With regard to the most significant items of assets and liabilities, the table below shows a comparison between the value for which those assets of the Bank valued other than at fair value are recorded, and their corresponding fair value, estimated at the close of each financial year:
€000s 31/12/2012
Recognised value Fair value Asset:
Loans and advances to customers 43,575,351 43,833,390
Held to maturity investments 2,755,355 2,735,665
Property, plant and equipment 442,288 455,115
Liabilities:
Deposits from central banks 9,580,854 9,721,707
Deposits from credit institutions 4,008,226 4,103,613
Customer deposits 24,631,869 25,009,016
Policies for managing structural risks and market risks
Bankinter is guided by principles that constitute the basis of the general risk policy.
These basic principles are of a permanent nature; they have been applied in recent years and continue to apply. In general, these policies are as follows:
1.- The purpose of Bankinter’s policy on the management and control of “Structural Risks” and “Market Risk” is to neutralise the impact of variations in interest rates, in the main market variables and in the balance sheet structure itself, on the Bank’s profit and loss account, by adopting the most appropriate investment or hedging strategies.
2.- To develop the most appropriate systems for measuring structural and market risks so as to provide information on the Entity’s exposure to these risks, and to any possible deviations that might arise regarding established limits and procedures.
The Board of Directors decides the strategy and policy for the Bankinter Group’s policy as regards “Structural Risks” and “Market Risk” and delegates management, monitoring and control to various Bodies in the Institution. It also decides on the risk profile that the Institution is willing to undertake, establishing the maximum limits that it delegates to said bodies and which are reviewed on an annual basis.
It should be noted that exchange rate risk is not significant in the Banking Group.
Structural risks
The Board of Directors delegates the ongoing monitoring of decisions regarding structural balance sheet risks (interest rate risk and liquidity risk), stock market risk and exchange rate risk of the Bank’s corporate positions, as well as the establishment of the financing policies, to the Assets and Liabilities Committee (ALCO). Moreover, each year it reviews, approves and delegates to the ALCO the limits applicable for managing the aforementioned risks. The Treasury and Capital Markets area implements the decisions taken by the ALCO with regard to the Bank’s corporate positions.
To exercise these functions, the most appropriate financial instruments at any given time are used, which include interest-rate, exchange-rate and variable income derivatives. The financial instruments with which trading is undertaken must, in general, be sufficiently liquid and be associated with hedging instruments.
The organisational structure of the entire risks function reports hierarchically to the Executive Vice-Chairman, reflecting the independence that is inherent to the function.
The identification, measurement, management, control and monitoring of the risks inherent in banking operations constitute a fundamental aim, always within a context of optimising the overall management of all risks.
Bankinter has received Bank of Spain approval for its internal rating models, methodologies, systems and policies for measuring most of its risks, applying them to the calculation of capital requirements as established by the Basel II Capital Framework.
The basic principles that continue to govern risk management are:
- Contribute towards maximising capital, safeguarding the Bank’s solvency.
- Independence of the function.
- Alignment with strategic objectives.
- New products: risk determination, approval ad monitoring.
- Integrated risk management.
- Mass use of automated approval.
- Diversification of risk.
- Relevance of the quality of service factor in the risks function.
- Policy of Sustainable Investment .
The basic risk principles are determined in the Framework Agreement for each segment. In this regard we would highlight the fact that, pursuant to the provisions of the Transparency Act, we have brought together the various aspects of the Responsible Lending Policy in a single document, in the interests of greater clarity, even though all the principles had been incorporated over the past few years in the Framework Agreement, which is reviewed and updated every year.
The Balance Sheet Management unit, which is part of the Capital Markets Directorate, has the function of measuring and managing the institution’s structural risks.
Market Risk, reporting to the Risks Directorate has the independent function of controlling them:
Interest rate structural risk
Structural interest rate risk is the Entity’s exposure to changes in market interest rates arising from timing differences between maturities and repricings of the various items in the overall Balance Sheet.
Bankinter performs active management of this risk in order to protect the interest margin and to preserve the economic value of the Bank against interest rate fluctuations.
In order to control exposure to the interest rate structural risk, the Bank has established a structure of limits that is reviewed and approved on an annual basis by the Board of Management, in accordance with Bankinter’s strategies and policies in this regard.
