Risk management

Management and control model

General risk management and control model

 

Identifying and managing risks is at the core of the board of directors’ remit. The BBVA board monitors on a regular basis a set of financial and non-financial risks which may affect the success of Group BBVA’s business activities.

The BBVA Group has a general risk management and control model that is appropriate for its business model, its organization, the countries where it operates and its corporate governance system. This model allows the Group to carry out its activity within the management and risk control strategy and policy defined by the corporate bodies of BBVA (considering sustainability specifically) and to adapt itself to a changing economic and regulatory environment, facing this management at a global level and aligned to the circumstances at all times.

The Model, for which the Group’s Chief Risk Officer (CRO) is responsible and that must be updated or reviewed at least annually, is fully applied in the Group and it comprises the following basic elements:

  • Governance and organization
  • Risk Appetite Framework
  • Assessment, monitoring and reporting
  • Infrastructure

 

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Risk integration

The economic capital required to cover losses is calculated by integrating the various risks managed by the Group. Through risk diversification, BBVA’s needs of total economic capital are lower than the sum of the economic capital needs of its individual activities.  Measurement is a two-stage process: first, risks (credit, market and other) are defined individually according to their specific features; then, they are aggregated using a model that takes risk inter-dependency into account.

 

Credit risk

 

In 2020,  the local authorities of the countries in which the Group operates initiated economic support measures for the management of the COVID-19 crisis, including the granting of relief measures in terms of temporary payment deferrals to customers affected by the pandemic, as well as the granting of loans covered by public guarantees, especially to companies and self-employed workers.

These measures were supported by the rules issued by the authorities of the geographical areas where the Group operates, as well by certain industry agreements, and were intended to ease the temporary liquidity needs of the customers. By the end of 2021, the temporary deferral measures had been completed in all the geographical areas.

For the purposes of classifying exposures based on their credit risk, the Group has maintained a rigorous application of IFRS 9 at the time of granting the moratoriums and has reinforced the procedures to monitor credit risk both during their tern and upon their maturity. In this regard, additional indicators were introduced to identify the significant increase in risk that may have occurred in some operations or a set of them and, where appropriate, proceed to classify it in the corresponding risk stage.

 

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Market risk

 

Market risk originates from the possibility of experiencing losses in the value of positions held as a result of movements in market variables that affect the valuation of financial assets and liabilities.

Market risk in the Group’s trading portfolios stems mainly from the portfolios originated by Global Markets valued at fair value and held for the purpose of trading and generating short-term results.

Market risk in the field of banking book is clearly and distinctly addressed and can be broken down into structural risks relating to interest rate, exchange rate and equity.

 

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Structural risks

 

Liquidity and funding
Liquidity and funding management at BBVA aims to finance the recurring growth of the banking business at suitable maturities and costs, using a wide range of instruments that provide access to a large number of alternative sources of financing. In this context, it is important to notice that, given the nature of BBVA’s business, the funding of lending activity is fundamentally carried out through the use of stable customer funds.

Due to its subsidiary-based management model, BBVA is one of the few major European banks that follows the Multiple Point of Entry (MPE) resolution strategy: the parent company sets the liquidity policies, but the subsidiaries are self-sufficient and responsible for managing their own liquidity and funding (taking deposits or accessing the market with their own rating), without fund transfers or financing occurring between either the parent company and the subsidiaries or between the different subsidiaries. This strategy limits the spread of a liquidity crisis among the Group’s different areas and ensures that the cost of liquidity and financing is correctly reflected in the price formation process.

 

Foreign exchange
Foreign exchange risk management of BBVA’s long-term investments, principally stemming from its overseas franchises, aims to preserve the Group’s capital adequacy ratio and ensure the stability of its income statement.

BBVA maintains its policy of actively hedging its main investments in emerging markets, covering on average between 30% and 50% of annual earnings and around 70% of the CET1 capital ratio surplus. The closing of the sale of BBVA USA in June has modified the Group’s CET1 fully-loaded ratio sensitivity to changes in the currencies. The most affected sensitivity by this change has been the U.S. dollar, which stands at around +18 basis points in the face of a 10% depreciation in the currency. The sensitivity of the Mexican peso is estimated at -7 basis points at the end of December 2021 and -1 basis point in the case of the Turkish lira, both currencies estimated against a depreciation of 10%. With regard to coverage levels of the expected results for 2022 is close to 65% in the case of Mexico, 20% in Turkey and 100% in Peru and Colombia.

