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Report BFA - Bankia 2014 / Risk managementMarket risk

Market risk is the risk of a possible loss caused by potential adverse movements in the prices of the financial instruments in which the institution trades.

During 2014 and as a result of the commitments assumed in the Recapitalisation Plan, the institution ramped down trading in the financial markets and focused on serving its customers and managing its own structural risks. The institution does not trade on its own account, thereby dramatically reducing market risk and capital needed to cover this risk.

Market risk is measured as follows:

VaR

Market risk is primarily measured using two metrics: sensitivity, expressing the impact of fluctuations in the various risk factors on the value of financial instruments; and VaR, which quantifies the maximum loss that could be borne over a given time horizon and confidence level. SVaR is the VaR calculated in an adverse market scenario.

Sensitivity

Sensitivity quantifies changes in the economic value of a portfolio due to given movements and determinates of the variables affecting this value. The main fluctuations in market factors used in sensitivity analysis are: interest rates (100 basis-point change), equity prices (20% change in price), exchange rates (10% change), volatility (change by type of underlying risk), and credit spreads (change according to credit rating).

Stress testing

Periodically, stress-testing is performed to quantify the economic impact of extreme movements in market factors on the portfolio.

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