BBVA in 2012

Every estimate of loss given default (LGD, LRLGD and DLGD) is performed for each portfolio, takinginto account all the aforementioned factors. However, no LRLGD or DLGD estimates are madein portfolios in which the loss given default is not significantly sensitive to the cycle, as they arerecovery processes that cover extended periods of time in which the isolated situations of theeconomic cycle are mitigated.In addition to being a basic input for quantifying losses (both expected and capital losses), LGDestimates have other internal management purposes. For example, LGD is an essential factor todiscriminate prices, in the same way that it can determine the approximate value of a defaultedportfolio in the hypothetical event of outsourcing recoveries or defining which potential recoveryactions have the highest priority.Exposure at default (EAD)Exposure at default (EAD) is another of the inputs required to calculate expected loss andcapital. It is defined as the outstanding debt at the time of default.The exposure of a contract tends to be the same as its balance, although for products withexplicit limits, such as cards or credit lines, exposure should include the potential increase inthe outstanding balance from a reference date to the time of default. The EAD is thereforeobtained by adding the risk already drawn on the transaction to a percentage of undrawnrisk. This percentage of the undrawn balance that is expected to be used before defaultoccurs is known as the CCF. Thus, the EAD is estimated simply by calculating this conversionfactor. In addition, the relevance of adding to EAD the possibility of using an additionalpercentage of the limit for transactions that exceed it on a reference date is assessed,according to the risk policy for each product.The estimate of these conversion factors also includes distinguishing factors that dependon the characteristics of the transaction. For example, in the case of BBVA Spain companycredit cards, the conversion factor is estimated based on card activity, the amount of itslimit, and the initial usage percentage, which is defined as the ratio between current riskand limit. Chart 15 shows the CCF for active company credit cards based on their limit, insuch a way that a reverse relationship can be seen between the limit and the conversionfactor.15CCFs for BBVA Spain company credit cards (active cards by limit)+CCF–– +LimitIn order to obtain CCF estimates for low-default portfolios, the LDPs, external studies and internaldata are combined, or behavior similar to other portfolios is assumed and their CCFs are assignedin this way.100 Risk management