The portfolio model and concentration and diversification effects

Credit risk for the global portfolio of the BBVA Group is measured through a portfolio model where the effects of concentration and diversification are analyzed. Its purpose is to study the entire loan book as a whole, by analyzing and capturing the effect of interrelations between the various portfolios.

In addition to enabling a more comprehensive calculation of capital needs, this model is a key tool for credit risk management, as it establishes loan limits based on the contribution of each unit to total risk in a global, diversified setting.

The portfolio model considers that risk comes from various sources (it is a multi-factor model). This feature implies that economic capital is increasingly sensitive to geographic diversification, a crucial aspect in a global entity like BBVA. These effects have been made more apparent against the current backdrop in which, despite the stress undergone by the markets and the different rates of recovery in the countries where the Group operates, they have contributed to lessening their impact on BBVA.

In addition, industry and geographical factors are now key to business concentration analyses. And finally, the tool is also sensitive to the concentration that may exist in certain credit exposures, such as the Institution’s large customers.