BANCO BILBAO VIZCAYA ARGENTARIA, S.A. AND ... - BBVA

7.2 MARKET RISK
a) Market Risk
Market risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market prices, resulting in changes in the different assets and financial risk factors.
The risk can be mitigated or even eliminated through hedges using other products (assets/liabilities or
derivatives), or by undoing the transaction/open position.
There are three main risk factories that affect market prices: interest rates, foreign exchange rates and
equity.
• Interest rate risk: defined as changes in the term structure of market interest rates for different
currencies.
• Foreign-exchange risk: this is the risk resulting from changes in the foreign exchange rate for
different currencies.
• Price risk: this is the risk resulting from variations in market prices, either due to factors specific to
the instrument itself, or alternatively to factors which affect all the instruments traded on the market.
In addition, for certain positions, other risks also need to be considered: credit spread risk, basis risk,
volatility or correlation risk.
Value at Risk (VaR) is the basic variable for measuring and controlling the Group’s market risk. This risk
metric estimates the maximum loss that may occur in a portfolio’s market positions for a particular time
horizon and given confidence level. VaR is calculated in the Group at a 99% confidence level and a 1-day
time horizon.
The BBVA and BBVA Bancomer have received approval from the Bank of Spain to use the internal model to
calculate bank capital for market risk.
In BBVA and BBVA Bancomer VaR is estimated using Historic Simulation methodology. This methodology
consists of observing how the profits and losses of the current portfolio would perform if the market
conditions from a particular historic period were in force, and from that information to infer the maximum loss
at a certain confidence level. It offers the advantage of accurately reflecting the historical distribution of the
market variables and of not requiring any specific distribution assumption. The historic period used is one of
two years.
With regard to market risk, limit structure determines a system of VaR and economic capital at risk limits for
each business unit, with specific sub-limits by type of risk, activity and desk.
Validity tests are performed on the risk measurement models used to estimate the maximum loss that could
be incurred in the positions assessed with a certain level of probability (backtesting), as well as
measurements of the impact of extreme market events on risk positions (stress testing). The Group is
currently performing stress testing on historical and economic crisis scenarios drawn up by its Economic
Research Department.
Changes in market risk for the six months ended June 30, 2010
The BBVA Group’s market risk increased in 2010 compared to previous years. The average risk for the six
months ended June 30, 2010 stood at €32.4 million (VaR calculation without smoothing). This growing risk of
the Group can be explained primarily by the increase of the risk of Global Markets Europe and, to a lesser
extent, by Global Markets Bancomer upon raising equity risk for greater exposure. The increase in Global
Markets Europe is due to a great extent to the upturn in the volatility of market variables as a consequence
of the situation in the second quarter in the debt markets in the southern Euro area countries. This situation
has led to an increase in risk measurements, especially in the credit spread and interest rate risk.
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