The portfolio model and concentration and diversification effects

Credit risk for the global portfolio of the BBVA Group is measured through a portfolio model where the effects of concentration and diversification are analyzed. The purpose is to study jointly the entire loan book, by analyzing and capturing the effect of interrelations between the various portfolios.

In addition to enabling a more comprehensive calculation of capital needs, this model is a key tool for credit risk management, contributing to the base of the asset allocation model, a model for efficient portfolio allocation based on the risk-return trade-off.

The portfolio model considers that risk comes from various sources (it is a multi-factor model). This feature implies that economic capital is sensitive to geographic diversification, a crucial aspect in a global entity like BBVA. In addition, and in the context of the asset allocation project, the sector and geographical factors are now the key to business concentration analyses. Finally, the tool is also sensitive to the concentration that may exist in certain credit exposures, such as the Institution’s large customers.