Exposure to structural equity risk is mainly derived from BBVA’s holdings in industrial and financial companies with a medium and long-term investment horizon. Some of these holdings are consolidated in the Group accounts, although in this case changes in value do not have an immediate effect on equity. This exposure is reduced through net short positions held in derivatives on the same underlying assets, with the aim of limiting the portfolio’s sensitivity to potential falls in prices.
The GRM corporate area acts as an independent unit that is responsible for monitoring and analyzing risks, driving integration in the management of risk metrics and providing tools that can anticipate potential deviations from the targets set. In addition, it monitors the level of compliance with the limits set and authorized by the Executive Committee, according to risk appetite, and reports regularly on changes to these to the Risk Management Committee, the Board of Directors’ Risk Committee and the Executive Committee, above all in the case of significant levels of risk assumed, in accordance with current corporate policy.
The mechanisms of risk control and limitation focus on the core aspects of exposure, earnings and economic capital. The metrics of structural equity risk designed by GRM according to the corporate model contribute to the effective monitoring of risk through estimates of the sensitivity and capital needed to cover possible unexpected losses. These losses may occur due to changes in the value of the companies making up the Group’s investment portfolio, with a level of confidence that corresponds to the Entity’s target rating, taking into account the liquidity of the positions and statistical behavior of the assets being considered. Stress tests and analyses of sensitivity 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.
The aggregate sensitivity of the Group’s consolidated equity to a fall of 1% in the share price stood at €31m as of December 31, 2013, and the sensitivity of pre-tax profit is estimated at €1m. These figures include exposure in shares valued at market price or, where applicable, fair value (except for the positions held by the trading floor units) and the net positions in options on the same underlying assets in terms of delta equivalent.
