BBVA in 2012

Risk in market unitsFor yet another year, 2012 was characterized by the continuing economic crisis in Spain, withcontinued market instability and pressures on prices. This has caused continuing market instabilityand pressures on prices. Against this backdrop, the function of risk control in market activities hastaken on a special importance.The activity of each of the Group’s trading desks is controlled and monitored in terms of thepossible impact of negative market conditions, both under ordinary circumstances and insituations of heightened risk factors.Market risk in market activitiesThe basic measurement model used to assess market risk is Value at Risk (VaR), whichprovides a forecast with a 99% probability of the maximum loss that can be incurred bytrading portfolios in a one-day horizon, stemming from fluctuations in equity prices, interestrates, foreign exchange rates and commodity prices. In addition, for certain positions, otherrisks also need to be considered, such as credit spread risk, basis risk, volatility and correlationrisk. The VaR is calculated by using a historical period of 2 years of observation of the riskfactors.Currently, BBVA, S.A. and BBVA Bancomer have been authorized by the Bank of Spain to usetheir internal model to determine capital requirements deriving from risk positions in theirtrading book, which jointly accounts for 80-90% of the Group’s trading-book market risk.Furthermore, and following guidelines established by Spanish and European regulators, BBVAhas created additional metrics to comply with the regulatory requirements issued by theBank of Spain. The new market risk measures for the trading book include the calculation ofthe stressed VaR (to quantify the risk level in extreme historical conditions), the quantificationof non-performing risks, and of downgrade risks in the rating of some positions held in theportfolio, such as bonds and credit derivatives; they also quantify securitization and correlationportfolio charges, using the standard model.The market-risk limits model currently in force consists of a system of VaR (Value at Risk) andeconomic capital limits and VaR sub-limits, as well as stop-loss limits for each of the Group’sbusiness units. The global limits are proposed by the corporate GRM area and approved bythe Executive Committee on an annual basis, once they have been submitted to the Board’sRisk Committee. This limits structure is developed by identifying specific risks by type, tradingactivity and trading desk. The market risk units maintain consistency between the limits. Thissystem of limits is supplemented by measures of the impact of extreme market movementson risk positions held.The stress analysis is currently carried out based on historical crisis scenarios. The referencehistorical scenario today is the collapse of Lehman Brothers in 2008. Economic crisisscenarios are also prepared, which are updated on a monthly basis and drawn up ad hoc foreach one of the Group’s trading floors. These scenarios identify the most significant marketrisk positions and assess the possible impact that fluctuations in market variables may haveon such positions.116 Risk management