Risk management
amounts in millions of euros, unless stated otherwise
STUCTURE OF RISK MANAGEMENT
- Key Developments Risk Management 2007
- ING Group
- Risk Governance
- ING Group Risk Profile
- ING Bank
- ING Bank Risk Profile
- ING Bank – Credit Risks
- ING Bank – Market Risks
- ING Bank – Liquidity Risk
- ING Insurance
- ING Insurance Risk Profile
- ING Insurance – Market Risks
- ING Insurance – Insurance Risks
- ING Insurance – Credit Risks
- Compliance and Operational Risks
- Compliance Risk
- Operational Risks
- Model Disclosures
KEY DEVELOPMENTS RISK MANAGEMENT 2007
Taking measured risks is part of ING’s business. Like other financial services companies, ING faces several categories of risk, including credit, interest rate, real estate, equity, insurance and liquidity. Beyond that, there are also operational, information, security and compliance risks attached to doing business.
ING has systematically invested in improving its risk management capabilities over the past years, including investments in people, governance, processes, measurement tools and systems, etc. Recent examples are the introduction of the risk dashboard (discussed below) at the ING Group level, the company-wide embedding of the Compliance and Financial Economic Crime policies, the implementation of advanced measurement methods under Basel II (Credit Risk Internal Rating Based and Operational Risk Advanced Measurement Approach (AMA)) for the Bank and the roll-out of an intranet-based Economic Capital reporting system based on replicating portfolio techniques (ECAPS) to consistently calculate Economic Capital for insurance businesses. The addition of the position of Chief Risk Officer as part of the Executive Board in April 2007 provides a strong commitment to ensuring that risk is a key component of management decisions. To show the commitment and improvements to its risk management ING chose risk management as its theme for its 14th Investor Relations Symposium in London on 20 September 2007.
Effects of market developments during 2007
Throughout 2007, significant market turmoil was experienced in the credit markets, beginning with concerns over US sub-prime mortgages and then widening into a general banking liquidity crisis. For the year ended 31 December 2007, this crisis had only limited impact on the profit and loss account as a result of ING’s investments in pressurised assets classes e.g. US sub-prime and Alt-A residential mortgage backed securities (RMBS), Collateralized Debt Obligations (CDOs) and Collateralized Loan Obligations (CLOs). Unrealised gains (losses) relating to available for sale (fixed income) asset backed securities, including RMBS, are taken to the revaluation reserve in shareholders equity, unless there is evidence of impairment, in which case the negative revaluation reserve is recognised in the profit and loss account.
ING’s risk management organisation and its liquidity position helped it to manage the problems that occurred in the credit and other financial markets in 2007. It has been ING’s policy to maintain a high quality and well diversified portfolio. To that effect ING has limits and investment policies in place which are defined in mandates for every portfolio. Investment and trading decisions are based on internal research, and not only on published ratings. Some limits were set at more stringent levels since early 2007, in anticipation of a potential downturn of the market. As a result ING’s exposure to pressurised asset classes is of high quality and has not led to major impairments. The total direct pre-tax negative impact on ING’s 2007 profit and loss account was EUR 255 million as a result of exposures in pressurised asset classes and leveraged finance as well as monoline insurers, Structured Investments Vehicles (SIVs) and Asset-Backed Commercial Paper. Pre-tax revaluation (via equity) for the pressurised asset classes (US subprime RMBS, Alt-A RMBS and CDOs/CLOs) at year-end 2007 was EUR –1,377 million. This runs through shareholders’ equity in the balance sheet on an after-tax basis.
The Group’s total exposure to US sub-prime assets, representing less than 0.2% of total assets, relates to non originated loans acquired as investments in RMBS. At 31 December 2007 approximately 96% of ING’s US sub-prime portfolio was rated AA or higher. ING Group does not originate sub-prime mortgages. The vast majority of the total mortgage backed securitisations (MBS) contain (residential) mortgages that are not classified as sub-prime.
As at 31 December 2007 ING’s well collateralised Alt-A RMBS portfolio was approximately 2% of total assets. Approximately 86% related to ING Direct; the average loan to value ratio is approximately 71% and more than 99% of the portfolio is AAA rated. ING’s available for sale Alt-A investments are measured at fair value in the balance sheet. Net investments in CDOs/CLOs at 31 December 2007 were 0.1% of total assets and are measured at fair value in the balance sheet. An analysis of the method applied in determining the fair values of financial assets and liabilities is provided in Note 33 ‘Fair value of Financial Assets and Liabilities’.
ING has a limited exposure to monoline insurers. ING’s direct exposure to monoline insurers is negligible. However, ING has some indirect exposure to monoline insurers as it has insured 0.3% of total assets, either through embedded financial guarantees (‘wrapped bonds’) or through credit derivatives. Changes in the monoline insurer’s rating (and as a result the asset’s fair value) impact the profit and loss account for financial assets at fair value through profit and loss. Underlying wrapped bonds in the available for sale securities portfolio are monitored through the regular credit review process and were not impaired as of 31 December 2007.
ING’s approach to liquidity management requires a surplus of liquid assets, contingency plans and close monitoring of market conditions. Since the start of the market turmoil in August 2007, ING’s Liquidity Crisis Committee has met on a regular basis in line with ING’s liquidity policy. The Committee discusses ING’s liquidity and funding profile and is chaired by the Chief Risk Officer. Other members include the Chief Financial Officer, all the main treasurers of ING Group, the head of Market Risk Management and the head of Corporate Communications and Affairs. The Liquidity strategy and market conditions are monitored on a daily basis. Large buffers of liquidity were retained throughout 2007, and as a result, contingency funding plans, in place at all levels, were not required to be executed as ING’s liquidity position remained sound during the year.
ING Group’s credit risk management is described below for both ING Bank and ING Insurance. ING’s exposure to credit risk and the resulting credit risk losses in 2007 have been mitigated by maintaining a well diversified portfolio.
ING Group’s capital management is described in the Capital Management section below. Throughout the market turmoil experienced during 2007, capital levels of ING Group, ING Bank and ING Insurance exceeded those required by regulators.
Developments during the year relating to ING Group’s involvement in securitisation and asset backed commercial paper vehicles are described in Note 27 ‘Special Purpose Entities and Securitisation’.
Ongoing volatility in the financial markets
As a result of ongoing and unprecedented volatility in the global financial markets in recent quarters, we have incurred negative revaluations on our investment portfolio, which have impacted our shareholders’ equity. Furthermore, we have incurred certain impairments and other losses, which have impacted our profit and loss accounts. Such impacts have arisen primarily as a result of valuation issues arising in connection with our exposures to US mortgage-related structured investment products, including sub-prime and Alt-A Residential Mortgage-Backed Securities (RMBS), Collateralized Debt Obligations (CDOs) and Collateralized Loan Obligations (CLOs), monoline insurer guarantees, Structured Investment Vehicles (SIVs) and other investments. In many cases, the markets for such instruments have become highly illiquid, and issues relating to counterparty credit ratings and other factors have exacerbated pricing and valuation uncertainties. Valuation of such 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.
