In anticipation of tests of balance-sheet resilience under different stress scenarios which the European Central Bank is to carry out on European banks in 2014 in coordination with the European Banking Authority, Banco Sabadell engaged consultancy Oliver Wyman to conduct its own internal stress test. The test measured the resilience of Banco Sabadell’s balance sheet in the period June 2013 to December 2016 under two specified macroeconomic scenarios: one central and one pessimistic. The result was that, over the test period, Banco Sabadell was found to have a loss absorption capacity and a capital surplus (to cover losses in the loan book and the foreclosed asset portfolio) of 24,800 million and 5,800 million, respectively, under the central scenario and 25,300 and 2,400 million under the pessimistic scenario.

The chief categories of risk inherent in the business of Banco Sabadell and its group are credit risk, market risk and operational risk.

The accurate and efficient management and control of risk is critical to realizing the aim of maximizing shareholder value while ensuring an appropriate degree of financial strength. The management and control of risk comprises a broad framework of principles, policies, procedures and advanced evaluation methodologies, integrated within an efficient decision-making structure. These are fully and clearly set out in the Annual Accounts, the Report of the Directors, the Report on Corporate Governance and the Basel Pillar 3 Disclosures, all of which can be found on the group’s web site.

Banco Sabadell complies with guidelines drawn up under the Basel Capital Accord, a fundamental principle of which is that a bank’s capital requirements should be more closely related to risks actually incurred, based on internal risk measurement models which have been independently validated. The Bank has supervisory approval for the use of its own internal models in estimating its regulatory capital requirements (see Figure F3 & F4).

Credit risk is the possibility that losses may be incurred as a result of borrowers failing to meet their obligations or through losses in value due simply to deterioration in borrower quality.

To maximize the business opportunities provided by each customer and to guarantee an appropriate degree of security, responsibility for monitoring risks is shared between the relationship manager and the risk analyst, who are thus able to obtain a comprehensive view of each customer’s individual circumstances.

The Board of Directors delegates powers and discretions to the Risk Control Committee, which then sub-delegates authority at each level. The addition of controls on these authority thresholds to loan approval management systems ensures that the powers delegated at each level are appropriate to the expected loss estimates for all loan applications by business customers.

The establishment of effective processes for managing existing risk exposures also benefits the process of managing past due accounts, since the early identification of probable default cases ensures that measures can be taken proactively. With an early warning system, the quality of a risk can be monitored in an integrated way and risks transferred to recovery specialists who are best equipped to determine the most suitable type of recovery procedure in each case (see Figure F1 & F2).