EU conglomerate capital rules expose ING’s weak group capital

This week ING revealed its plans to spin off its Korean insurance unit, see this link from Bloomberg. This made me wonder how this bank-assurer would fare under the current capital rules for conglomerates. The current Fico Directive is clear:

” … the multiple use of elements eligible for the calculation of own funds at the level of the financial conglomerate (multiple gearing) as well as any inappropriate intra-group creation of own funds must be eliminated.”

Three European regulators last week published a Technical Standard complementing the Fico directive. In practice, this Technical Standard reinforces the directive in crossing out the availability of hybrid capital for conglomerate capital purposes. The Technical Standard also raises the requirements for capital before it can be called “surplus capital.” See my earlier post.

So how does it look for ING, a bank-assurer that some months ago reported 58,725M EUR of “Adjusted Equity.”

To asses the prudential quality of this figure, I will look at the ability of “Adjusted Equity” to absorb losses. Normal accounting equity absorbs losses: a net loss for the year will be subtracted from Equity; likewise, profits are added to Equity.

Things that don’t absorb losses are debt, as it shall be repaid in full. State support does not absorb losses either: taxpayers want their money back, 100% or more. Hybrids, as the Technical Standard published last week points out, only serve a purpose within the sector, i.e. bank hybrids can only be used as bank capital; likewise this applies to insurers.

Using information from ING’s press release (p.11 mainly) from May 8 this year, and subtracting state-support and non-group hybrids, ING Group looks significantly less fierce. The surplus available for absorbing conglomerate losses drops to 3,796 MEUR. Compare this tot total assets of the group (1.2TEUR), and the results will show a drop of the conglomerate surplus from 2.50% to 0.32%. In other words, a small decrease in asset values can get ING Group into trouble.

ING Group (May 8, 2013 press release) Q1 2013
Capital Surplus Bank (available -/- requirement) 19,737
Capital Surplus Insurer 10,215
Total Surplus 29,952
Core Debt 7,120-
State Support 2,250-
Group Surplus after eliminating debt-like elements 20,582
Hybrids Unavailable for group, Tier 1 and Tier 2 16,786-
Group Surplus after Fico Directive & Tech Standard 3,796
Capital Requirements Bank + Insurer (met) 33,776
Adjusted Total Capital group 37,572
Compare to ING’s press release p.11 55,993
Difference 18,421-