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2018 Pillar 3 Disclosures
Annex
As a result, interest-rate risk management maintaining
this at prudent levels is essential for the security and
strength of the bank.
Objectives, policies and processes for the
management of interest-rate risk in the
banking book
The objectives set for the management of balance
sheet risks are as follows:
•
Establishing appropriate mechanisms in order to
prevent unexpected losses from the impact of
interest-rate movements, through protection of the
financial margin and economic value of capital.
•
Adopting investment and hedging strategies which
achieve a short-term (financial margin) and long-
term (economic value of capital) balance in the
financial impact deriving from movements in
interest rates.
•
Executing hedging and investment strategies which
strengthen the generation of profit under the risk
levels approved.
•
Ensuring adequate liquidity levels that facilitate
adequate business growth with optimum financing
costs, ensuring an adequate level of liquid assets
and managing changes in liquidity in the medium/
long term through own debt issuances or through
any other means.
In order to achieve the aforementioned objectives, a
structure of structural balance-sheet risk limits has
been devised, guaranteeing that levels of exposure to
risk lie within the tolerance level established by senior
management.
The Board of Directors defines the general operational
framework, and approves risk limits in accordance with
its risk tolerance level. The structural risk is managed
for both the short term and the medium and long
terms, and takes the form of limits which are approved
by the Board itself, and for which monthly monitoring
is performed.
Senior management is actively involved in the risk
management through the Assets and Liabilities
Committee (ALCO). This committee is responsible for
performing the actions required in order to redress any
possible balance-sheet risk imbalances.
Ensuring that exposure to interest-rate movements is
kept within the levels approved by the Board, along
with the measurement, analysis and control of the
structural balance-sheet risk incurred by the Financial
Division operations, is the responsibility of the Market,
Balance Sheet and Liquidity Risk Division.
Measurement of interest-rate risk in the
banking book
Repricing gap analysis
The purpose of gap analysis is to measure any surplus
or shortfall in the volume of sensitive assets with
respect to sensitive liabilities, and the volume not
matched (and so not hedged), and subject to possible
variations in interest rates. Thus, the risk exposure
is identified through a study of the concentration of
volumes of repricing risk over significant time frames.
It illustrates the exposure to interest-rate risk on the
basis of the structure of maturities and/or repricing of
positions. This analysis enables interest risk positions
to be ascertained over different terms, and also aims
to ascertain where potential impacts may affect the
financial margin and economic value.
The interest-rate gap is built up by distributing
into time bands the positions and balances of the
sensitive entries on and off the balance sheet, in
the part corresponding to the banking book. In the
case of entries with no maturity or repricing date,
they are distributed in accordance with a historical
performance hypothesis.
Simulation of the financial margin
In order to incorporate a dynamic balance-sheet
analysis to address various rate scenarios, financial
margin simulations are performed over a time horizon
of one year. This enables the analysis of the impact
of changes through a movement in interest rates in
accordance with the repricing periods of the various
balance sheet entries.
The scenarios analysed are not only the implicit market
forward rates, but also include other anticipated
movements in the curve and stress scenarios.
Sensitivity of the Economic Value of Capital
In order to analyse the sensitivity of economic
value, the impact of the usage of a number of
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