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Report BFA - Bankia 2015 / Risk managementTools

Risk management is implemented through a series of tools. These tools are as follows:

Classification

Rating and scoring tools are used to classify borrowers and transactions by risk level. Practically all portfolio segments are subject to classification, based mainly on statistical models. Classifying risk not only assists risk decision making but also helps to incorporate the risk appetite and risk tolerance set by the bank’s governing bodies into decision making. The risk classification framework also includes the so-called monitoring levels system, which classifies risks in four categories: Level I or high risk (risks to be extinguished in an orderly manner); Level II or medium-high risk (risks to be reduced); Level III or average risk (risks to be maintained); and all other exposures.

Quantification

Credit risk is quantified using two measures: the expected loss of the portfolios, which reflects the average amount of losses and is associated with the determination of provisioning requirements; and the unexpected loss, which is the likelihood that the actual loss in a given period will substantially exceed the expected loss, thus affecting the level of capital considered necessary to meet objectives. The parameters for measuring credit risk, which are derived from internal models, are exposure at default, probability of default based on rating grade and loss given default, or severity.

Projection

Stress tests are another key element of credit risk management, as they can be used to assess portfolio risk profiles BFA-BANKIA REPORT year III and capital adequacy in adverse scenarios. The purpose of stress testing is to assess the systemic component of risk, while also taking portfoliospecific vulnerabilities into account. It involves analysing the impact of macroeconomic stress scenarios on the risk parameters and migration matrices.

Risk-adjusted rETURN

The return on a transaction must be adjusted for the cost of the various risks it entails, not only credit risk. It must also be compared with the volume of capital that must be allocated to cover unexpected losses (economic capital) and meet regulatory capital requirements (regulatory capital).

Business dEVELOPMENT

One of the functions of risk management is to create value and develop the business in accordance with the risk appetite framework established by the governing bodies. The Risk Directorate therefore has shared responsibility for developing the lending business by providing tools and criteria for identifying potential customers, simplifying decision processes and allocating lines of risk, always within the set tolerance levels.

Recovery mANAGEMENT

Recovery management is an end-toend process that starts even before the first non-payment occurs and covers all phases of the recovery cycle until a settlement is reached, whether friendly or otherwise. At the retail level, early warning models are used to identify potential problems and provide solutions, which may involve adjusting the terms of the borrowing. In relation to business borrowing, the system of levels, described earlier, is also designed to allow early management of arrears.

Concentration risk mANAGEMENT

In Bankia, various tools are used to analyse and monitor concentration risk. Among other things, a methodology similar to that used by rating agencies is applied, assessing the main exposures as a percentage of capital and in terms of income-generating capacity.

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