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2018 Pillar 3 Disclosures
Annex
market risk exposure, which are quantified and reported
daily. The sensitivity measurements performed are as
follows:
•
Total delta.
Sensitivity of the Net Present Value (NPV) to parallel
movements in the interest-rate curve.
•
Curve risk.
Sensitivity of the NPV to changes in the structure of
the interest rate curve terms resulting from changes
in the slope or the form of the curve in any section.
•
Spread risk.
Measurement of the specific risk incurred with debt
instrument issuers.
In addition, liquidity risk is quantified by taking into
consideration the nature of the portfolio positions
and the situation of the financial markets.
•
Exchange-rate sensitivity.
Sensitivity of the NPV of foreign currency positions in
the portfolio to movements in exchange rates.
•
Price sensitivity
Sensitivity of the NPV of variable income positions
in the portfolio to movements in the prices of the
portfolio securities.
•
Volatility sensitivity.
Sensitivity of the NPV of options positions in the
portfolio to movements in the volatility of the
underlying factors (Vega risk).
Stress testing
The purpose of stress tests is to estimate the effects in
terms of losses of an extreme movement in the market on
the current portfolio. To this end, one or several “worst-
case scenarios” are defined for the evolution of prices and
rates, based on actual situations that have been observed
in the past, or others that may be generated.
The inclusion of the results of the stress tests in reporting
systems provides information to operators and persons
responsible on the level of losses which could be suffered
in positions in extreme cases, and helps to identify the risk
profile of the portfolios in such situations.
The stages to be assessed are approved at the Financial
Risk Committee and ratified by the ALCO. To these are
added the specific risk impact (via the spread).
Two types of calculations are made to obtain the impacts of
stress. This first one employs a static methodology in which
the market conditions are altered without considering
any type of correlation between the different assets. The
second calculation uses a stochastic methodology (Stress-
VaR) that applies the correlations and volatilities occurred
in a historical period of high volatility in the market.
Limits on market risk
The measurement of market risk for the trading
book is performed by means of the VaR, both by the
Parametric and Historical Simulation methodology
(for the purposes of the consumption of limits, the
former is currently used), incorporating criteria
of diversification and correlation between risks
(diversification benefit).
The general structure of limits is determined by the
following guidelines:
•
The Board of Directors, within the Risk Tolerance
Framework, establishes global limits and, at the
proposal of the ALCO, approves implementation plans
and management procedures.
•
The Assets and Liabilities Committee establishes a
general framework of limits for market risk management
and the distribution of limits across the desks.
•
The Board of Directors approves and reviews, in the
ALCO Manual, modifications to these limits at the
proposal of the Assets and Liabilities Committee.
•
The head of the Financial Department is responsible
for consumption of the global limit, along with the
delegated limits, with any possible excesses requiring
authorisation from the ALCO.
The Risk Department is responsible for the monitoring
of and compliance with the limits and reporting of
consumption to the Assets and Liabilities Committee.
There are two limit structures to control market risk in
trading activity:
•
VaR limits measure the maximum one-day potential
loss authorised in accordance with the size and
composition of the portfolio risk exposure at the
close of day.
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