as at 31 December
2008 and the impact from these asset backed securities on net result in 2008.
Futhermore, the ‘Risk management’ section provides under Impact of financial crisis a breakdown of the methods applied in determining
fair values of pressurised assets.
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ING Group Annual Report 2008