Company: BCDRF
Filing Date: 2025-02-28
Form Type: 20-F
Source: 0000891478-25-000054
Chunk: 551

Company: Banco Santander, S.A.
Filing Date: 2025-02-28
Form: 20-F
Chunk 551
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 and controlling market risk, measures maximum expected loss with a certain confidence level over a given time. For standard historical simulation, the confidence level is 99% and the time window is one day. We also apply a two-year horizon or VaR over 520 days and other statistical adjustments in order to quickly and efficiently account for recent events that influence risk levels.

We report the highest of two VaR figures, which we calculate every day. One figure includes an exponential decay factor with a low weighting on the oldest observations; the other weights all observations the same. We also use the same methodology to calculate value at earnings (VaE), which gives maximum potential earnings within a certain confidence level and time horizon.

As a risk metric, historical VaR simulation has many advantages. It states a portfolio’s market risk in a single figure according to market movements. Still, it does have its limitations:

• VaR is calibrated to a certain confidence level, above which it does not reveal potential losses.

• The liquidity horizon of products in a portfolio is longer than the VaR model’s.

• VaR is not a dynamic measure of risk even if it is subject every day to significant, albeit unlikely, changes.

• High sensitivity to time windows.

• Inability to show plausible high-impact events outside the time window.

• No market inputs (e.g. correlations, dividends or recovery rates) for measurement parameters.

• Slow adaptation to new volatility and correlations, as the weighting of the newest and the oldest data is the same.

To circumvent some limitations, we use stressed VaR (sVaR) and expected shortfall (ES); calculate VaR with exponential decay; make conservative measurement adjustments; and run analyses and backtesting to assess the accuracy of the VaR calculation model.

b) Stressed VaR (sVaR) and Expected Shortfall (ES)

Every day, we calculate sVaR for our main portfolios using the same VaR calculation method but with these exceptions:

Annual report 2024 525

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• A window of 260 observations (as opposed to 520 for VaR) over a continuous stress period. For each portfolio, we review the history of a subset of market risk factors (selected with expert criteria) and the most significant positions per book.

• Unlike VaR, the percentile we take to get sVaR has uniform weighting and is