Bankinter has tools to monitor and control the structural interest rate risk. We will now go on to specify the main measurements used by the Bank that enable the management and control of the interest rate risk profile approved by the Board of Directors:
a) Sensitivity of the Financial Margin:
Dynamic simulation measures are used to measure on a monthly basis financial margin exposure in different scenarios of variation in interest rates and for a 12-month time horizon. Financial margin sensitivity is obtained as the difference between the financial margin projected with the market curves at each analysis date and the one that is projected with the interest-rate curves altered in different scenarios, both of parallel movement of rates and changes in the slope of the curve.
Every year, the Board of Directors sets a reference for the financial margin in terms of sensitivity for 100 basis point parallel movements in the interest rate curves for a term of up to 12 months.
The exposure of Bankinter’s financial margin to interest rate risk in the event of +/- 100 bp parallel movements in market interest rates is approximately 2.2% for a 12-month horizon.
The sensitivity of the Bank’s financial margin to changes in the slope of the curve for a 12-month horizon is 4.5%. This scenario is built by holding the 6-month rate constant and changing the short-term (up to 3 months) and 12-month rates by the same amounts but in opposite directions so as to alter the slope of the curve by 25 basis points in the period under consideration.
Financial Margin Sensitivity 2012
100 bp parallel movements 2.2%
25 bp slope variations 4.5%
b) Economic Value Sensitivity
This is a measurement that complements the previous two and which is calculated on a monthly basis. It allows the exposure of the Bank’s economic value to interest-rate risk to be quantified, and is obtained as the difference between the net present value of the items that are sensitive to interest rates calculated using the curves for rates in different scenarios and the rates curve listed in the market at each analysis date.
Every year, the Board of Directors sets a reference in terms of the economic value sensitivity for 200 bp parallel movements in market interest rates. Sensitivity to this scenario is measured, controlled and submitted to the ALCO.
The sensitivity of the Bank’s Economic Value to 200 bp parallel movements, obtained by means of the criterion described above, was, at year-end 2012 and 2011, 7.5% and 3.4% of the Bank’s equity, respectively.
Economic Value Sensitivity
2011 2012
NPV Sensitivity 3.4% 7.5%
Structural liquidity risk
Management of this risk is the responsibility of the ALCO committee, delegated by the Board of Directors.
Liquidity requirements were covered by turning to the international medium- and long-term debt markets. The Bank issued €6.05 billion of mortgage-backed bonds and €1.44 billion of senior debt, of which €1.40 billion is guaranteed by the Kingdom of Spain. In both cases a portion is retained in the Balance Sheet.
To meet its requirements, the Group used short-term issue programmes, mainly in the domestic market with its commercial paper programme. The balance of promissory notes placed in the wholesale market was €897 million as at 31 December.
The Group has various tools for analysing and monitoring the short- and long-term liquidity situation. These tools are static and dynamic. Back-testing is also carried out on projections made.
One of the analyses used for controlling and monitoring liquidity is the liquidity plan or gap.
a) Liquidity plan or gap
This shows information on the distribution of the balances and cash flows of the asset and liability positions of the balance sheet between various timeframes depending on the expected date of completion or liquidation and in accordance with a series of assumptions based on the historical performance of these products. These assumptions are reviewed on a regular basis and, in such cases as where they are necessary, supported by models based on historical series.
Liquidity plans or gaps at year-end 2012 and 2011 were as follows. The information provided by the liquidity plan is static, and does not show the expected financing needs as it does not include behavioural models of the asset items, that is, the prepayment of mortgage loans and the renewal of lines of credit or of liability items such as the renewal of fixed term deposits, among others.
