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  2. Risk Management

Risk Management

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Risk management is a strategic pillar for Bankia. Its main purpose is to preserve the group’s financial and capital strength, driving value creation and business development in accordance with the risk appetite and risk tolerance set by the bank’s management bodies.

Bankia therefore has an Internal Control Framework, which includes a series of risk control and risk management policies defined by the bank’s Board of Directors. The board also approves the Risk Appetite and Risk Tolerance Framework, which together with the Capital Planning Framework defines the bank’s strategic lines of action in matters of risk and capital under normal business conditions. Both these frameworks influence the planning of the bank’s activities and businesses.

The bank also has a Recovery Plan, which sets out the measures that may be taken in a hypothetical crisis situation and which is triggered if the level set in the plan is exceeded.

Credit risk profile

Credit risk policies

Bankia’s credit risk policies are approved each year by the Board of Directors, following the bank’s best practice. These policies set out general criteria for the lending activity, most notably:

  • Responsible lending.
  • Transparency. Provision of information to customers, especially retail customers, so that they know and understand the risks associated with the product offered to them.
  • Consideration of the environmental and social impact of the activities of corporate
    borrowers. Refusal to finance transactions or projects linked to companies involved in human rights violations.

Bankia’s goal is to have a loan book that is as diversified as possible, across borrowers and sectors. This goal is taken into account when granting loans by applying a diversification policy at individual and sector level.

An important aspect of the bank’s risk policies is the refinancing and restructuring of debt to adapt the financing to the customer’s current ability to pay and, where feasible, to ensure that the borrower or its group has sufficient financial stability to continue operating.

Market risk

Market risk is the loss that would be incurred in the event of adverse changes in the prices of the financial instruments in which Bankia trades. Bankia has a general framework for managing market risk whose purpose is to maintain the bank’s level of solvency and prevent any impact on results due to the complexity and scale of the risks taken.

Last year, the bank took part in six market risk exercises organised by the European Banking Authority (EBA) and the European Central Bank (ECB). In 2020, Bankia plans to complete the integration of the revised standardised approach for the calculation of capital requirements for market risk; adapt market risks to the new framework; review and adapt internal policies to the new capital requirements framework for market risk; improve business frameworks, processes and controls; and participate in all the exercises proposed by the EBA and the ECB in relation to market risk.

Counterparty credit risk in financial markets

Counterparty credit risk is the risk that a counterparty will fail to meet its contractual obligations, giving rise to a loss for the bank in its financial market activity.

Bankia's Board of Directors is responsible for approving the Policy Manual for Credit Risk in Market Activities.

In this area, in 2019, the bank worked to implement the calculation of the Initial Margin to meet EMIR requirements. The project will be completed in September 2020, which is the EMIR effective date for Bankia. In addition, the bank signed contracts and set limits for new counterparties due to Brexit, automated a number of reports and promoted the securities lending project. The bank also took part in various counterparty credit risk exercises organised by the EBA and the ECB.

Challenges for 2020 include integrating the latest regulatory changes in the calculation of counterparty credit risk exposure for derivatives under the Standardised Approach for Counterparty Credit Risk (SA_CCR); studying the impact of the regulation on capital requirements for counterparty credit risk and the CVA (credit value adjustment); and participating in all the exercises proposed by the EBA and the ECB.

Interest rate risk in the banking book

Interest rate risk in the banking book is the risk of loss resulting from adverse movements in market interest rates, which affect net interest income and the value of assets and liabilities.

Over the course of 2019, further improvements were made to the model architecture and to the efficiency of the processes associated with the calculation engine. A baseline risk model for information and data quality was developed, the European Banking Federation’s approach to credit spread risk in the banking book (CSRBB) was adopted and work proceeded on a baseline risk model.

In 2020, Bankia’s priorities will be to improve information, start the adaptation to the Risk Data Aggregation (RDA) rules, develop a stress testing programme to assess interest rate risk under stressed conditions, and make more intensive use of dynamic models to integrate interest rate risk in the banking book (IRRBB) more fully into management.

Liquidity and funding risk

The Group’s goal is to maintain a long-term funding structure in line with the liquidity of its assets, with maturity profiles that are compatible with the generation of stable and recurrent cash flows, so that the balance sheet can be managed without liquidity strains in the short term. To that end, the bank’s liquidity position is identified, controlled and monitored daily.

To supplement the monitoring of liquidity risk under normal business conditions, an action framework has been designed that will help prevent and manage liquidity stress events.

In 2019, to strengthen the liquidity and funding risk management framework, a range of qualitative aspects were assessed to determine the extent to which the management framework complies with regulatory and supervisory principles and guidelines. A number of weaknesses and points for improvement were identified, helping to further enhance the quality of the liquidity risk management framework.

The challenges for 2020 in the field of liquidity and funding will be concentrated in regulatory reporting; automation of risk metrics and regulatory reporting; improvements in data and the start of adaptation to the RDA guidelines; the completion of developments associated with securitisations; and effective implementation of the best transfer pricing methodologies in the institution’s internal processes.

