7. Risk management

The BBVA Group understands the risk management function as one of the essential and differentiating elements of its competitive strategy. In this context, the aim of the Global Risk Management (GRM) Corporate Area is to preserve the BBVA Group’s solvency, help define its strategy with respect to risk and assume and facilitate the development of its businesses. Its activity is governed by the following principles:

• The risk management function is single, independent and global.
• The risks assumed by the BBVA Group must be compatible with the capital adequacy target and must be identified, measured and assessed. Risk monitoring and management procedures and sound mechanisms of control and mitigation systems must likewise be in place.
• All risks must be managed integrally during their life cycle, and be treated differently depending on their nature and with active portfolio management based on a common measure (economic capital).
• It is each operating segment’s responsibility to propose and maintain its own risk profile, within its autonomy in the corporate action framework (defined as the set of risk control policies and procedures defined by the BBVA Group), using an appropriate risk infrastructure to control their risks.
• The infrastructures created for risk control must be equipped with means (in terms of people, tools, databases, information systems and procedures) that are sufficient for their purpose, so that there is a clear definition of roles and responsibilities, thus ensuring efficient allocation of resources among the corporate area and the risk units in operating segments.

In light of these principles, integrated risk management is structured around five main components:

• A governance and organizational system for the risk function, which considers:
  • Definition of roles and responsibilities for different functions and areas
  • Organizational structure of the GRM Corporate Area and Risk Units of the operating segments, including relationship and codependency mechanisms
  • Committee Schemes at a Corporate and operating segment levels
  • Structure delegation of functions and risks
  • Internal control system in line with the nature and volume of risk exposure
• A general risk framework, where the Group’s risk profile objective is defined and where the tolerance levels that the Group is willing to assume is clearly defined in order to carry out its strategic plan without relevant deviations, even in stress situations.
• A risk management corporate governance scheme which includes:
  • a regulatory body of policies and procedures, tolerances and corrective actions
  • Annual risk planning scheme whereby Risk Appetite is incorporated into the Group’s business decision making process
  • ongoing management of financial and non-financial risks
• A Framework for Identification, Assessment, Monitoring and Reporting of risks assumed in base and stress scenarios, allowing prospective and dynamic risk assessment
• An infrastructure that encompasses the set of tools, methodologies and risk culture that is the basis on which the differentiated risk management scheme is founded.

Corporate governance system

The BBVA Group has developed a corporate governance system in line with the best international practices, which adapts to the regulatory requirements of the countries where its operating segments carry out their business.

The Board of Directors is, in accordance with the Regulations of the Board, the body responsible for approving the policy control and risk management, as well as performing the periodic monitoring of internal information and control systems. Based on the general policies established by the Board of Directors, the Executive Committee (EC) sets corporate policies that previously been approved by the Board of Directors and the Group's risk limits by geographies, sectors and portfolios composing all the corporate action framework on risk . In this context, and for the adequate performance of its functions, the EC has a key role in developing the Risk Committee of the Board which, among other functions, analyzes and evaluates proposals on these issues that are risen to the EC for approval, performing a continuous monitoring of risk evolution and approving transactions that are considered relevant for qualitative or quantitative reasons.

Risk management in the BBVA Group from a corporate action framework set by the governing bodies of the Bank is carried out by corporate risk management units and the operating segments themselves. Thus, the risk function in the Group (Global Risk Management , hereinafter GRM) , is distributed among the risk units of the operating segments and the GRM corporate area, the latter being responsible for ensuring compliance with policies and global strategies. The risk units of the operating segments advise and manage risk profiles within their autonomy, though they always respect the corporate framework for action.

The Corporate GRM Area combines a vision by risk type with a global vision. It is divided into six units, as follows:

• Corporate Risk Management and Risk Portfolio Management: Responsible for management and control of the BBVA Group’s financial risks. In addition, this area focuses on fiduciary risk management, insurance, Asset Management and monitors the retail banking business from a cross functional point of view.
• Operational and Control Risk: Manages operational risk, internal risk area control and the internal validation of the measurement models and the acceptance of new risks.
• Technology & Methodologies: Responsible for the management of the technological and methodological developments required for risk management in the Group.
• Technical Secretariat: Undertakes the contrast of the proposals made to the Risk Management Committee and the Risk Committee.
• Planning, Monitoring & Reporting: Responsible for the development of the ERM framework and the definition and monitoring of risk appetite. It also prepares reporting requirements, both internal and regulatory, for those risks the Group is exposed to.
• GRM South America: Responsible for credit risk management and monitoring in South America.

The head of the GRM Department is the Chief Risk Officer, and, among his responsibilities, ensures that the Group's risks are managed according to the defined policy, relying on the GRM corporate area units and the risk units of the operating segments. In turn, the risk managers of the operating segments maintain a hierarchical reporting line with the head of their operating segment and a functional reporting to the Group Chief Risk Officer. This structure ensures the independence of the role of local risk and alignment with the policies and objectives of the Group. This structure gives the Corporate GRM Area reasonable comfort with respect to:

• integration, control and management of all the Group’s risks;
• the application throughout the Group of standard principles, policies and metrics; and
• the necessary knowledge of each geographical area and each business.