Figures as at December 2012 in € millions Sight 1 day to 1 month 1 to 3 months 3 to 12 months 12 months to 5
years more than 5 years TOTAL
ASSETS
Loans and receivables 2,165 2,871 6,172 12,121 27,557 50,887
Deposits with credit institutions 0 0 0 1,120 1,120
Loans and advances to customers 2,165 2,871 6,131 12,098 26,413 49,679
Other 0 0 41 23 24 88
Fixed Income Portfolio 195 634 2,444 9,877 1,793 14,942
Trading portfolio 16 0 445 580 463 1,504
Available-for-Sale Portfolio 85 633 1,320 7,851 94 9,983
Held-to-Maturity Portfolio 95 1 679 1,445 1,236 3,455
Other Assets 666 0 0 0 2,167 2,833
Total Assets 3,026 3,505 8,616 21,998 31,517 68,662
LIABILITIES
Fixed income portfolio 365 236 98 522 452 1,673
Trading portfolio 365 236 98 522 452 1,673
Financial liabilities at Amortised Cost 11,043 3,896 4,963 8,534 9,933 20,062 58,430
Deposits from credit institutions 430 239 288 881 12,114 13,951
Customer deposits 11,043 1,546 3,924 5,206 4,585 6,330 32,633
Marketable debt securities 1,920 800 3,040 4,468 1,054 11,282
Other 0 0 0 0 563 563
Other liabilities 0 0 0 0 748 748
Equity 0 0 0 0 2,862 2,862
Total Liabilities and Equity 11,043 4,260 5,199 8,632 10,455 24,123 63,713
TOTAL LIQUIDITY GAP -11,043 -1,234 -1,695 -16 11,543 7,394 4,949
Figures as at December 2011 in € million
Total Assets 3,510 2,589 10,493 16,140 33,244 65,976
Total Liabilities and Equity 9,667 3,258 3,136 9,771 14,293 22,687 62,812
TOTAL LIQUIDITY GAP -9,667 252 -547 722 1,847 10,557 3,164
Note 1: Foreign-currency positions are not material and so have not been included in the breakdowns of the
Market Risk
The Board of Directors delegates proprietary trading in the financial markets to Treasury and Capital Markets, which acts through its Trading Area with a view to taking advantage of trading opportunities that arise, using the most appropriate financial instruments at any given time, including interest and exchange rate derivatives and equity derivatives. The financial instruments with which trading is undertaken must, in general, be sufficiently liquid and be associated with hedging instruments. The risk that may derive from the management of the institution’s own accounts is associated with movements in interest rates, stock market prices, exchange rates, volatility and credit spreads.
The Board of Directors delegates to the ALCO the continuous monitoring of the Treasury Trading area's proprietary trading activities and establishes maximum limits for the authorisation of the possible excesses that may arise in this activity.
Market Risk, which reports to the Risks Directorate, has the independent function of measuring, tracking and controlling the Bank’s market risk and the delegated limits.
Market risk is measured mostly using the “Value-at-Risk” (VaR) methodology, considered both globally and segregated for each significant risk factor. The limits in VaR terms are supplemented by other measures such as stress testing, sensitivities, stop loss and concentration.
We will now go on to describe the methodology for measuring the main market risk indicators.
Value-at-Risk (VaR)
“Value-at-Risk” (VaR) is defined as the maximum loss that is anticipated from a particular portfolio of financial instruments, under normal market conditions, for a certain confidence level and time horizon, as a consequence of movements in prices and market variables.
The VaR is the main indicator used daily by the Group to measure and control on an integrated and global basis exposure to market risks arising from interest rates, equities, exchange rates, volatility and credit.
In addition to those previously mentioned, the means used by Market Risks to control the liquidity risk include checking to ensure compliance with the limits established by the Board and delegated to the department heads and the ALCO (Assets and Liabilities Committee). The calculation of limits is carried out by Market Risks based on the information prepared for the various regulators.
There are three broad types of limit:
1) Determining the liquidity buffer
The Bank uses both the definition of regulatory LCR (liquidity coverage ratio) and a similar ratio extended to ninety days and with a definition of liquid assets in accordance with those accepted by the European Central Bank as collateral for liquidity. Another reference for calculating the liquidity buffer is the schedule of upcoming maturities of wholesale issues over the next few months.
2) Wholesale financing concentration ratios
With the aim of avoiding Bankinter’s being subjected to stress as a result of a possible sudden shutdown of wholesale markets, limits are established on the amount of short-term wholesale financing that can be taken, as well as on the concentration of issue maturities.
3) Ratio of stable deposits to total lending.
With a view to limiting reliance on wholesale financing, a minimum ratio of stable deposits to loans is established. In establishing the stability of deposits, use is made both of the regulatory definition of the NSFR (Net Stable Funding Ratio) and of experience of the Spanish finance sector.
As well as the limits established by the Board, monitoring also covers the evolution in the gap or ‘liquidity plan’ and information and analysis on the specific situation of the balances resulting from trade operations, wholesale maturities, interbank assets and liabilities and other sources of funding. These analyses are carried out both under normal market conditions and simulating different liquidity scenarios that could come about as a result of different trading conditions or changes in market conditions.
2012 was characterised by severe turbulence in the public debt markets of the euro zone.
On top of the interest rate risk came significant credit risk and the risk of redenomination of various countries’ public debt. As these risks built up, so liquidity in certain financial markets diminished.
