The basic measurement model used is Value-at- Risk (VaR), which provides a forecast of the maximum loss that can be incurred by trading portfolios in a one-day horizon, with a 99% probability, stemming from fluctuations in equity prices, interest rates, foreign exchange rates and commodity prices. In addition, for certain positions, other risks also need to be considered, such as credit spread risk, basis risk and volatility risk.
Currently, BBVA S.A. and BBVA Bancomer are authorized by the Bank of Spain to use their internal model to determine capital requirements deriving from risk positions in their trading book, which jointly accounts for 80-90% of the Group’s trading book market risk. Since December 2007, the method used for estimating market risk in BBVA S.A. and BBVA Bancomer has been based on historic simulation through the Algorithmics risk assessment platform. The sample period used is two years. The rest of the banks in the Group use a parametric methodology.
In 2009 risk measurements were bolstered to strengthen controls and the application of market risk policies in BBVA in line with the new guidelines from Basel II.
The market risk limits model currently in force consists of a global structure comprising economic capital and VaR limits and VaR stoploss sublimits for each of the Group’s business units. The global limits are proposed by the Risk area and approved by the Executive Committee on an annual basis, once they have been submitted to the Board’s Risk Committee.
This limits structure is developed by identifying specific risks by type, trading activity and trading desk. The market risk units maintain consistency between the limits. This is supplemented by analyses of impacts on the income statement when risk factors enter a stress situation, taking into account the impact of financial crises that have taken place in the past and economic scenarios that could occur in the future.
In order to assess business unit performance over the year, the accrual of negative earnings is linked to the reduction of VaR limits set. The structure in place is supplemented by limits on loss and alert signals to anticipate the effects of adverse situations in terms of risk and/or result.
Finally, the market risk measurement model includes backtesting or ex-post comparison, which helps to refine the accuracy of the risk measurements by comparing day-on-day results with their corresponding VaR measurements.