Credit risk in market activities

The credit risk assessment in OTC financial instruments is made by means of a Monte Carlo simulation, which calculates not only the current exposure of the counterparties, but also their possible future exposure to fluctuations in market variables.

The model combines different credit risk factors to produce distributions of future credit losses and thus allows a calculation of the portfolio effect; in other words, it incorporates the term effect (the exposure of the various transactions presents potential maximum values at different points in time) and the 99 Risk in market areas correlation effect (the relation between exposures, risk factors, etc. are normally different to 1). It also uses credit risk mitigation techniques such as legal netting and collateral agreements.

The maximum credit risk exposure in derivatives to counterparties in the Group as of 31-Dec-2011 stood at €58,494m, an increase of 31% on year-end 2010. The maximum credit risk exposure in derivatives in BBVA, S.A. is estimated at €52.796 million. BBVA S.A.’s overall reduction in terms of exposure due to netting and collateral agreements was €37,587m.

Therefore, the net risk in derivatives at BBVA, S.A., as of December 31, 2011, is €15,210m.

As of December 31, 2011, gross exposure amounts to €54,015m and the portfolio effect in that date is €3,441m.

The table below shows the distribution by maturity of the maximum exposure amounts under OTC financial instruments. Maturity index is 3.14 years.

The counterparty risk assumed in this activity involves entities with a high credit rating (equal to or above A- in 81% of cases). Exposure is mainly concentrated in financial entities (87%) and corporates (6%).

By geographical area, the highest exposure of BBVA, S.A. was in Europe (77%) and the United States (14%), which together account for 91% of the total.

OTC Derivatives. Maximum exposure BBVA, S.A.

(Million euros)

OTC financial instruments Gross exposure Portfolio effect Gross maximum exposure
IRS 29,208 560 29,768
FRAs 95 1 96
Interest rate options 2,133 210 2,344
Total "OTC interest rate" 31,436 771 32,207
Forward FX 4,330 885 5,214
Currency swaps 6,544 844 7,389
Currency options 595 32 628
Total "OTC exchange rate" 11,469 1,761 13,230
OTC Equity 7,545 902 8,447
Lending 3,172 6 3,178
Commodities 393 0 393
Total "OTC equity and others" 11,110 908 12,018
Total diversification

Total 54,015 3,441 52,796
Net exposure BBVA, S.A.

Netting savings on collateral agreements

Net exposure on contractual agreements

Maximum exposure in OTC financial instruments. BBVA, S.A. Distribution by maturity

(Million euros)

Type of product 2011
Maximum exposure Up to 1 year Up to 3 years Up to 5 years Up to 10 years Up to 15 years Up to 25 years As of 25 years
OTC interest rate 32,207 52,546 65,365 30,651 33,052 6,061 2,861 508
OTC exchange rate 13,230 17,155 19,381 7,860 9,592 2,204 420 1
OTC equity and others 12,018 15,260 14,766 3,938 3,783 1,338 1,081 137
Total diversification (4,660)

Total 52,796 84,961 99,512 42,449 46,427 9,603 4,362 645
37. Distribution by rating of maximum exposure in BBVA, S.A.
38. Geographical distribution of maximum exposure in BBVA, S.A