BBVA in 2012

Structural exchange-rate risk

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The foreign exchange market has been volatile throughout the year. It has been affected by the uncertainty surrounding the crisis evolution in the Euro Zone. This situation has led to the general appreciation in Latin American currencies against the euro, particularly in the case of Mexico and Chile. As a result, exchange rate fluctuations have contributed to BBVA Group closing the year on a positive note in capital ratios and in equity terms.

BBVA’s structural exchange-rate risk management aims to minimize the potential negative impact from fluctuations in exchange rates on the book value and on the contribution to earnings of the Group’s long term international investments.

The GRM corporate area acts as an independent unit that is responsible for monitoring and analyzing risks, standardizing risk management metrics and providing tools that can anticipate potential deviations from targets. It also monitors the level of compliance with established risk limits, and reports regularly to the Risk Management Committee, the Board of Directors’ Risk Committee and the Executive Committee, particularly in the case of deviation or tension in the levels of risk assumed.

The Balance Sheet Management unit, through ALCO, designs and executes the hedging strategies with the main purpose of minimizing the potential negative impact of exchange-rate fluctuations on capital ratios, as well as hedging the equivalent value in euros of the foreign-currency earnings of the Group’s subsidiaries, adjusting transactions according to market expectations and hedging costs. The Balance Sheet Management unit carries out this work by ensuring that the Group’s risk profile is at all times adapted to the framework defined by the limits structure authorized by the Executive Committee. To do so, it uses risk metrics obtained according to the corporate model designed by the GRM area.

Apart from monitoring exposure and sensitivity to different currencies, risk control and management are based on probabilistic metrics that estimate maximum impacts for different confidence levels. Limits and alerts are established according to the tolerance levels established by the Group. Structural exchange-rate risk control is completed by an analysis of the marginal contributions to risk from currencies, diversification effects, the effectiveness of hedging and analysis of scenarios and stress. This gives a complete overview of the Group’s exposure to structural exchange-rate risk.

In 2012, in an environment that has once again been marked by uncertainty and market volatility, a policy of prudence was maintained. This has moderated the risk assumed, despite the growing contribution of “non-euro” results to the Group’s earnings and equity. The hedging level of the carrying value in books of BBVA Group’s holdings in foreign currency has remained at an average of 42%. Hedging of foreign-currency earnings has been at levels of close to 50%. At the end of the year, there was still significant hedging of the foreign-currency earnings forecast for 2013.