ING Direct 2009 Annual Report Download - page 272

RISKS RELATED TO THE GROUP
Ongoing turbulence and volatility in the financial markets have adversely affected us, and may continue to do so.
Our results of operations are materially impacted by conditions in the global capital markets and the economy generally. The stress
experienced in the global capital markets that started in the second half of 2007 continued and substantially increased throughout 2008
and, although market conditions have improved, volatility continued in 2009, particularly the early part of the year. The crisis in the
mortgage market in the United States, triggered by a serious deterioration of credit quality, led to a revaluation of credit risks. These
conditions have resulted in greater volatility, widening of credit spreads and overall shortage of liquidity and tightening of financial markets
throughout the world. In addition, prices for many types of asset-backed securities (‘ABS’) and other structured products have significantly
deteriorated. These concerns have since expanded to include a broad range of fixed income securities, including those rated investment
grade, the international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset
classes, such as public and private equity, and real estate sectors. As a result, the market for fixed income instruments has experienced
decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Securities that are less liquid
are more difficult to value and may be hard to dispose of. International equity markets have also been experiencing heightened volatility
and turmoil, with issuers, including ourselves, that have exposure to the real estate, mortgage, private equity and credit markets
particularly affected. These events and market upheavals, including extreme levels of volatility, have had and may continue to have an
adverse effect on our revenues and results of operations, in part because we have a large investment portfolio and extensive real estate
activities around the world. In addition, the confidence of customers in financial institutions is being tested. Consumer confidence in
financial institutions may, for example, decrease due to our or our competitors’ failure to communicate to customers the terms of, and the
benefits to customers of, complex or high-fee financial products. Reduced confidence could have an adverse effect on our revenues and
results of operations, including through an increase of lapses or surrenders of policies and withdrawal of deposits. Because a significant
percentage of our customer deposit base is originated via Internet banking, a loss of customer confidence may result in a rapid withdrawal
of deposits over the Internet.
As a result of the ongoing and unprecedented volatility in the global financial markets in 2007 and 2008, we have incurred substantial
negative revaluations on our investment portfolio, which have impacted our shareholders’ equity and earnings. During 2009, the
revaluation reserve position improved substantially, positively impacting shareholders’ equity. Although we believe that reserves for
insurance liabilities are generally adequate at the Group, inadequacies in certain product areas have developed.
Such impacts have arisen primarily as a result of valuation issues arising in connection with our investments in real estate (both in and
outside the US) and private equity, exposures to US mortgage-related structured investment products, including sub-prime and Alt-A
Residential and Commercial Mortgage-Backed Securities (‘RMBS’ and ‘CMBS’, respectively), Collateralised Debt Obligations (‘CDOs’) and
Collateralised Loan Obligations (‘CLOs’), monoline insurer guarantees and other investments. In many cases, the markets for such
investments and instruments have been and remain highly illiquid, and issues relating to counterparty credit ratings and other factors have
exacerbated pricing and valuation uncertainties. Valuation of such investments and instruments is a complex process involving the
consideration of market transactions, pricing models, management judgment 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 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 to our shareholders’ equity or profit and loss accounts from such assets in
future periods.
The implementation of the Restructuring Plan and the divestments anticipated in connection with that plan will significantly
alter the size and structure of the Group and involve significant costs and uncertainties that could materially impact the
Group.
In November 2008 the Dutch State purchased the Core Tier 1 Securities, and in the first quarter of 2009 we and the Dutch State entered
into the Illiquid Assets Back-up Facility (the ‘Illiquid Assets Back-up Facility’) pursuant to which we transferred to the Dutch State the
economic risks and rewards of 80% of the approximately EUR 30 billion par value Alt-A residential mortgage-backed securities portfolios
of ING Direct US and Insurance Americas.
As a result of having received state aid through the Dutch State Transactions, we were required to submit a restructuring plan (the
‘Restructuring Plan’) to the EC in connection with obtaining final approval for the Dutch State Transactions under the EC state aid rules. On
26 October 2009, we announced our Restructuring Plan, pursuant to which we are required to divest by the end of 2013 all of our
insurance business, including the investment management business, as well as ING Direct US, which operates our direct banking business
in the United States, and certain portions of our retail banking business in the Netherlands. The EC’s approval of the Restructuring Plan
was issued on 18 November 2009. On 28 January 2010 we announced that we will file an appeal with the general court of the European
Union (the ‘General Court’) against specific elements of the EC’s decision regarding the Restructuring Plan. Notwithstanding the appeal
before the General Court, we are committed executing the Restructuring Plan as announced on 26 October 2009. In addition, in order to
obtain approval of the Restructuring Plan, we committed to make a series of additional payments to the Dutch State, corresponding to
adjustments to the net fees payable under the Illiquid Assets Back-up Facility. These payments have significantly increased the cost of the
Risk factors (continued)
2.4 Additional information
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