BBVA in 2013

Structural exchange-rate risk

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Structural exchange-rate risk is originated basically through the exposure to changes in exchange rates in BBVA Group’s companies abroad and in the endowment funds of foreign subsidiaries in a currency other than that of the investment.

BBVA’s structural exchange-rate risk management aims to minimize the potential negative impact of fluctuations in exchange rates on the solvency ratios 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 of monitoring and analyzing risks, integrating risk metrics into management and providing tools that can anticipate potential deviations from the targets set. 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 Asset/Liability Management unit, through ALCO, designs and executes the hedging strategies with the main purposes of minimizing the potential negative impact of exchange-rate fluctuations on capital ratios, as well as ensuring 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 Asset/Liability 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.

The corporate measurement model uses a simulation of exchange-rate scenarios based on their historical trends. This allows a quantification of the changes in value that can take place with a given confidence level and a predetermined time horizon. The impacts are also evaluated on three core management elements: the capital ratio, equity and the Group’s income statement. The calculation of the risk estimates takes into account the risk mitigation measurements aimed at reducing exposure to exchange-rate risk. It also takes into account the diversification from investments in different geographical areas. Lastly, the risk measurements are supplemented by analyses of scenarios, stress testing and backtesting, thus giving a more complete view of the Group’s exposure to structural exchange-rate risk.

As well as monitoring exposure and sensitivity to different currencies, risk control and management are based on probabilistic metrics that estimate maximum impacts for different confidence levels in each of the core elements. Limits and alerts are set for these 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 different scenarios. This gives a complete overview of the Group’s exposure to structural exchange-rate risk.

In 2013, in an environment characterized by uncertainty and volatility in the foreign-currency markets, the level of risk mitigation of the book value of BBVA Group’s foreign-currency holdings has remained at an average of 39%. Hedging of the estimated exposure of foreign-currency earnings in 2013 has been at a level of 43%. The average sensitivity of equity exposure to a 1% depreciation in exchange rates against the euro of the main currencies to which BBVA is exposed amounts to €200m, of which 34% corresponds to the Mexican peso, 26% to South American currencies, 23% to Asian currencies and the Turkish lira, and 15% to the U.S. dollar.