This organizational scheme is complemented by various committees, which include the following:

• The Global Risk Management Committee: This committee is made up of the risk managers from the risk units located in the operating segments and the managers of the GRM Corporate Area units. This committee meets on a monthly basis and among its responsibilities are the following:
  • establishing the Group’s risk strategy and presenting its proposal to the appropriate governing bodies, and in particular to the Board of Directors, for their approval,
  • monitoring the management and control of risks in the Group, and
  • adopting any necessary actions.
• The Risk Management Committee: Its permanent members are the Global Risk Management director, the Corporate Risk Management director and the Technical Secretariat. The other committee members propose the operations that are analyzed in its working sessions. The committee analyzes and, if appropriate, authorizes financial programs and operations within its scope and submits the proposals whose amounts exceed the set limits to the Risks Committee, when its opinion on them is favorable.
• The Assets and Liabilities Committee (ALCO): The committee is responsible for actively managing structural interest rate and foreign exchange risk positions, global liquidity and the Group’s capital base.
• The Technology and Methodologies Committee: The committee decides on the effectiveness of the models and infrastructures developed to manage and control risks that are integrated in the operating segments, within the framework of the operational model of Global Risk Management.
• The New Businesses and Products Committees: Their functions are to analyze and, where appropriate, give technical approval to and implement new businesses, products and services prior to their marketing: to undertake subsequent control and monitoring of new authorized products; and to foster orderly business operations to ensure they develop in a controlled environment.
• The Global Corporate Assurance Committee: Its task is to undertake a review at both Group and operating segment level of the control environment and the effectiveness of the operational risk internal control and management systems, as well as to monitor and analyze the main operational risks the Group is subject to, including those that are cross-cutting in nature.

Internal control system

The BBVA Group’s internal control system is based on the best practices developed in “Enterprise Risk Management – Integrated Framework” by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as well as in “Framework for Internal Control Systems in Banking Organizations” by the Bank for International Settlements (BIS). The Group’s system for internal control is therefore part of the Integral Risk Management Framework.

The system of internal control of the Group reaches all areas of the organization and is designed to identify and manage the risks that the Group companies are facing and ensuring that the corporate objectives are met.

The control model has a three-line defense system:

• The first line is formed by the Group's operating segments, which are responsible for the control within their scope and implementation of the measures set by higher authorities.
• The second line are the specialists control units (Compliance, Global Accounting & Informational Management / Financial Internal Control , Risk Internal Control, IT Risk , Fraud & Security, Operational Control and production director support units , such as Human Resources , Legal , etc. ...). This line supervises the control of the different units from a horizontal hierarchy stand point. Also, reporting to this line is the operational risk corporate management unit, which provides a common methodology and management tools.
• The third line is the Internal Audit unit, which conducts an independent review of the model, verifying compliance and effectiveness of corporate policies and providing independent information on the control model.

Find following list shows the main principles that support the internal control system:

• Its core element is the “process.”

• The form in which the risks are identified, assessed and mitigated must be unique for each process; and the systems, tools and information flows that support the internal control and operational risk activities must be unique, or at least be administered fully by a single unit.

• The responsibility for internal control lies with the BBVA Group’s operating segments. These units, along with the specialized units mentioned above, are responsible for the implementation of the system of control within its scope of responsibility and managing the existing risk by proposing any improvements to processes it considers appropriate.

• Given that some operating segments have a global scope of responsibility, there are cross-cutting control functions which supplement the control mechanisms mentioned earlier.

• The Operational Risk Management Committee in each operating segment is responsible for approving suitable mitigation plans for each existing risk or weakness. This committee structure culminates at the Group’s Global Corporate Assurance Committee.

Within the GRM area, the Group has set up a unit of Internal Risk Control and Risk Validation that is independent from the units that develop models, manage processes and execute controls, and provide expert resources for the management of the different types of risks. Its objectives are:

• Ensure that there is a policy, process and measures identified for each risk relevant to the group.
• Ensure that these are implemented and applied in the manner in which they were defined.
• Control and communication any identified deficiencies and setting goals for improvement.
• Internal validation of models, independent from the model development process.

Both units report their activities and report their working plans to the Risk Committee of the Board.

The Internal Risk Control is built into the second line of defense. It has a global scope, both geographically and in terms of type of risk, reaching to all those risk types managed by the Corporate Risk Area. For the development of its function, the unit has a team structure at the corporate level and at the geography level in the case of the most important geographies in which the Group operates. As in the Corporate Area, the local units are maintained independent from the operating segment processes and from those units that execute controls. It maintains however a functional dependency to the Internal Risk control unit. The lines of action of this unit are set at a Group level, adapting and executing at a local level as well as reporting the most relevant aspects.

Risk Appetite Framework

The Group Risk policy is aimed towards a moderate risk profile through conservative management and a global banking business model diversified by geographical area, type of assets, portfolios and customers. The Group has a large international presence, both in emerging and developed countries, maintaining a medium/low risk profile in each geography while seeking sustainable growth over time.

In order to achieve the above, a number of key metrics have been established that characterize the objective of the entity behavior and are enforced across the organization. These metrics are related to the solvency, liquidity and recurrence of results; and depending on the circumstances prevailing in each case, determine the risk in the Group and allow to reach the desired objectives.

Tolerance levels for key metrics are proposed by the GRM and approved by the Executive Committee. These metrics define the risks that the group is willing to assume. They defined the Group’s Risk Appetite and therefore are considered permanent save for exceptions.

Also, on an annual basis, the Executive Committee establishes, after a proposal from GRM and favorable report of the Risk Committee, limits for the main types of risks present in the Group, such as credit, liquidity, funding and market. The compliance with these limits is monitored periodically through Risk committees. For credit risk, limits are defined at portfolio and/or sector level for each operating segment. In credit risk limits defined portfolio level and / or sector and for each operating segment. These thresholds are the maximum exposure to lending for the BBVA Group for a time horizon of one year.

The Group's objective is not to eliminate all risks, but to take a prudent level of risk that will generate results while maintaining adequate levels of capital and funding in order to generate recurring profits.

Corporate Scheme of Risk Management

Corporate Scheme of Risk Management includes macro processes as detailed below:

• Regulatory enhancement process for the Risk area. GRM has established a set of principles, policies and procedures that serve as foundation to the regulatory structure of the risk function. The objectives are:
  • Consistency of all policies of the Group, Holding and local level, with the guiding principles of risk appetite and within themselves.
  • Uniformity between the operating segments in the implementation of risk policies, avoiding disparities in the risks taken based on the operating segment.
  • Framework of action, establishing the general lines of action for the operating segments, respecting the autonomy of these units.
• Annual Planning Process: Planning is done taking into account the risk appetite and establishes a series of limits by type of asset that ensure consistency with the global objective profile of the Group's risk.
• Management of the main risks which are faced by the Group are the following:
  • Credit risk:

This arises from the probability that one party to a financial instrument will fail to meet its contractual obligations for reasons of insolvency or inability to pay and cause a financial loss for the other party. This includes management of counterparty risk, issuer credit risk, liquidation risk and country risk.

