Structural risk in the equity portfolio

The GRM corporate area undertakes ongoing monitoring of structural risk in its equity portfolio, in order to constrain the negative impact that an adverse performance by its holdings may have on the Group’s solvency and earnings recurrence. This ensures that the risk is maintained within levels that are compatible with BBVA’s target risk profile.

The scope of monitoring includes the holdings that the Group has in the capital of other industrial or financial companies with a medium or long-term investment horizon. These holdings include those accounted in the investment portfolio and those that are consolidated in the accounts, although in the latter case changes in value do not have an immediate effect on equity. In order to determine the exposure, positions held in derivatives are taken into account in order to limit the portfolio sensitivity to potential falls in prices.

This monitoring function is carried out by the Risk area by estimating the levels of risks assumed, and complementing this with periodic checks using stress tests and backtesting, as well as scenario analysis. It also monitors the level of compliance with the limits authorized by the Executive Committee, and periodically informs the Group’s senior management of these aspects. The mechanisms of risk control and limitation hinge on the key aspects of exposure, earnings and economic capital. Economic capital measurements are also built into the risk-adjusted return metrics to ensure efficient capital management in the Group.

In 2011, in a context of high stock-market volatility, structural equity risk management has been aimed at safeguarding the book value of the Group’s holdings. Thus, active position management, together with a hedging policy, has enabled the Group to maintain the risk taken, measured in terms of economic capital, at moderate levels.