Annual report 2009 - Santander

183E. Exposures related to complex structured assetsGrupo Santander continues to have a very limited exposureto instruments or complex structured vehicles, reflecting amanagement culture one of whose hallmarks is prudence inrisk management. At the end of 2009, the Group had:• CDOs/CLOs: position of EUR 637 million, mostly due to theintegration of the portfolio of Alliance & Leicester in 2008(56% of the portfolio has an AAA rating and 85% A orhigher).• Non-agency CMOs and pass-through with underlyingmortgage alt-A 11 : exposure of EUR 730 million at the end of2009.• Hedge funds: the total exposure is not significant (EUR 549million at the end of 2009) and most of it is through financingthese funds (EUR 342 million), as the rest is direct participationin portfolio. This exposure has low levels of loan-to-value ofaround 50% (EUR 1,095 million of collateral). The risk with thistype of counterparty is analysed case by case, establishing thepercentages of collateral on the basis of the features andassets of each fund. The exposure was 52% lower than in2008.• Conduits: the only exposure is as a result of buying Alliance &Leicester, which led to the incorporation of a conduit withassets of EUR 657 million at the end of 2009 (42% with AAArating and 83% A or higher).• Monolines: Santander’s exposure to bond insurancecompanies was EUR 396 million 12 at the end of 2009, EUR 191million of it indirect exposure by virtue of the guaranteeprovided by this type of entity to various financing ortraditional securitisation operations. The exposure in this caseis double default, as the primary underlying assets are of highcredit quality (mainly AA). The small remaining amount isdirect exposure (for example, via purchase of credit defaultswaps).The exposure to this type of instrument, the result of theGroup’s usual operations, has declined. The only instruments aredue to integrating the positions of banks acquired by the Group,such as Alliance & Leicester and Sovereign (in 2008 and 2009,respectively). All these positions were known at the time ofpurchase, having been duly provisioned.Santander’s policy for approving new transactions related tothese products remains very prudent and conservative; it issubject to strict supervision by the Group’s senior management.Before approving a new transaction, product or underlyingasset, the risks division verifies:• The existence of an appropriate valuation model to monitorthe value of each exposure: mark-to-market, mark-to-modelor mark-to-liquidity.• The availability in the market of the necessary inputs to be ableto apply this valuation model.And provided these two points are always met:• The availability of appropriate systems, duly adapted tocalculate and monitor every day the results, positions and risksof new operations.• The degree of liquidity of the product or underlying asset, inorder to make possible their coverage when deemedopportune.4.5 Internal modelThe Bank of Spain approved at the end of 2008 the use of ourinternal market risk model for calculating regulatory capital.Although the approval was first effective for treasury tradingactivity of the parent bank, the Group’s objective is to graduallyincrease approval to the rest of units.As a result of this approval, the regulatory capital of tradingactivity is now calculated via advanced methods instead of theprevious standard methods. The VaR calculated for the marketrisks area is the fundamental metric and incorporates anincremental default risk.We closely co-operate with the Bank of Spain in order toadvance in the perimeter susceptible of entering into theInternal Model (at the geographic and operational levels), aswell as analysis of the impact of possible future changes, inline with the consultative documents published by the Baselcommittee in December 2009 to strengthen the capitalof banks 13 .(11) Alternative A-paper: mortgages originated in the US market which for various reasons areconsidered as having an intermediate risk level between prime and subprime mortgages (nothaving all the necessary information, loan-to-value levels higher than usual, etc).(13) “Strengthening the resilience of the banking sector” and “International framework for liquidityrisk measurement, standards and monitoring.”(12) Guarantees provided by monolines for bonds issued by US states (municipal bonds) are notconsidered as exposure. As a result of the acquisition of Sovereign Bank, the Group integrated aEUR 1,260 million portfolio of these bonds.Risk management Annual Report 2009