Management of credit risk covers the analytic process before decisions have been taken, decision making, instrumentation, monitoring formalized and recovery operations, as well as the entire process of control and reporting at customer level, segment, industry, operating segment or subsidiary. The main principles on which decision-making should be supported within credit risk are: a sufficient customer generation of resources and capital solvency and the existence of adequate and effective collateral. The management of credit risk in the Group has a comprehensive structure that allows all functions making decisions objectively and independently throughout the life cycle risk.

• Market risk:

This is originated by the likelihood of losses in the value of the positions held as a result of changes in the market prices of financial instruments. The BBVA Group manages this risk in terms of probability of VaR (Value at Risk). It includes three types of risks:

• Interest-rate risk: This arises from variations in market interest rates.
• Exchange Rate risk: This is the risk resulting from variations in foreign-currency exchange rates.
• Price risk: This is the risk resulting from variations in market prices, either due to factors specific to the instrument itself, or alternatively to factors which affect all the instruments traded on a specific market.
  • Liquidity risk

Control, monitoring and management of liquidity risk and funding aims in the short term, ensuring compliance with payment obligations of the BBVA Group in the time and manner provided, without the need to obtain funds under unfavorable conditions. In the mid-term it aims to ensure the adequacy of the Group's financial structure and its evolution in the context of the economic, market and regulatory changes.

• Structural risk, includes the following:
• Interest rate structural risk: The management of this kind of risk seeks to maintain exposure levels for the BBVA Group in line with its strategy and risk profile to address changes in market interest rates. For this aim, ALCO carries out an active balance sheet management through operations intended to optimize the level of risk in relation to the expected results and with respect to the maximum tolerable risk levels. The activity of the ALCO uses the interest rate risk measurements performed by the Corporate Area GRM.
• Exchange rate structural risk: This risk arises primarily from exposure to changes in exchange rates arising from foreign companies to the BBVA Group and endowment funds to branches abroad financed in a different currency the investment. Managing this risk is based on a simulation model of scenarios to quantify the changes in value that can be produced with a given confidence level and a horizon predetermined, and ALCO is the responsible for arranging hedging transactions, to restrict the equity impact due to the changes in exchange rates according to their projected trend.
• Structural equity risk: This risk arises due to the possible negative impact due to the impairment value of its investments in Industrial and Financial entities with medium and long horizons. The Corporate area GRM is responsible for measurement and effective monitoring of the structural risk of equity, estimating for this reason the sensitivity and the capital required to cover any unexpected losses arising from changes in value of the companies comprising the investment portfolio of the Group, with a confidence level in accordance with the target entity rating, taking into account liquidity positions and the statistical behavior of the assets under consideration.
  • Operational risk:

This arises from the possibility of human error, inadequate or faulty internal processes, system failures or external events. This definition includes the legal risk and excludes strategic and/or business risk and reputational risk The operational risk management in the Group is based on the levers of value that generates advanced AMA (advanced measurement approach): knowledge, identification, prioritization and management of potential and actual risks, supported by indicators to analyze the evolution, define alerts and check the controls.

Framework for identifying, analyzing and monitoring risk

The process of identification, assessment and monitoring / reporting have the following objectives:

• Evaluate the performance of risk appetite in the present moment.
• Identified and evaluate risk situation that may compromise the performance of the risk appetite.
• Evaluate the performance of risk appetite to future under basis and stress scenario.

Infrastructure: Technology, Culture and Risk Methodologies

• Technology: assessing the adequacy of information systems and technology necessary for the performance of the functions within the framework of integrated risk management of the Group.
• The BBVA Group’s main activities with respect to the management and control of its risks are as follows:
  • Calculation of exposure to risks of the different portfolios, taking into account any possible mitigating factors (guarantees, balance netting, collaterals, etc.).
  • Calculation of the probabilities of default (hereinafter, “PD”).
  • Estimation of the foreseeable losses in each portfolio, assigning a PD to new operations (rating and scoring).
  • Measurement of the risk values of the portfolios in different scenarios through historical simulations.
  • Establishment of limits to potential losses according to the different risks incurred.
  • Determination of the possible impacts of structural risks on the BBVA Group’s consolidated income statement.
  • Identification and quantification of operational risks, by operating segments, to facilitate mitigation through appropriate corrective actions.
• Risk Culture

In accordance with best practice and in line with recent regulatory recommendations, BBVA has implemented a robust risk culture that spreads all levels of the organization so that principles of risk management could be unique, and known throughout the group.

Global Risk Management Risk Culture diffuses as a value and as a fundamental part of its management model, with the aim to strengthening the direction of the risk management, emphasizing that this culture could be communicated, understood, accepted and controlled throughout the organization.

Risk Culture has opted for three different areas:

• Communication, which aims to spread understanding of the Risk Management Framework of the Group consistently and integrated throughout the organization through the most appropriate channels of communication.

• Training, in which specific formats have been developed to raise awareness of risks in the organization and ensure certain standards in skills and knowledge of Risk Management

• Compensation, area where it is intended that the financial and non-financial incentives could support the values and culture of risk at all levels and for which they have been established mechanisms based on the risk management, in accordance with the objectives established by the Group.

It has been established continuously monitored to verify proper implementation of these areas and their development.

7.1 Credit risk

7.1.1 Credit risk exposure

In accordance with IFRS 7, the BBVA Group’s maximum credit risk exposure (see definition below) by headings in the balance sheet as of December 31, 2013, 2012 and 2011 is provided below. It does not consider the availability of collateral or other credit enhancements to guarantee compliance with payment obligations. The details are broken down by financial instruments and counterparties.

