Annual report 2009 - Santander

169They include analysis of scenarios which define alternatives forthe performance of different financial variables and provide theimpact on results. These scenarios can replicate criticaldevelopments or circumstances that happened in the past (suchas a crisis) or determine plausible alternatives that are notconcerned with the past. A minimum of three types of scenarioare given: plausible, severe and extreme, and a VaR is obtainedas well as a much fuller picture of the risk profile.The Market Risk Area, at the level of each unit and globally andfollowing the principle of independence of the business units,carries out daily monitoring of positions, through an exhaustivecontrol of the changes that take place in the portfolio in orderto detect possible new developments for immediate correction.The daily preparation of the income statement is an excellentindicator of risk levels, as it enables us to identify the impact ofchanges on financial variables in the portfolios.Lastly, in order to control derivative activities and creditmanagement, because of its atypical nature, specific measuresare conducted daily. In the first case, sensitivity to the pricemovements of the underlying asset (delta and gamma), volatility(vega) and time (theta) is controlled. In the second case,measures such as the spread sensitivity, jump-to-default, andconcentration of positions by rating levels, etc, are systematicallyreviewed.As regards the credit risk inherent in trading portfolios and inline with the recommendations of the Basel Committee onBanking Supervision and prevailing regulations, an additionalmeasurement began to be calculated (incremental default risk,IDR), in order to cover the risk of default that is not adequatelycaptured in the VaR, via changes in lending spreads. Thecontrolled products are basically fixed-rate bonds, both publicand private sector, derivatives on bonds (forwards, options, etc)and credit derivatives (credit default swaps, asset backedsecurities, etc). The method for calculating the IDR, in essencesimilar to that of the credit risk of positions outside trading, isbased on direct measurements of the tails of the distribution oflosses to the appropriate percentile (99.9%). The Monte Carlomethodology is used, applying a million simulations.B. Balance sheet managementInterest rate riskThe Group analyzes the sensitivity of net interest margin andmarket value of equity to changes in interest rates. Thissensitivity arises from gaps in maturity dates and the reviewof interest rates in the different asset and liability items.On the basis of the positioning of balance sheet interest rates,as well as the situation and outlook for the market, the financialmeasures are agreed to adjust the positioning to that desiredby the Bank. These measures range from taking positions inmarkets to defining the interest rate features of commercialproducts.The measures used by the Group to control interest rate risk inbalance sheet management are the interest rate gap and thesensitivity of net interest margin and net worth to changes ininterest rates, Value at Risk (VaR) and analysis of scenarios.a) Interest rate gap of assets and liabilitiesInterest rate gap analysis focuses on lags or mismatchesbetween changes in the value of asset, liability and offbalancesheet items. It provides a basic representation of thebalance sheet structure and allows for the detection ofinterest rate risk by concentration of maturities. It is also auseful tool for estimating the impact of eventual interest ratemovements on net interest margin or equity.All on- and off-balance sheet items must be disaggregated bytheir flows and looked at in terms of repricing/maturity. In thecase of those items that do not have a contractual maturity,an internal model of analysis is used and estimates made ofthe duration and sensitivity of them.b) Net interest margin sensitivity (NIM)The sensitivity of net interest margin measures the change inthe short/medium term in the accruals expected over aparticular period (12 months), in response to a shift in theyield curve.It is calculated by simulating the net interest margin, both fora scenario of a shift in the yield curve as well as for thecurrent situation. The sensitivity is the difference between thetwo margins calculated.Risk management Annual Report 2009