The positive performance of the stock markets in 2009, with prices recovering, has led to a significant increase in the accumulated capital gains on the Group’s holdings. Given this situation, in order to preserve this increase in capital gains, risk management has reduced levels of exposure, so that the risk assumed, measured in terms of use of economic capital, has moderated in the final months of the year.
The Risk area undertakes a constant monitoring of structural risk in its equity portfolio, in order to constrain the negative impact that an adverse performance by its holdings may have on the Group’s solvency and earnings recurrence. This ensures that the risk is held within levels that are compatible with BBVA’s target risk profile. The monitoring perimeter of the profile takes in the Group’s holdings in the capital of other industrial and financial companies, booked under the holdings portfolio. It includes, for reasons of management prudence and efficiency, the consolidated holdings, although their variations in value have no immediate effect on equity in this case. In order to determine exposure, account is taken of the positions held in derivatives of underlying assets of the same kind, used to limit portfolio sensitivity to potential falls in prices.
This monitoring function is carried out by the Risk area by providing estimates of the risk levels assumed, which it supplements with periodic stress and back testing and scenario analyses. It also monitors the degree of compliance with the limits authorized by the Executive Committee, and periodically informs the Group’s senior management on these matters. The mechanisms of risk control and limitation hinge on the aspects of exposure, earnings and economic capital. Economic capital measurements are also built into the risk-adjusted return metrics, used to ensure efficient capital management in the Group.