ING Direct 2011 Annual Report Download - page 307

While certain of such conditions have improved over 2009 and 2010, these conditions have generally 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 and especially the sovereign debt of some EEA
countries and the United States, 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 of these and other factors, sovereign
governments across the globe, including in regions where the Group operates, have also experienced budgetary and other financial
difficulties, which have resulted in austerity measures, downgrades in credit rating by credit agencies, planned or implemented bail-out
measures and, on occasion, civil unrest (for further details regarding sovereign debt concerns, see ‘– US Sovereign Credit Rating’ and ‘–
European Sovereign Debt Crisis’ below). As a result, the market for fixed income instruments has experienced decreased liquidity, increased
price volatility, credit downgrade events, and increased probability of default. In addition, the confluence of these and other factors has
resulted in volatile foreign exchange markets. 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 since 2007, we have incurred substantial negative
revaluations and impairments on our investment portfolio, which have impacted our shareholders’ equity and earnings. During 2009,
2010 and 2011 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.
The aforementioned impacts have arisen primarily as a result of valuation and impairment issues arising in connection with our investments
in real estate (both in and outside the US) and private equity, exposures to European sovereign debt and 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,
private equity and other investments. In many cases, the markets for 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. We continue to monitor our exposures, however there can be no assurances that we will not
experience further negative impacts to our shareholders’ equity or profit and loss accounts in future periods.
US Sovereign Credit Rating
After a period of uncertainty as to whether US lawmakers would be able to reach the political consensus needed to raise the federal debt
ceiling, and notwithstanding that US lawmakers passed legislation to raise the federal debt ceiling before the US actually defaulted on any
ofits obligations, on 5 August 2011, Standard & Poor’s Ratings Group, Inc. lowered its long-term sovereign credit rating on the United States
of America from AAA to AA+. Although other ratings agencies have not similarly lowered the long-term sovereign credit rating ofthe United
States of America, they have put that credit rating on review. There continues to be a perceived risk of a future sovereign credit ratings
downgrade of the US government, including the rating of US Treasury securities. It is foreseeable that the ratings and perceived
creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the US
government could also be correspondingly affected by any such downgrade. Instruments of this nature are key assets on the balance sheets
of financial institutions and are widely used as collateral by financial institutions to meet their day-to-day cash flows in the short-term debt
market. A downgrade of the sovereign credit ratings of the US government and the perceived creditworthiness of US government-related
obligations could impact our ability to obtain funding that is collateralised by affected instruments, as well as affecting the pricing of that
funding when it is available. Adowngrade may also adversely affect the market value of such instruments. We cannot predict if, when or
how any changes to the credit ratings or perceived creditworthiness of these organisations will affect economic conditions. Such ratings
actions could result in a significant adverse impact to the Group.
Risk factors continued
1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information
305ING Group Annual Report 2011