ING Direct 2015 Annual Report Download - page 109

Contents
Who we are
Report of the
Management
Board
Corporate
Governance
Consolidated
annual accounts
Parent company
annual accounts
Other
information
Additional
information
Notes to the Consolidated annual accounts of ING Bank - continued
a.3) Fair value hierarchy
ING Bank has categorised its financial instruments that are either measured in the balance sheet at fair value or of which the fair value
is disclosed, into a three level hierarchy based on the priority of the inputs to the valuation. The fair value hierarchy gives the highest
priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to valuation techniques
supported by unobservable inputs. An active market for the asset or liability is a market in which transactions for the asset or liability
occur with sufficient frequency and volume to provide reliable pricing information on an ongoing basis. The fair value hierarchy
consists of three levels, depending upon whether fair values were determined based on (unadjusted) quoted prices in an active market
(Level 1), valuation techniques with observable inputs (Level 2) or valuation techniques that incorporate inputs which are unobservable
and which have a more than insignificant impact on the fair value of the instrument (Level 3). Financial assets in Level 3 include for
example illiquid debt securities, complex OTC and credit derivatives, certain complex loans (for which current market information
about similar assets to use as observable, corroborated data for all significant inputs into a valuation model is not available) and asset
backed securities for which there is no active market and a wide dispersion in quoted prices.
Observable inputs reflect market data obtained from independent sources. Unobservable inputs are inputs which are based on the
Bank’s own assumptions about the factors that market participants would use in pricing an asset or liability, developed based on the
best information available in the circumstances. Unobservable inputs may include volatility, correlation, spreads to discount rates,
default rates and recovery rates, prepayment rates and certain credit spreads. Transfers into and transfers out of fair value hierarchy
levels are recognised as of the date of the event or change in circumstances that caused the transfer.
Level 1 – (Unadjusted) quoted prices in active markets
This category includes financial instruments whose fair value is determined directly by reference to published quotes in an active
market that ING Bank can access. A financial instrument is regarded as quoted in an active market if quoted prices are readily and
regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent
actual and regularly occurring market transactions with sufficient frequency and volume to provide pricing information on an ongoing
basis. Transfers out of Level 1 into Level 2 occur when ING Bank establishes that markets are no longer active and therefore
(unadjusted) quoted prices no longer provide reliable pricing information.
Level 2 – Valuation technique supported by observable inputs
This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model), where inputs in
the model are taken from an active market or are observable. If certain inputs in the model are unobservable, the instrument is still
classified in this category, provided that the impact of those unobservable inputs on the overall valuation is insignificant. Included in
this category are items whose value is derived from quoted prices of similar instruments, but for which the prices are modified based
on other market observable external data and items whose value is derived from quoted prices but for which there was insufficient
evidence of an active market. This category also includes financial assets and liabilities whose fair value is determined by reference to
price quotes but for which the market is considered inactive.
Level 3 – Valuation technique supported by unobservable inputs
This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model) for which more
than an insignificant part of the inputs in terms of the overall valuation are not market observable. This category also includes
financial assets and liabilities whose fair value is determined by reference to price quotes but for which the market is considered
inactive. Level 3 Trading assets, Non-trading derivatives and Assets designated at fair value through profit and loss and Level 3
Financial liabilities at fair value through profit and loss include financial instruments with different characteristics and nature, which
are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable. An instrument in its
entirety is classified as Level 3 if a significant portion of the instrument’s fair value is driven by unobservable inputs. Unobservable in
this context means that there is little or no current market data available from which the price at which an arm’s length transaction
would be likely to occur can be derived. More details on the determination of the fair value of these instruments is included above
under ‘Derivatives’, ‘Debt securities’ and ‘Loans and advances to customers’.
ING Bank Annual Report 2015 107