In view of this situation in the financial markets, over the course of the year Bankinter established a series of sub-limits in accordance with market circumstances. Apart from this, the VaR calculation was reinforced by extending the stress testing analysis, as dealt with in the following section, by adding specific assumptions based on expectations of their occurring in the financial markets, as well as endeavouring to simulate the most adverse circumstances for the positions taken in trading operations.
The market risk (VaR) for the Línea Directa Aseguradora portfolio at the close of the financial years 2012 and 2011, was €0.77 million and €0.88 million respectively, calculated using the “Historical Simulation” method, with a level of confidence of 95% and a time horizon of one day. Market risk is slightly less from one year to the next due to the reduced duration of the portfolio and a change in the distribution by type of risk, which increases the correlation between positions at risk.
Stress Testing
Stress testing, or the analysis of extreme scenarios, is a supplementary test to VaR. The estimates from the stress tests quantify the potential loss in portfolio value under extreme scenarios of change in the risk factors to which the portfolio is exposed.
Every year, the Board of Directors approves an extreme scenario based on significant movements in interest rates, securities exchanges, exchange rates and volatility, and certain upper references regarding these variations for each type of risk. Additionally, estimates are made using other scenarios which replicate different historical crisis situations and other relevant current market situations.
In 2012, the stress scenarios for Interest Rate and Volatility were updated to adapt them to each product type and to the evolution of events observed in the market for this type of risk factors.
The method used to measure VaR is “Historical Simulation” based on the analysis of possible changes in the value of the position, using historical movements in the individual assets forming it. VaR is calculated with a level of confidence of 95% and a time horizon of one day, although additional monitoring is carried out with other levels of confidence.
There is also a monthly monitoring of the VaR of its subsidiary Línea Directa Aseguradora S.A. using the “Historical Simulation” method.
The following are the comparative VaR data by risk factor for the Bank’s positions in 2012 and 2011, both for the total and differentiated by portfolio:
Total VaR 2012
million euros Final
Interest Rate VaR 18.71
Equities VaR 0.32
Exchange Rate VaR 0.07
Volatility Rate VaR 0.05
Credit VaR 0.00
18.80
Total VaR 2011
million euros Final
Interest Rate VaR 10.71
Equities VaR 0.76
Exchange Rate VaR 0.03
Volatility Rate VaR 0.02
Credit VaR 0.02
11.96
Trading VaR 2012
million euros Final
Interest Rate VaR 0.86
Equities VaR 0.15
Exchange Rate VaR 0.07
Volatility Rate VaR 0.05
Credit VaR 0.00
0.91
Trading VaR 2011
million euros Final
Interest Rate VaR 0.59
Equities VaR 0.47
Exchange Rate VaR 0.03
Volatility Rate VaR 0.02
Credit VaR 0.02
0.91
Available-for-sale VaR 2012 Available-for-sale VaR 2011
Basic governing principles.
With a view to achieving an adequate system for managing Operational Risk, Bankinter has laid down the following basic governing principles:
- The basic aim is to identify and preventively mitigate the major operational risks, seeking to minimise any possible associated losses.
- Systematic procedures are established for assessing, analysing, measuring and reporting risks and generating appropriate action plans to control them.
- With a view to exploring the Bank’s activities to draw up an inventory of the operational risks, the unit selected for analysis is the business unit. By analysing the business units’
risks and aggregating and consolidating them, the Bank’s total risks are obtained.
- Of the possible Capital calculation systems associated with Operational Risk in the framework of the Basel Accord, Bankinter has adopted the Standard Method. This method is reserved to institutions with efficient and systematic operational risk management
Operational Risk Management Framework
The Bankinter Management Framework for Operational Risk is based on the following main elements:
- Identification and evaluation of risks by developing risk maps showing the severity level of the risk, evaluating the appropriateness of existing control mechanisms and showing action plans for mitigating these risks.
- Recording of loss events arising, with the associated management information, sorted and classified in accordance with Basel recommendations.
- Monitoring risk by establishing a panel of indicators to provide information on the evolution of existing operational risk levels and alerts on the appearance of undesired trends.
- Drawing up Continuity and Contingency Plans describing the set of procedures that are alternative to normal operations and which are aimed at restoring activity in the event of an unforeseen interruption to critical services.
- Generating and disseminating management information that is suited to the needs of each governing body that has responsibilities in managing operational risk.
Stress Testing 2012
million euros Final
Interest Rate Stress 74.85
Interest Rate Stress 74.85