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Maximum Credit Risk Exposure	Millions of Euros
	Notes	2013	2012	2011
Financial assets held for trading		29,708	28,265	20,946
Debt securities	10	29,602	28,020	20,946
Government		24,696	23,370	17,955
Credit institutions		2,734	2,545	1,889
Other sectors		2,172	2,106	1,102
Customer lending		106	244	-
Other financial assets designated at fair value through profit or loss		664	753	708
Debt securities	11	664	753	708
Government		142	174	129
Credit institutions		16	45	44
Other sectors		506	534	535
Available-for-sale financial assets		71,439	62,615	48,507
Debt securities	12	71,439	62,615	48,507
Government		48,728	38,926	32,476
Credit institutions		10,431	13,157	7,067
Other sectors		12,280	10,532	8,964
Loans and receivables		364,030	384,097	377,519
Loans and advances to credit institutions	13.1	22,792	25,372	24,400
Loans and advances to customers	13.2	336,759	354,973	350,239
Government		32,400	34,917	34,941
Agriculture		4,982	4,738	4,697
Industry		28,679	30,731	34,834
Real estate and construction		40,486	47,223	49,418
Trade and finance		47,169	51,912	54,736
Loans to individuals		149,891	151,244	137,437
Other		33,151	34,208	34,176
Debt securities	13.3	4,481	3,751	2,880
Government		3,175	2,375	2,128
Credit institutions		297	453	461
Other sectors		1,009	923	291
Held-to-maturity investments	14	-	10,163	10,955
Government		-	9,210	9,896
Credit institutions		-	393	451
Other sectors		-	560	608
Derivatives (trading and hedging)		41,294	49,208	53,561
Subtotal		507,135	535,101	512,196
Valuation adjustments		1,068	338	530
Total Financial Assets Risk		508,203	535,439	512,726
Financial guarantees (Bank guarantees, letter of credits,..)		33,543	37,019	37,629
Drawable by third parties		87,542	83,519	86,375
Government		4,354	1,360	3,143
Credit institutions		1,583	1,946	2,417
Other sectors		81,605	80,213	80,815
Other contingent commitments		6,628	6,624	4,313
Total Contingent Risks and Commitments	34	127,713	127,161	128,317
Total Maximum Credit Exposure		635,916	662,601	641,043

The maximum credit exposure of the table above is determined by type of financial asset as explained below:

• In the case of financial assets recognized in the consolidated balance sheets, exposure to credit risk is considered equal to its gross accounting value, not including certain valuation adjustments (impairment losses, derivatives and others), with the sole exception of trading and hedging derivatives.
• The maximum credit risk exposure on financial guarantees granted is the maximum that the Group would be liable for if these guarantees were called in, and that is their carrying amount.
• Our calculation of risk exposure for derivatives is based on the sum of two factors: the derivatives market value and their potential risk (or "add-on").

The first factor, market value, reflects the difference between original commitments and market values on the reporting date (mark-to-market). As indicated in Note 2.2.1 to the consolidated financial statements, derivatives are accounted for as of each reporting date at fair value in accordance with IAS 39.

The second factor, potential risk (‘add-on’), is an estimate (using internal models) of the maximum increase to be expected on risk exposure over a derivative market value (at a given statistical confidence level) as a result of future changes in the fair value over the remaining term of the derivatives.

The consideration of the potential risk ("add-on") relates the risk exposure to the exposure level at the time of a customer’s default. The exposure level will depend on the customer’s credit quality and the type of transaction with such customer. Given the fact that default is an uncertain event which might occur any time during the life of a contract, the BBVA Group has to consider not only the credit exposure of the derivatives on the reporting date, but also the potential changes in exposure during the life of the contract. This is especially important for derivatives, whose valuation changes substantially throughout their terms, depending on the fluctuation of market prices.

7.1.2 Mitigation of credit risk, collateralized credit risk and other credit enhancements

In most cases, maximum credit risk exposure is reduced by collateral, credit enhancements and other actions which mitigate the Group’s exposure. The BBVA Group applies a credit risk hedging and mitigation policy deriving from a banking approach focused on relationship banking. The existence of guarantees could be a necessary but not sufficient instrument for accepting risks, as the assumption of risks by the Group requires prior evaluation of the debtor’s capacity for repayment, or that the debtor can generate sufficient resources to allow the amortization of the risk incurred under the agreed terms.

The policy of accepting risks is therefore organized into three different levels in the BBVA Group:

• Analysis of the financial risk of the operation, based on the debtor’s capacity for repayment or generation of funds;
• The constitution of guarantees that are adequate, or at any rate generally accepted, for the risk assumed, in any of the generally accepted forms: monetary, secured, personal or hedge guarantees; and finally,
• Assessment of the repayment risk (asset liquidity) of the guarantees received.

The procedures for the management and valuation of collaterals are set out in the Internal Manuals on Credit Risk Management Policies and Procedures (retail and wholesale), which establish the basic principles for credit risk management, including the management of collaterals assigned in transactions with customers.

The methods used to value the collateral are in line with the best market practices and imply the use of appraisal of real-estate collateral, the market price in market securities, the trading price of shares in mutual funds, etc. All the collaterals assigned must be properly drawn up and entered in the corresponding register. They must also have the approval of the Group’s legal units.

The following is a description of the main types of collateral for each financial instrument class:

• Financial instruments held for trading: The guarantees or credit enhancements obtained directly from the issuer or counterparty are implicit in the clauses of the instrument.
• Trading and hedging derivatives: In derivatives, credit risk is minimized through contractual netting agreements, where positive- and negative-value derivatives with the same counterparty are offset for their net balance. There may likewise be other kinds of guarantees, depending on counterparty solvency and the nature of the transaction.