Operational risk

Operational risk is the risk of loss resulting from inadequate or failed processes or systems, human factors or external events. Thisdefinition includes legal risk but excludes reputational risk.

To manage operational risk, Bankia works to promote an operational risk management culture that emphasises awareness building, acceptance of responsibility and commitment, and service quality. The bank also aims to reliably identify and measure operational risk; implement systems for continuous improvement of processes, control structure and mitigation plans; and develop new risk transfer mechanisms that will limit exposure, while also ensuring that contingency and business continuity plans are in place.

In 2019, the bank carried out the risk self-assessment exercise, reviewing its degree of exposure and the application of the controls over the most important risks. Additionally, new roles and responsibilities were created in the operational risk unit, following the Three Lines of Defence model. In the last quarter of the year, the operational risk and internal risk control functions were unified under a single Non-Financial Risk Control Directorate, with the aim of exploiting synergies and common methodologies and tools that will help strengthen the bank’s control framework and expand these functions’ role as a second line of defence in the fields of technology and cybersecurity.

During the year, the information from the IT risk control indicator reported in the Risk Appetite Framework was consolidated, complementing the information already reported in relation to cyber risk.

In the field of regulatory reporting, the automation of IT risk reporting was completed, so that the Chief Data Officer (CDO) is able to generate the required information. As regards the management of outsourcing in the bank, the updated Policy on the Outsourcing of Services and Functions, which has been adapted to the EBA Guidelines on outsourcing arrangements (EBA/GL/2019/02), was approved. Together with the General Outsourcing Model and its Functions Manual, this Policy sets out the roles and responsibilities in procurement management and control.

In 2020, the bank will work to consolidate the integration of operational risk and internal risk control methodologies; advance the implementation of a technology solution for the comprehensive risk management process; monitor the IT, cybersecurity and outsourcing risk management system; and continue the process of assessing and including emerging risks in the Group’s risk taxonomy, in line with current concerns.

Reputational risk

In 2019, Bankia integrated this risk type into its risk model, using a quantification methodology based on a monitoring indicator within the Risk Appetite Framework. During the year, the number of directorates involved was expanded to cover practically the whole of the bank's organisation, allowing for a more comprehensive view that facilitates decision making.

Social risk

Bankia continues to promote policies to protect borrowers who, due to unforeseen circumstances, find themselves in financial difficulties, offering negotiated solutions to help them meet their obligations.

Bankia has adopted the Code of Good Practices created by Royal Decree Law 6/2012 of 9 March on urgent measures to protect mortgage debtors without resources, and subsequent amendments.

It also applies voluntary measures aimed at resolving, as far as possible, situations where families face the loss of their primary residence and preventing situations where family units with any kind of vulnerability find themselves with nowhere to live.

As a result of this policy, in 2019 a total of 387 mortgage modifications (more flexible terms to adapt the loans to the household’s ability to pay) were implemented, representing a total amount of 40.01 million euros, compared to 1,127 modifications in 2018.

At the same time, the bank accepted 2,464 debt-for-asset transactions (agreements to cancel the mortgage debt in return for surrender of the home) in the amount of 311.66 million euros, compared to 991 the previous year. In all cases, these were negotiated solutions, aimed at avoiding evictions among especially vulnerable social groups, while at the same time seeking to minimise the loss to the bank.

Since 2012, Bankia has accepted a total of 12,047 home surrenders and has executed 77,025 mortgage modifications. In doing so it has helped palliate the loss of the family home for many vulnerable families and groups.

Foreclosed assets (i.e. assets the bank has recovered under a court order) totalled 2,170 in 2018, compared to 1,823 in 2017.

In 2019 the bank also renegotiated the terms of 7,003 consumer loans (4,671 in 2018), in an amount of 96.7 million euros; and 1,449 loans to self-employed individuals and companies (1,085 in 2018), in an amount of 98.59 million euros. The cumulative totals since 2012 are 73,498 consumer loans and 20,466 loans to self-employed individuals and companies.


77,025

MORTGAGE MODIFICATIONS
SINCE 2012


12,047

PAYMENT DATES
GRANTED SINCE 2012

Emerging risks

Bankia has a continuous, dynamic risk identification and assessment procedure,
involving all the directorates affected by potential risks, to assess any risks it incurs,
or may incur, as a result of its activity.

This procedure takes a standardised, economic approach to the assessment of emerging risks, so that the Board of Directors can decide which are material and which will be covered by capital and accordingly include them in the bank's risk map.

Financing of controversial sectors

Bankia has a series of principles in its Lending Policy that reflect the guidelines set out in the framework for the provision of finance:

  • The environmental impact of the borrower’s business activity must be taken into account.
  • Companies are required to comply with applicable environmental laws and regulations.
  • No new loans or project finance will be granted to companies which the bank knows to have been involved in human rights violations.
  • Environmental and social aspects, as well as compliance with the Equator Principles, will be taken into account in assessing investment projects.
  • The environmental and social risks associated with assets taken as collateral will be assessed.

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