BBVA in 2012

Interest rate risk measurement is supplemented by analysis of BBVA Research’s scenarios, as wellas stress testing, which evaluates extreme scenarios of a possible breakthrough in both interestratelevels and historical correlations and volatility.Structural exchange-rate riskThe foreign exchange market has been volatile throughout the year. It has been affected by theuncertainty surrounding the crisis evolution in the Euro Zone. This situation has led to the generalappreciation in Latin American currencies against the euro, particularly in the case of Mexico andChile. As a result, exchange rate fluctuations have contributed to BBVA Group closing the year on apositive note in capital ratios and in equity terms.BBVA’s structural exchange-rate risk management aims to minimize the potential negative impactfrom fluctuations in exchange rates on the book value and on the contribution to earnings of theGroup’s long term international investments.The GRM corporate area acts as an independent unit that is responsible for monitoring andanalyzing risks, standardizing risk management metrics and providing 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 in the case of deviation or tension in thelevels of risk assumed.The Balance Sheet Management unit, through ALCO, designs and executes the hedging strategieswith the main purpose of minimizing the potential negative impact of exchange-rate fluctuationson capital ratios, as well as hedging the equivalent value in euros of the foreign-currency earningsof the Group’s subsidiaries, adjusting transactions according to market expectations and hedgingcosts. The Balance Sheet Management unit carries out this work by ensuring that the Group’s riskprofile is at all times adapted to the framework defined by the limits structure authorized by theExecutive Committee. To do so, it uses risk metrics obtained according to the corporate modeldesigned by the GRM area.Apart from monitoring 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 according to the tolerance levels establishedby the Group. Structural exchange-rate risk control is completed by an analysis of the marginalcontributions to risk from currencies, diversification effects, the effectiveness of hedging andanalysis of scenarios and stress. This gives a complete overview of the Group’s exposure tostructural exchange-rate risk.In 2012, in an environment that has once again been marked by uncertainty and marketvolatility, a policy of prudence was maintained. This has moderated the risk assumed, despitethe growing contribution of “non-euro” results to the Group’s earnings and equity. The hedginglevel of the carrying value in books of BBVA Group’s holdings in foreign currency has remainedat an average of 42%. Hedging of foreign-currency earnings has been at levels of close to50%. At the end of the year, there was still significant hedging of the foreign-currency earningsforecast for 2013.Liquidity and funding riskLiquidity and funding risk management aims to ensure that a bank does not have any difficultiesin meeting its payment commitments, and that it does not have to make use of funding underonerous conditions. The management of structural funding and short-term liquidity in BBVAGroup is decentralized to prevent possible contagion from a crisis affecting only one or a fewgeographical areas.Movements on international financial markets in 2012 continued to be conditioned by thesovereign debt crisis in the Euro Zone. During the second half of the year, the main risks were theStructural risks113