The Group uses credit derivatives to mitigate credit risk in its loan portfolio and other cash positions and to hedge risks assumed in market transactions with other clients and counterparties. Credit risk originating from the derivatives in which the Group operates is mitigated through the contractual rights existing for offsetting accounts at the time of their settlement. This has reduced the Group’s exposure to credit risk to €25,475 million as of December 31, 2013, €32,586 million as of December 31, 2012 and €34,770 million as of December 31, 2011.

Derivatives may follow different settlement and netting agreements, under the rules of the International Swaps and Derivatives Association (ISDA). The most common types of settlement triggers include bankruptcy of the reference credit institution, acceleration of indebtedness, failure to pay, restructuring, repudiation and dissolution of the entity. Since the Group typically confirms over 99% of the credit derivative transactions in the Depository Trust & Clearing Corporation (DTCC), substantially the entire credit derivatives portfolio is registered and matched against BBVA’s counterparties.

• Other financial assets designated at fair value through profit or loss and Available-for-sale financial assets: The guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent to the structure of the instrument.
• Loans and receivables:
  • Loans and advances to credit institutions: These usually only have the counterparty’s personal guarantee.
  • Loans and advances to customers: Most of these operations are backed by personal guarantees extended by the counterparty. There may also be collateral to secure loans and advances to customers (such as mortgages, cash guarantees, pledged securities and other collateral), or to obtain other credit enhancements (bonds, hedging, etc.).
  • Debt securities: The guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent to the structure of the instrument.

Collateralized loans granted by the Group as of December 31, 2013, 2012 and 2011, excluding balances deemed impaired, is broken down in the table below:

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Collateralized Credit Risk	Millions of Euros
	2013	2012	2011
Mortgage loans	125,564	137,870	129,536
Operating assets mortgage loans	3,778	3,897	3,574
Home mortgages	108,745	119,235	108,190
Rest of mortgages (1)	13,041	14,739	17,772
Secured loans, except mortgage	23,660	23,125	23,915
Cash guarantees	300	377	286
Secured loan (pledged securities)	570	997	589
Rest of secured loans (2)	22,790	21,751	23,041
Total	149,224	160,995	153,451

(1) Loans with mortgage collateral (other than residential mortgage) for property purchase or construction. (2) Includes loans with cash collateral, other financial assets with partial collateral.

• Financial guarantees, other contingent risks and drawable by third parties: These have the counterparty’s personal guarantee.

7.1.3 Policies for preventing excessive risk concentration

In order to prevent the build-up of excessive concentrations of credit risk at the individual, country and sector levels, the BBVA Group maintains maximum permitted risk concentration indices updated at individual and portfolio sector levels tied to the various observable variables within the field of credit risk management. The limit on the Group’s exposure or financial commitment to a specific customer therefore depends on the customer’s credit rating, the nature of the risks involved, and the Group’s presence in a given market, based on the following guidelines:

• The aim is, as far as possible, to combine the customer’s credit needs (commercial/financial, short-term/long-term, etc.) with the interests of the Group.
• Any legal limits that may exist concerning risk concentration are taken into account (relationship between risks with a customer and the capital of the entity that assumes them), the markets, the macroeconomic situation, etc.
• To properly management risk exposures of transactions over 2.5% of the Group’s Net Equity any transactions over this threshold will be authorized by the Risk Committee of the Bank’s Board of Directors.

Risk concentrations by geography

Below is a breakdown of the balances of financial instruments registered in the accompanying consolidated balance sheets by their concentration in geographical areas and according to the residence of the customer or counterparty. It does not take into account valuation adjustments, impairment losses or loan-loss provisions:

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Risks by Geographical Areas 2013	Millions of Euros
	Spain	Europe, Excluding Spain	Mexico	USA	South America	Other	Total
Financial assets -
Financial assets held for trading	14,882	33,091	15,707	2,677	3,412	2,345	72,114
Loans and advances to customers	-	-	-	107	-	-	107
Debt securities	6,320	5,838	13,410	424	2,608	1,002	29,602
Equity instruments	2,752	953	632	118	148	163	4,766
Derivatives	5,810	26,300	1,665	2,028	656	1,180	37,639
Other financial assets designated at fair value through profit or loss	211	106	1,591	503	2	-	2,413
Loans and advances to credit institutions	-	-	-	-	-	-	-
Debt securities	107	54	5	497	-	-	663
Equity instruments	104	52	1,586	6	2	-	1,750
Available-for-sale portfolio	42,074	8,587	10,380	7,729	5,626	3,011	77,407
Debt securities	38,732	8,453	10,329	7,247	5,535	1,143	71,439
Equity instruments	3,342	134	51	482	91	1,868	5,968
Loans and receivables	194,383	26,712	44,414	39,650	53,886	4,984	364,031
Loans and advances to credit institutions	5,224	9,171	2,366	2,707	1,909	1,415	22,792
Loans and advances to customers	187,400	17,519	42,048	36,047	50,173	3,569	336,759
Debt securities	1,759	22	-	896	1,804	-	4,481
Held-to-maturity investments	-	-	-	-	-	-	-
Hedging derivatives	434	2,113	8	60	10	4	2,629
Total Risk in Financial Assets	251,984	70,609	72,100	50,618	62,935	10,344	518,591
Contingent risks and liabilities
Contingent risks	15,172	9,038	767	2,344	5,292	929	33,542
Contingent liabilities	28,096	17,675	16,109	24,485	7,002	803	94,170
Total Contingent Risk	43,268	26,713	16,876	26,829	12,294	1,732	127,712
Total Risks in Financial Instruments	295,252	97,322	88,976	77,447	75,229	12,076	646,303

