Structural risk in the equity portfolio

The Risk area undertakes a constant monitoring of structural risk in its equity portfolio, in order to constrain the negative impact that an adverse performance by its holdings may have on the Group’s solvency and earnings recurrence. This ensures that the risk is held within levels that are compatible with BBVA’s target risk profile.

The monitoring perimeter of the profile takes in the Group’s holdings in the capital of other industrial and financial companies, recorded as the investment portfolio. It includes, for reasons of management prudence and efficiency, the consolidated holdings, although their variations in value have no immediate effect on equity in this case. In order to determine exposure, account is taken of the positions held in derivatives of underlying assets of the same characters, used to limit portfolio sensitivity to potential falls in prices.

This monitoring function is carried out by the Risk area by providing estimates of the risk levels assumed, which it supplements with periodic stress and back testing and scenario analyses. It also monitors the degree of compliance with the limits authorized by the Executive Committee, and periodically informs the Group’s senior management on these matters. The mechanisms of risk control and limitation hinge on the aspects of exposure, earnings and economic capital. Economic capital measurements are also built into the risk-adjusted return metrics, used to ensure efficient capital management in the Group.

In 2010, in a context of high volatility in the stock markets, structural equity price risk management has been aimed at safeguarding the net-asset value of the Group’s holdings. Thus, active position management, together with the hedging policy, has enabled the Bank to maintain the risk borne, which is measured in terms of economic capital, at moderate levels.