ING Direct 2008 Annual Report Download - page 184

2.1 Consolidated annual accounts
Fair value of US subprime RMBS, US Alt-A RMBS and CDOs/CLOs
2007
Reference to
published price
quotations in
active markets
Valuation
technique
supported by
market inputs
Valuation
technique not
supported by
market inputs Total
US Subprime RMBS 2,636 153 2,789
US Alt-A RMBS 23,312 4,170 27,4 82
CDOs/CLOs 281 1,597 17 1,895
Total 26,229 5,920 17 32,166
An amount of EUR 25 billion of mortgage 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. Reference is made
to Note 33 ‘Fair value of financial assets and liabilities’.
Impact on Real Estate
By the end of 2008 ING Group’s total exposure to real estate was EUR 15.5 billion of which EUR 9.8 billion was subject to revaluation
through the profit and loss account. In 2008, ING recorded EUR 1,184 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 negative real estate
markets throughout the world.
Impact on Equity securities – available-for-sale
Direct equity exposure at 31 December 2008 in this caption was EUR 5.8 billion (public) and EUR 0.4 billion (private). During 2008 ING
booked EUR 1,707 million of pre-tax impairments on this direct public 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 other asset classes
Negative impact on results 2008 (pre-tax) from private equity and alternative assets amounted to EUR 399 million. Negative impact on
results 2008 (pre-tax) from debt securities other than mentioned above amounted to EUR 292 million.
Impact on counterparty risk
In the third quarter a number of financial institutions were no longer expected to fulfil their obligations. ING incurred EUR 483 million
pre-tax losses (excluding loan losses) on Lehman Brothers, Washington Mutual and the Icelandic banks. The loss included impairments of
debt securities, trading losses and derivative positions, including the costs to replace derivatives on which the banks were counterparty.
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. 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.
Ongoing volatility in the financial markets
The impacts have arisen primarily as a result of the deterioration of the US housing market which caused real estate prices to decline.
This caused valuation issues in connection with ING’s exposure to US mortgage-related structured investment products, including
sub-prime and Alt-A RMBS, CDOs and CLOs. In many cases, the markets for such instruments have become highly illiquid, and issues
relating to counterparty credit ratings and other factors have exacerbated pricing and valuation uncertainties. Valuation of such
instruments is a complex process involving the consideration of market transactions, pricing models, management judgement and
other factors, and is also impacted by external factors such as underlying mortgage default rates, interest rates, rating agency actions
and property valuations.
While we continue to monitor our exposures in this area, in the light of the ongoing market environment and the resulting uncertainties
concerning valuations, there can be no assurances that we will not experience further negative impacts on our shareholders’ equity or
profit and loss accounts from such assets in future periods.
The financial crisis has demonstrated the importance of having a robust risk management organisation in place. Although ING’s risk
management organisation and liquidity profile have helped it to limit the impact and manage the company through the turmoil,
ING will continue to further strengthen its risk management organisation. The lessons learned in this crisis will contribute to this
continuous process.
Risk management (continued)
ING Group Annual Report 2008
182