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Risks by Geographical Areas 2012	Millions of Euros
	Spain	Europe Excluding Spain	Mexico	USA	South America	Other	Total
Financial assets -
Financial assets held for trading	13,768	39,360	15,035	4,751	3,643	3,272	79,830
Loans and advances to customers	-	-	-	244	-	-	244
Debt securities	5,726	5,155	12,960	577	2,805	796	28,020
Equity instruments	1,270	519	101	543	239	243	2,915
Derivatives	6,772	33,686	1,973	3,387	599	2,233	48,651
Other financial assets designated at fair value through profit or loss	296	87	13	2,134	-	-	2,531
Loans and advances to credit institutions	-	-	-	-	-	-	-
Debt securities	190	42	9	512	-	-	753
Equity instruments	106	45	4	1,622	-	-	1,777
Available-for-sale portfolio	36,109	6,480	9,601	7,163	6,128	1,085	66,567
Debt securities	33,107	6,267	9,035	7,112	6,053	1,040	62,615
Equity instruments	3,002	213	566	51	75	45	3,952
Loans and receivables	209,786	31,375	46,384	40,259	51,978	4,314	384,096
Loans and advances to credit institutions	3,220	11,042	4,549	3,338	2,065	1,157	25,372
Loans and advances to customers	205,216	19,979	41,835	36,040	48,753	3,151	354,973
Debt securities	1,350	354	-	880	1,160	6	3,751
Held-to-maturity investments	7,279	2,884	-	-	-	-	10,162
Hedging derivatives	914	3,798	159	226	5	18	5,120
Total Risk in Financial Assets	268,151	83,984	71,192	54,532	61,754	8,691	548,305
Contingent risks and liabilities
Contingent risks	16,164	10,074	872	3,159	5,858	891	37,019
Contingent liabilities	26,514	19,678	13,564	22,027	7,097	1,264	90,142
Total Contingent Risk	42,678	29,752	14,435	25,186	12,955	2,155	127,161
Total Risks in Financial Instruments	310,829	113,736	85,627	79,718	74,709	10,846	675,466

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Risks by Geographical Areas 2011	Millions of Euros
	Spain	Europe, Excluding Spain	Mexico	USA	South America	Other	Total
Financial assets -
Financial assets held for trading	12,955	33,187	11,676	4,664	5,452	2,538	70,472
Debt securities	5,075	2,039	10,933	565	2,030	304	20,946
Equity instruments	662	357	741	69	125	238	2,192
Derivatives	7,218	30,791	2	4,030	3,297	1,996	47,334
Other financial assets designated at fair value through profit or loss	234	107	1,470	509	454	-	2,774
Debt securities	117	77	6	508	1	-	709
Equity instruments	117	30	1,464	1	453	-	2,065
Available-for-sale portfolio	26,546	5,390	7,825	8,151	5,164	654	53,730
Debt securities	22,371	5,184	7,764	7,518	5,068	601	48,506
Equity instruments	4,175	206	61	633	96	53	5,224
Loans and receivables	207,858	32,598	42,489	42,646	44,535	7,397	377,523
Loans and advances to credit institutions	3,034	10,079	4,877	2,570	2,195	1,647	24,402
Loans and advances to customers	203,459	22,392	37,612	39,384	41,650	5,744	350,241
Debt securities	1,365	127	-	692	690	6	2,880
Held-to-maturity investments	7,374	3,582	-	-	-	-	10,956
Debt securities	395	3,489	485	244	16	56	4,685
Total Risk in Financial Assets	255,362	78,353	63,945	56,214	55,621	10,645	520,140
Contingent risks and liabilities
Contingent risks	16,149	10,169	1,098	3,986	4,733	1,494	37,629
Contingent liabilities	30,848	18,429	11,929	22,002	6,192	1,288	90,688
Total Contingent Risk	46,997	28,598	13,027	25,988	10,925	2,782	128,317
Total Risks in Financial Instruments	302,359	106,951	76,972	82,202	66,546	13,427	648,457

The breakdown of the main figures in the most significant foreign currencies in the accompanying consolidated balance sheets is set forth in Appendix VII.

Sovereign risk concentration

Sovereign risk management

The risk associated with the transactions involving sovereign risk is identified, measured, controlled and tracked by a centralized unit integrated in the BBVA Group’s Risk Area. Its basic functions involve the preparation of reports in the countries where sovereign risk exists (called “financial programs”), tracking such risks, assigning ratings to these countries and, in general, supporting the Group in terms of reporting requirements for any transactions involving sovereign risk. The risk policies established in the financial programs are approved by the relevant risk committees.

The country risk unit tracks the evolution of the risks associated with the various countries to which the Group are exposed (including sovereign risk) on an ongoing basis in order to adapt its risk and mitigation policies to any macroeconomic and political changes that may occur. Moreover, it regularly updates its internal ratings and forecasts for these countries. The internal rating assignment methodology is based on the assessment of quantitative and qualitative parameters which are in line with those used by certain multilateral organizations such as the International Monetary Fund (IMF) and the World Bank (WB), rating agencies and export credit organizations.

Sovereign risk exposure

The table below provides a breakdown of exposure to financial instruments, as of December 31, 2013, 2012 and 2011, by type of counterparty and the country of residence of such counterparty. The below figures do not take into account valuation adjustments, impairment losses or loan-loss provisions:

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Risk Exposure by countries	Millions of Euros
	2013
	Sovereign Risk (*)	Financial Institutions	Other Sectors	Total	%
Spain	59,114	11,870	166,677	237,661	51.1%
United Kingdom	3	5,405	4,377	9,785	2.1%
Italy	3,888	422	2,617	6,927	1.5%
France	942	2,640	2,316	5,898	1.3%
Portugal	385	238	5,179	5,802	1.2%
Germany	1,081	1,338	1,206	3,625	0.8%
Ireland	-	221	487	708	0.2%
Turkey	10	65	163	238	0.1%
Greece	-	-	72	72	0.0%
Rest of Europe	2,608	2,552	4,239	9,399	2.0%
Europe	68,031	24,751	187,333	280,115	60.2%
Mexico	26,629	2,810	38,312	67,751	14.6%
The United States	5,224	3,203	41,872	50,299	10.8%
Rest of countries	7,790	5,480	53,649	66,919	14.4%
Total Rest of Countries	39,643	11,493	133,833	184,969	39.8%
Total Exposure to Financial Instruments	107,674	36,244	321,166	465,084	100.0%

