ING Direct 2008 Annual Report Download - page 22

ING Group Annual Report 2008
1.2 Report of the Executive Board
20
RISK MANAGEMENT IN TIMES OF CRISIS
Taking measured risks is part of ING’s business. As a financial
services company active in banking, investments, life insurance
and retirement services, ING is naturally exposed to a variety
of risks. To ensure measured risk-taking ING 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.
Investment and trading decisions are based on extensive
internal research.
Like other financial institutions, ING has not been immune to the
market turmoil. The turmoil started in the US subprime mortgage
market in early 2007 and intensified over 2008 as prices fell across
most major asset classes throughout the world. Equity markets
lost significant ground; over the course of the year the S&P 500
declined by 38% and the Dutch Amsterdam Exchange index (AEX)
by 52%. Real estate prices were generally under pressure. In the
US the S&P Case-Shiller Index showed a cumulative decline in
housing prices of 18.6% over 2008. Credit spreads in the
corporate and financial sectors widened significantly, both in the
US and Europe. As liquidity became tight, central banks around
the world were quick to provide funding to prevent the interbank
market from drying up. There were also a number of financial
institutions that failed during the year. As the turmoil spread
beyond the financial sector it also affected consumer confidence,
other sectors and economic growth. All of these factors placed
major strains on risk management departments in financial services
companies, including ING, and emphasised the importance of
having a robust risk management organisation in place that can
take forceful measures to reduce risk.
Risk mitigating actions
Although some limits had been set at more stringent levels
since early 2007, anticipating a downturn in the market, ING has
taken additional actions over time to reduce risk across major
asset classes.
De-leveraging
ING is working to reduce the bank balance sheet by 10% by
decreasing the non-lending part by 25%. The available for sale
portfolio will be reduced over time as proceeds from maturing
securities will be used to fund ING-originated loans. Reducing
trading activities, deposits at other banks and reverse-repos will
make up most of the remaining reduction. At the same time,
lending activities will be maintained with focus on the corporate
and retail business.
Credit risk
In January 2009, ING entered into an Illiquid Assets Back-up Facility
terms sheet with the Dutch State covering ING’s Alt-A Residential
Mortgage-Backed Securities (RMBS) portfolio. Through this
transaction, which is expected to close in the first quarter of 2009,
subject to final documentation and regulatory approval, the Dutch
State will become the economic owner of 80% of the Alt-A
RMBS portfolio. This transaction is expected to be concluded at
90% of the EUR 30 billion par value of the portfolio. Following
the deteriorated economic outlook in the third and fourth quarter,
market prices for these securities had become depressed as
Risk management
Mitigating risk a top priority
2008 was a challenging year for the financial sector. The
crisis that originated in the US housing market intensified
in the second half of the year, with prices falling across
most asset classes and the turmoil impacting the broader
economy around the world. Top global banks and financial
institutions worldwide were impacted. ING Group has not
been immune to developments in the markets, however
its approach to risk management and the steps it has taken
to reduce risk have helped in limiting the impact. In this
environment a robust risk management organisation
is essential.
Pre-tax P&L impact impairments, fair value changes
and trading losses
in EUR million 2008 2007
US subprime RMBS –120 –64
Alt-A RMBS –2,064 0
CDOs/CLOs –394 –51
Monolines –9 –66
Investments in SIVs, ABCP –11 –45
Leveraged Finance 0–29
Total –2,598 –255
US subprime RMBS, Alt-A RMBS and CDO/CLO exposures
and revaluations at year-end 2008
in EUR million Market value
Pre-tax
revaluation
via equity
US subprime RMBS 1,778 –1,146
Alt-A RMBS 18,847 –7,474
CDO/CLO 3,469 –352
Total 24,094 –8,972