BBVA in 2012

Structural risk in the equity portfolio

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

The scope of monitoring includes the investments in capital held by the Group in industrial or financial companies and accounted as investment portfolio. These holdings include those consolidated in the Group, although in this case changes in value do not have an immediate effect on equity. Positions held in derivatives whose underlying assets are of this type are also taken into account in order to limit the portfolio sensitivity to potential falls in prices.

The GRM corporate area estimates the risk levels assumed and monitors the level of compliance with the limits set, according to the risk appetite and as 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 measurement is also built into the risk-adjusted return metrics to ensure efficient capital management in the Group. Within GRM, CRM is the unit responsible for informing the Executive Committee and the Risk Committee of the effect on BBVA Group of any critical market conditions that may occur in the future. Stress tests and sensitivity analyses to different simulated scenarios are carried out periodically to analyze the risk profile in more depth. They are based on both past crisis situations and forecasts made by BBVA Research. In addition, backtesting is carried out monthly on the risk measurement model used.

In 2012, structural equity risk management has been aimed at safeguarding the book value of the Group’s holdings, taking into account the current context of financial crisis. Thus, active management, together with a hedging policy, has enabled the Group to maintain the risk taken, measured in terms of economic capital, at moderate levels.