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Risk Exposure by countries	Millions of Euros
	2012
	Sovereign Risk (*)	Financial Institutions	Other Sectors	Total	%
Spain	62,558	11,839	182,785	257,182	52.9%
United Kingdom	13	159	400	572	0.1%
Italy	2	7,095	2,336	9,433	1.9%
France	4,203	405	3,288	7,896	1.6%
Portugal	443	590	5,763	6,796	1.4%
Germany	1,739	3,291	2,631	7,661	1.6%
Ireland	1,298	1,025	734	3,057	0.6%
Turkey	-	280	456	736	0.2%
Greece	-	-	99	99	0.0%
Rest of Europe	1,664	2,484	5,256	9,404	1.9%
Europe	71,920	27,168	203,748	302,836	62.3%
Mexico	25,059	5,492	36,133	66,684	13.7%
The United States	3,942	3,768	42,157	49,867	10.3%
Rest of countries	7,521	5,484	53,481	66,486	13.7%
Total Rest of Countries	36,523	14,744	131,771	183,037	37.7%
Total Exposure to Financial Instruments	108,443	41,912	335,519	485,873	100.0%

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	Millions of Euros
	2011
Risk Exposure by countries	Sovereign Risk (*)	Financial Institutions	Other Sectors	Total	%
Spain	56,473	6,883	178,065	241,420	52.7%
United Kingdom	120	6,547	3,498	10,164	2.2%
Italy	4,301	487	4,704	9,493	2.1%
France	279	829	6,715	7,824	1.7%
Portugal	619	1,653	3,038	5,310	1.2%
Germany	582	902	908	2,392	0.5%
Ireland	0	182	212	394	0.1%
Turkey	17	42	291	350	0.1%
Greece	109	0	32	141	0.0%
Rest of Europe	647	4,319	5,549	10,515	2.3%
Europe	63,147	21,844	203,011	288,002	62.8%
Mexico	22,875	5,508	31,110	59,493	13.0%
The United States	3,501	3,254	42,550	49,305	10.8%
Rest of countries	7,281	3,800	50,386	61,467	13.4%
Total Rest of Countries	33,657	12,562	124,046	170,266	37.2%
Total Exposure to Financial Instruments	96,805	34,405	327,058	458,268	100.0%

(*) In addition, as of December 31, 2013, 2012 and 2011, undrawn lines of credit, granted mainly to the Spanish government or government agencies and amounted to €1,942 million, €1,613 million and €3,525 million, respectively.

The exposure to sovereign risk set out in the above table includes positions held in government debt securities in countries where the Group operates. They are used for ALCO’s management of the interest-rate risk on the balance sheets of the Group’s entities in these countries, as well as for hedging of pension and insurance commitments by insurance entities within the BBVA Group.

Sovereign risk exposure in Europe

In December 2013, sovereign risk exposure in Europe data was published by Group’s credit entities as of June 30, 2013 and December 31, 2012. This publication was made under the European Banking Authority (hereinafter "EBA" acronym for "European Banking Authority") scheme.

The table below provides a breakdown of the exposure of the Group’s credit institutions to European sovereign risk as of December 31, 2013, 2012 and 2011, by type of financial instrument and the country of residence of the counterparty, under EBA requirements:

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Exposure to Sovereign Risk by European Union Countries (1)	Millions of Euros
	2013
	Debt securities			Loans and Receivables	Derivatives (2)		Total (2)	Contingent risks and commitments	%
	Financial Assets Held-for-Trading	Available-for-Sale Financial Assets	Held-to-Maturity Investments		Direct Exposure	Indirect Exposure
Spain	5,251	24,339	-	23,430	258	(25)	53,253	1,924	82.8%
Italy	733	2,691	-	90	-	(6)	3,508	-	5.5%
France	874	-	-	-	-	(1)	873	-	1.4%
Germany	1,064	-	-	-	-	(1)	1,063	-	1.7%
Portugal	64	19	-	302	-	-	385	17	0.6%
United Kingdom	-	-	-	-	(13)	3	(10)	1	-
Greece	-	-	-	-	-	-	-	-	-
Hungary	-	65	-	-	-	-	65	-	0.1%
Ireland	-	-	-	-	-	-	-	-	-
Rest of European Union	2,100	3,038	-	38	-	10	5,186	-	8.1%
Total Exposure to Sovereign Counterparties (European Union)	10,086	30,152	-	23,860	245	(20)	64,323	1,942	100.0%

(1) This table shows sovereign risk balances with EBA criteria. Therefore, sovereign risk of the Group’s insurance companies (€11.093 million as of December 31, 2013) is not included. (2) Includes credit derivatives CDS (Credit Default Swaps) shown at fair value. Download Excel

Exposure to Sovereign Risk by European Union Countries (1)	Millions of Euros
	2012
	Debt securities			Loans and Receivables	Derivatives (2)		Total (2)	Contingent risks and commitments	%
	Financial Assets Held-for-Trading	Available-for-Sale Financial Assets	Held-to-Maturity Investments		Direct Exposure	Indirect Exposure
Spain	5,022	19,751	6,469	26,624	285	5	58,156	1,595	86.6%
Italy	610	811	2,448	97	-	(3)	3,963	-	5.9%
France	1,445	-	254	-	-	(2)	1,697	-	2.5%
Germany	1,291	-	-	-	(4)	(1)	1,286	-	1.9%
Portugal	51	18	15	359	-	-	443	17	0.7%
United Kingdom	-	-	-	-	(19)	-	(19)	1	-
Greece	-	-	-	-	-	-	-	-	-
Hungary	-	66	-	-	-	-	66	-	0.1%
Ireland	-	-	-	-	-	-	-	-	-
Rest of European Union	1,066	379	24	78	-	1	1,548	-	2.3%
Total Exposure to Sovereign Counterparties (European Union)	9,485	21,025	9,210	27,158	262	-	67,140	1,613	100.0%

