Balance Sheet at 31 December 2010 of BBVA
Balance Sheet at 31 December 2010 of BBVA
Balance Sheet at 31 December 2010 of BBVA
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Transl<strong>at</strong>ion <strong>of</strong> financial st<strong>at</strong>ements originally issued in Spanish and prepared in accordance with generally accounting principles Spain<br />
(See Note 1 and 54). In the event <strong>of</strong> a discrepancy, the Spanish-language version prevails.<br />
In addition to measuring the sensitivity to 100-basis-point changes in market interest r<strong>at</strong>es, the Bank<br />
performs probability calcul<strong>at</strong>ions th<strong>at</strong> determine the economic capital and risk margin for structural interest<br />
r<strong>at</strong>e risk in the <strong>BBVA</strong>’s banking activity (excluding the Treasury area), based on interest r<strong>at</strong>e curve simul<strong>at</strong>ion<br />
models. The Bank regularly performs stress tests and sensitivity analysis to complement its assessment <strong>of</strong><br />
its interest r<strong>at</strong>e risk pr<strong>of</strong>ile.<br />
All these risk measurements are subsequently analyzed and monitored, and levels <strong>of</strong> risk assumed and the<br />
degree <strong>of</strong> compliance with the limits authorized by the Executive Committee are reported to the various<br />
managing bodies <strong>of</strong> the Bank.<br />
As part <strong>of</strong> the measurement process, the Bank established the assumptions regarding the movement and<br />
behavior <strong>of</strong> certain items, such as those rel<strong>at</strong>ing to products with no explicit or contractual m<strong>at</strong>urity. These<br />
assumptions are based on studies th<strong>at</strong> estim<strong>at</strong>e the rel<strong>at</strong>ionship between the interest r<strong>at</strong>es on these<br />
products and market r<strong>at</strong>es and enable specific balances to be classified into trend-based balances m<strong>at</strong>uring<br />
<strong>at</strong> long term and seasonal or vol<strong>at</strong>ile balances with short-term residual m<strong>at</strong>urity.<br />
c) Structural currency risk<br />
Structural foreign exchange risk is basically caused by exposure to vari<strong>at</strong>ions in foreign exchange r<strong>at</strong>es th<strong>at</strong><br />
arise in the Bank’s foreign subsidiaries and the provision <strong>of</strong> funds to foreign branches financed in a different<br />
currency to th<strong>at</strong> <strong>of</strong> the investment.<br />
The ALCO is responsible for arranging hedging transactions to limit the capital impact <strong>of</strong> fluctu<strong>at</strong>ions in<br />
exchange r<strong>at</strong>es, based on their projected trend, and to guarantee the equivalent euro value <strong>of</strong> the foreign<br />
currency earnings expected to be obtained from these investments.<br />
Structural currency risk management is based on the measurements performed by the Risk Area. These<br />
measurements use a foreign exchange r<strong>at</strong>e scenario simul<strong>at</strong>ion model which quantifies possible changes in<br />
value for a given confidence interval and a pre-established time horizon. The Executive Committee<br />
authorizes the system <strong>of</strong> limits and alerts for these risk measurements, which include a limit on the economic<br />
capital or unexpected loss arising from the foreign exchange risk <strong>of</strong> the foreign-currency investments.<br />
d) Structural equity risk<br />
The Bank’s exposure to structural equity risk comes largely from its holdings in industrial and financial<br />
companies with medium- to long-term investment horizons, reduced by the short net positions held in<br />
deriv<strong>at</strong>ive instruments on the same underlying assets, in order to limit portfolio sensitivity to potential price<br />
cuts.<br />
The Risk Area measures and effectively monitors structural risk in the equity portfolio. To do so, it estim<strong>at</strong>es<br />
the sensitivity figures and the capital necessary to cover possible unexpected losses due to the vari<strong>at</strong>ions in<br />
the value <strong>of</strong> the equity portfolio <strong>at</strong> a confidence level th<strong>at</strong> corresponds to the institution’s target r<strong>at</strong>ing, and<br />
taking account <strong>of</strong> the liquidity <strong>of</strong> the positions and the st<strong>at</strong>istical performance <strong>of</strong> the assets under<br />
consider<strong>at</strong>ion. These figures are supplemented by periodic stress comparisons, back-testing and scenario<br />
analyses.<br />
5.3 LIQUIDITY RISK<br />
The aim <strong>of</strong> liquidity risk management, tracking and control is to ensure, in the short-term, th<strong>at</strong> the payment<br />
commitments can be duly met without having to resort to borrowing funds under burdensome terms, or<br />
damaging the image and reput<strong>at</strong>ion <strong>of</strong> the institution. In the medium term the aim is to ensure th<strong>at</strong> the<br />
financing structure is ideal and th<strong>at</strong> it moves in the right direction, in the context <strong>of</strong> the economic situ<strong>at</strong>ion,<br />
the markets and regul<strong>at</strong>ory changes.<br />
Liquidity management and structural finance in the <strong>BBVA</strong> Group are based on the principle <strong>of</strong> the financial<br />
autonomy <strong>of</strong> its subsidiaries. This management approach helps prevent or limit liquidity risk by reducing the<br />
vulnerability <strong>of</strong> the <strong>BBVA</strong> Group during high-risk periods.<br />
Once the decentraliz<strong>at</strong>ion is considered by geographical areas/subsidiaries, the management and monitoring<br />
<strong>of</strong> liquidity risk is carried out comprehensively in each <strong>of</strong> the Group’s units with both a short and long-term<br />
Approach. The short-term liquidity approach has a time horizon <strong>of</strong> up to 366 days. It is focused on the<br />
management <strong>of</strong> payments and collections from Treasury and Markets and includes the oper<strong>at</strong>ions specific to<br />
the areas and the Bank's possible liquidity requirements. The second medium-term or medium-financing<br />
approach is focused on financial management <strong>of</strong> all the balance sheet, with a time horizon <strong>of</strong> one year or<br />
more.<br />
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