The basic measurement model used to assess market risk is Value at Risk (VaR), which provides a forecast with a 99% probability of the maximum loss that can be incurred by trading portfolios in a one-day horizon, stemming from fluctuations in equity prices, interest rates, foreign exchange rates and commodity prices. In addition, for certain positions, other risks also need to be considered, such as credit spread risk, basis risk, volatility and correlation risk. The VaR is calculated by using a historical period of two years of observation of the risk factors.
Currently, BBVA, S.A. and BBVA Bancomer have been authorized by the Bank of Spain to use their internal model to determine capital requirements deriving from risk positions in their trading book, which jointly accounts for 80-90% of the Group’s trading-book market risk. Furthermore, and following guidelines established by Spanish and European regulators, BBVA has created additional metrics to comply with the regulatory requirements issued by the Bank of Spain. The new market risk measures for the trading book include the calculation of the stressed VaR (to quantify the risk level in extreme historical or market conditions), the quantification of non-performing risks, and of downgrade risks in the rating of some positions held in the portfolio, such as bonds and credit derivatives; they also quantify securitization and correlation portfolio charges, using the standard model.
The market-risk limits model currently in force consists of a system of VaR and economic capital limits and VaR sub-limits, as well as stop-loss limits for each of the Group’s business units. The global limits are approved annually by the Executive Committee at the proposal of the market risk unit, following presentation to the GRMC and the Board of Directors’ Risk Committee. This limits structure is developed by identifying specific risks by type, trading activity and trading desk. The market risk unit maintains consistency between the limits. The structure of control is supplemented by limits on loss and a system of warning signals to anticipate the effects of adverse situations in terms of risk and/or result.
Validity tests are performed regularly on the risk measurement models used by the Group. They estimate the maximum loss that could occur in the positions taken in consideration with a determined level of probability (backtesting), as well as measurements of the impact of extreme market movements in the risk positions held (stress testing). Backtesting is also carried out as an additional control measure at the level of trading desks with the aim of a more specific monitoring of the validity of the measurement models.
