ING Direct 2013 Annual Report Download - page 367

monetary asset purchases (‘tapering’), the level of U.S. national debt and the U.S. housing market, inflation levels, energy costs and
geopolitical issues all have contributed to increased volatility and diminished expectations for the economy and the markets in recent years.
While certain of such conditions have improved during the period between 2011 and 2013, 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 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 U.S., 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 ‘ —U.S. 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 continued to experience 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 high 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 incurred in past years substantial
negative revaluations and impairments on our investment portfolio, which have impacted our shareholders’ equity and earnings. During
2011, 2012 and 2013, the revaluation reserve position improved substantially, positively impacting shareholders’ equity. Although we
believe that, as of December 31, 2013, reserves for insurance liabilities were generally adequate at the Group, inadequacies in certain
product areas have developed. The aforementioned developments in the global financial markets and, in particular, decreasing interest
rates resulted in a decrease in our overall reserves adequacy and may further continue to produce reserves inadequacies in the future,
potentially leading to reserve strengthening.
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 U.S.) and private equity, exposures to European sovereign debt and to U.S. mortgage-related
structured investment products, including sub-prime and ‘Alt-A’ residential and commercial mortgage-backed securities, collateralised debt
obligations and collateralised loan obligations, 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. Although we continue to
monitor our exposures, there can be no assurance that we will not experience further negative impacts to our shareholders’ equity or
profit and loss accounts in future periods.
U.S. Sovereign Credit Rating
In 2011, Standard & Poor’s Ratings Services (‘S&P’) lowered its long-term sovereign credit rating on the U.S. from AAA to AA+. Although
other ratings agencies have not similarly lowered the long-term sovereign credit rating of the U.S., they have put that credit rating on
review. Amid the lingering uncertainty over the long-term outlook for the fiscal position and the future economic performance of the U.S.
within the global economy and potential future budgetary restrictions in the U.S., as illustrated by the recent budget negotiations and
partial shutdown of the U.S. government in October 2013, there continues to be a perceived risk of a future sovereign credit ratings
downgrade of the U.S. government, including the rating of U.S. Treasury securities. On 15 October 2013, Fitch Ratings placed the U.S.’s
AAA credit rating under ‘rating watch negative’ in response to the crisis, a step that would precede an actual downgrade. It is foreseeable
that the ratings and perceived creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities
directly linked to the U.S. 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. The impact of any further downgrades to the sovereign credit rating of the U.S. government or a
default by the U.S. government to satisfy its debt obligations likely would create broader financial turmoil and uncertainty, which would
weigh heavily on the global financial system and could consequently result in a significant adverse impact to the Group.
Risk factors continued
365ING Group Annual Report 2013
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