BBVA in 2012
BBVA in 2012
BBVA in 2012
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Interest rate risk measurement is supplemented by analysis of <strong>BBVA</strong> Research’s scenarios, as wellas stress test<strong>in</strong>g, which evaluates extreme scenarios of a possible breakthrough <strong>in</strong> both <strong>in</strong>terestratelevels and historical correlations and volatility.Structural exchange-rate riskThe foreign exchange market has been volatile throughout the year. It has been affected by theuncerta<strong>in</strong>ty surround<strong>in</strong>g the crisis evolution <strong>in</strong> the Euro Zone. This situation has led to the generalappreciation <strong>in</strong> Lat<strong>in</strong> American currencies aga<strong>in</strong>st the euro, particularly <strong>in</strong> the case of Mexico andChile. As a result, exchange rate fluctuations have contributed to <strong>BBVA</strong> Group clos<strong>in</strong>g the year on apositive note <strong>in</strong> capital ratios and <strong>in</strong> equity terms.<strong>BBVA</strong>’s structural exchange-rate risk management aims to m<strong>in</strong>imize the potential negative impactfrom fluctuations <strong>in</strong> exchange rates on the book value and on the contribution to earn<strong>in</strong>gs of theGroup’s long term <strong>in</strong>ternational <strong>in</strong>vestments.The GRM corporate area acts as an <strong>in</strong>dependent unit that is responsible for monitor<strong>in</strong>g andanalyz<strong>in</strong>g risks, standardiz<strong>in</strong>g risk management metrics and provid<strong>in</strong>g tools that can anticipatepotential deviations from targets. It also monitors the level of compliance with established risklimits, and reports regularly to the Risk Management Committee, the Board of Directors’ RiskCommittee and the Executive Committee, particularly <strong>in</strong> the case of deviation or tension <strong>in</strong> thelevels of risk assumed.The Balance Sheet Management unit, through ALCO, designs and executes the hedg<strong>in</strong>g strategieswith the ma<strong>in</strong> purpose of m<strong>in</strong>imiz<strong>in</strong>g the potential negative impact of exchange-rate fluctuationson capital ratios, as well as hedg<strong>in</strong>g the equivalent value <strong>in</strong> euros of the foreign-currency earn<strong>in</strong>gsof the Group’s subsidiaries, adjust<strong>in</strong>g transactions accord<strong>in</strong>g to market expectations and hedg<strong>in</strong>gcosts. The Balance Sheet Management unit carries out this work by ensur<strong>in</strong>g that the Group’s riskprofile is at all times adapted to the framework def<strong>in</strong>ed by the limits structure authorized by theExecutive Committee. To do so, it uses risk metrics obta<strong>in</strong>ed accord<strong>in</strong>g to the corporate modeldesigned by the GRM area.Apart from monitor<strong>in</strong>g exposure and sensitivity to different currencies, risk control andmanagement are based on probabilistic metrics that estimate maximum impacts for differentconfidence levels. Limits and alerts are established accord<strong>in</strong>g to the tolerance levels establishedby the Group. Structural exchange-rate risk control is completed by an analysis of the marg<strong>in</strong>alcontributions to risk from currencies, diversification effects, the effectiveness of hedg<strong>in</strong>g andanalysis of scenarios and stress. This gives a complete overview of the Group’s exposure tostructural exchange-rate risk.In <strong>2012</strong>, <strong>in</strong> an environment that has once aga<strong>in</strong> been marked by uncerta<strong>in</strong>ty and marketvolatility, a policy of prudence was ma<strong>in</strong>ta<strong>in</strong>ed. This has moderated the risk assumed, despitethe grow<strong>in</strong>g contribution of “non-euro” results to the Group’s earn<strong>in</strong>gs and equity. The hedg<strong>in</strong>glevel of the carry<strong>in</strong>g value <strong>in</strong> books of <strong>BBVA</strong> Group’s hold<strong>in</strong>gs <strong>in</strong> foreign currency has rema<strong>in</strong>edat an average of 42%. Hedg<strong>in</strong>g of foreign-currency earn<strong>in</strong>gs has been at levels of close to50%. At the end of the year, there was still significant hedg<strong>in</strong>g of the foreign-currency earn<strong>in</strong>gsforecast for 2013.Liquidity and fund<strong>in</strong>g riskLiquidity and fund<strong>in</strong>g risk management aims to ensure that a bank does not have any difficulties<strong>in</strong> meet<strong>in</strong>g its payment commitments, and that it does not have to make use of fund<strong>in</strong>g underonerous conditions. The management of structural fund<strong>in</strong>g and short-term liquidity <strong>in</strong> <strong>BBVA</strong>Group is decentralized to prevent possible contagion from a crisis affect<strong>in</strong>g only one or a fewgeographical areas.Movements on <strong>in</strong>ternational f<strong>in</strong>ancial markets <strong>in</strong> <strong>2012</strong> cont<strong>in</strong>ued to be conditioned by thesovereign debt crisis <strong>in</strong> the Euro Zone. Dur<strong>in</strong>g the second half of the year, the ma<strong>in</strong> risks were theStructural risks113