Classification of risks

BCV monitors four categories of risk in all of its activities:

• strategic/business risk, which arises from economic or regulatory changes that have an adverse effect on the Bank's strategic choices in the case of strategic risk, or from competitive changes that have an adverse effect on business decisions for a given strategy in the case of business risk.
• credit risk, which arises from the possibility that a counterparty may default. Credit risk exists before and during settlement of a transaction;
• market risk, which arises from potential adverse changes in market parameters, particularly prices, implied volatility and other base effects on the markets (e.g., correlation between assets, market liquidity). Liquidity risk in terms of the Bank's refinancing capacity is also deemed to be a component of market risk. Market risk exists on the trading book and the banking book.
• operational risk, which arises from a possible inadequacy or failure relating to processes, people and/or information systems within and outside the Bank. Operational risk includes the risk of non-compliance, i.e., the risk of the Bank breaching legal requirements, standards and regulations.

BCV analyzes and manages these risks on the basis of their potential impact. Three kinds of impact are considered:

• the financial impact, that is, a decrease in the Bank's net profit and/or the value of its capital;
• the regulatory impact, that is, inquiries, sanctions, increased monitoring or a restriction on banking activities;
• the reputational impact on the image the Bank projects to the outside world.