 

Interest rate
Interest rate risk management seeks to limit the impact that BBVA may suffer, both in terms of net interest income (short-term) and economic value (long-term), from adverse movements in the interest rate curves in the various currencies in which the Group operates. BBVA carries out this work through an internal procedure, pursuant to the guidelines established by the European Banking Authority (EBA), in order to analyze the potential impact that could derive from a range of scenarios on the Group’s different balance sheets.

 

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Risks associated with climate change

 

The risks related to climate change are considered as an additional factor which affects the risk categories already identified and defined in the BBVA Group and are therefore managed through the Groups risk management frameworks (credit, market, liquidity, operational and other non-financial risks).

As a consequence, the BBVA Group’s climate change risk-related is based on their incorporation into the currently processes and governance established, considering the regulation and supervisory trends.

 

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Operational Risk

 

BBVA defines operational risk (“OR”) as any risk that could result in losses caused by human error; inadequate or flawed internal processes; undue conduct with respect to customers, markets or the institution; antimoney laundering and financing of terrorist activities; failures, interruptions or flaws in systems or communications; theft, loss or wrong use of information, as well as deterioration of its quality, internal or external fraud, including in any case those derived from cyberattacks; theft or harm to assets or persons; legal risks; risks derived from staff management and labor health; and defective service provided by suppliers; as well as damages from extreme climate events, pandemics and other natural disasters.

Operational risk management is oriented towards the identification of the root causes to avoid their occurrence and mitigate possible consequences. This is carried out through the establishment of control framework and monitoring and the development of mitigation plans aimed at minimizing resulting economic and reputational losses and their impact on the recurrent generation of results, and contributing the increase the quality, safety and availability of the provided service. Operational risk management is integrated into the global risk management structure of the BBVA Group.

 

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Reputational risk

 

Since 2016, BBVA disposes of a reputational risk assessment methodology. Through this methodology, the Bank defines and reviews regularly a map in which it prioritizes the reputational risks which have to be faced and the set of action plans to mitigate them. The prioritization is done based on two variables: the impact on the perception of the stakeholders and the strength of BBVA facing the risk.

This exercise is performed annually in all countries where the Group has bank entities. Following the result of the assessment carried out in 2020, 17 mitigation action plans have been conducted during 2021.

The Responsible Business teams collaborate, together with the rest of the members of BBVA’s second defense line, in the different Committees of Admission of the Operational Risk, both at Group and the different geographical areas level. Those Committees perform the initial identification of potential reputational risks, and, where appropriate, an assessment of the foreseeable impact on BBVA’s reputation,

The results of the annual assessment of the Reputational Risk are reported in each geographical area at the appropriate governance level. At Group level, these results are reported to the Global Corporate Assurance Committee and, since 2020, to the Board’s Executive Committee.

 

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Risk factors

 

BBVA Group has processes in place for identifying risks and analyzing scenarios in order to enable the Group to manage risks in a dynamic and proactive way.The risk identification processes are forward looking to seek the identification of emerging risks and take into account the concerns of both the business areas, which are close to the reality of the different geographical areas, and the corporate areas and senior management.

Risks are identified and measured consistently using the methodologies deemed appropriate in each case. Their measurement includes the design and application of scenario analyzes and stress testing and considers the controls to which the risks are subjected.

As part of this process, a forward projection of the Risk Appetite Framework (RAF) variables in stress scenarios is conducted in order to identify possible deviations from the established thresholds. If any such deviations are detected, appropriate measures are taken to keep the variables within the target risk profile.

In this context, there are a number of emerging risks that could affect the evolution of the Group’s business. These risks are included in the following blocks:

  • Risk associated with COVID-19 pandemic
  • Macroeconomic and geopolitical risks
  • Regulatory and reputational risks
  • Business, operational and legal risks

 

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Market risk

 

Market risk originates from the possibility of experiencing losses in the value of positions held as a result of movements in market variables that affect the valuation of financial assets and liabilities.

Market risk in the Group’s trading portfolios stems mainly from the portfolios originated by Global Markets valued at fair value and held for the purpose of trading and generating short-term results.

Market risk in the field of banking book is clearly and distinctly addressed and can be broken down into structural risks relating to interest rate, exchange rate and equity.

 

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Updated page 01 July 2022