(1) This table shows sovereign risk balances with EBA criteria. Therefore, sovereign risk of the Group’s insurance companies (€5,093 million as of December 31, 2012) is not included. (2) Includes credit derivatives CDS (Credit Default Swaps) shown at fair value. Download Excel

Exposure to Sovereign Risk by European Union Countries (1)	Millions of Euros
	2011
	Debt securities			Loans and Receivables	Derivatives (2)		Total (2)	Contingent risks and commitments	%
	Financial Assets Held-for-Trading	Available-for-Sale Financial Assets	Held-to-Maturity Investments		Direct Exposure	Indirect Exposure
Spain	4,366	15,225	6,520	26,637	96	-	52,844	3,455	89.1%
Italy	350	634	2,956	184	-	(23)	4,101	-	6.9%
France	513	6	69	-	(3)	(2)	583	-	1.0%
Germany	338	12	254	-	-	(3)	601	-	1.0%
Portugal	39	11	13	216	-	(1)	278	65	0.5%
United Kingdom	-	120	-	-	(3)	-	117	1	0.2%
Greece	-	10	84	15	-	(8)	101	-	0.2%
Hungary	-	53	-	-	-	-	53	-	0.1%
Ireland	-	7	-	-	-	1	8	-	0.0%
Rest of European Union	155	351	-	130	-	2	638	4	1.1%
Total Exposure to Sovereign Counterparties (European Union)	5,761	16,429	9,896	27,182	89	(34)	59,323	3,525	100.0%

(1) This table shows sovereign risk balances with EBA criteria. Therefore, sovereign risk of the Group’s insurance companies (€3,972 million as of December 31, 2013) is not included. (2) Includes credit derivatives CDS (Credit Default Swaps) shown at fair value.

The following table provides a breakdown of the notional value of the CDS in which the Group’s credit institutions act as sellers or buyers of protection against the sovereign risk of European countries:

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Exposure to Sovereign Risk by European Countries	Millions of Euros
	2013
	Credit derivatives (CDS) and other contracts in which the Group act as a protection seller		Credit derivatives (CDS) and other contracts in which the Group act as a protection buyer
	Notional value	Fair value	Notional value	Fair value
Spain	14	-	62	(25)
Italy	622	(15)	595	9
Germany	205	-	200	(1)
France	204	-	149	(1)
Portugal	75	(3)	75	3
Poland	-	-	-	-
Belgium	-	-	-	-
United Kingdom	135	3	126	-
Greece	14	-	14	-
Hungary	1	-	-	-
Ireland	21	-	21	-
Rest of European Union	591	12	478	(2)
Total exposure to Sovereign Counterparties	1,882	(3)	1,720	(17)

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Exposure to Sovereign Risk by European Countries	Millions of Euros
	2012
	Credit derivatives (CDS) and other contracts in which the Group act as a protection seller		Credit derivatives (CDS) and other contracts in which the Group act as a protection buyer
	Notional value	Fair value	Notional value	Fair value
Spain	68	14	97	(9)
Italy	518	(22)	444	19
Germany	216	(1)	219	-
France	196	(1)	134	(1)
Portugal	91	(6)	89	6
Poland	-	-	-	-
Belgium	281	(4)	232	5
United Kingdom	56	1	64	(1)
Greece	18	-	18	-
Hungary	2	-	-	-
Ireland	82	-	82	-
Rest of European Union	149	2	155	(2)
Total exposure to Sovereign Counterparties	1,677	(17)	1,534	17

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Exposure to Sovereign Risk by European Countries	Millions of Euros
	2011
	Credit derivatives (CDS) and other contracts in which the Group act as a protection seller		Credit derivatives (CDS) and other contracts in which the Group act as a protection buyer
	Notional value	Fair value	Notional value	Fair value
Spain	20	2	20	(2)
Italy	283	38	465	(61)
Germany	182	4	184	(6)
France	102	3	123	(6)
Portugal	85	21	93	(22)
Poland	-	-	-	-
Belgium	-	-	-	-
United Kingdom	20	2	20	(2)
Greece	53	25	66	(33)
Hungary	-	-	2	-
Ireland	82	10	82	(9)
Rest of European Union	294	31	329	(29)
Total exposure to Sovereign Counterparties	1,119	136	1,382	(170)

The main counterparties of these CDS are credit institutions with a high credit quality. The CDS contracts are standard in the market, with the usual clauses covering the events that would trigger payouts.

As it can be seen in the above tables, exposure to sovereign risk in Europe is concentrated in Spain. As of December 31, 2013, 2012 and 2011, the breakdown of total exposure faced by the Group’s credit institutions to Spain and other countries, by maturity of the financial instruments, is as follows:

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Maturities of sovereign risks European Union	Millions of Euros
	2013
	Debt securities			Loans and Receivables	Derivatives		Total (*)	%
	Financial Assets Held-for-Trading	Available-for-Sale Financial Assets	Held-to-Maturity Investments		Direct Exposure	Indirect Exposure
Spain
Up to 1 Year	1,935	846	-	5,627	8	-	8,416	13.1%
1 to 5 Years	1,531	15,523	-	5,574	41	-	22,669	35.2%
Over 5 Years	1,784	7,969	-	12,229	209	(25)	22,166	34.5%
Rest of Europe
Up to 1 Year	3,198	645	-	311	(13)	-	4,141	6.4%
1 to 5 Years	847	3,016	-	8	-	4	3,875	6.0%
Over 5 Years	791	2,153	-	111	-	1	3,056	4.8%
Total Exposure to European Union Sovereign Counterparties	10,086	30,152	-	23,860	245	(20)	64,323	100.0%

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Maturities of sovereign risks European Union	Millions of Euros
	2012
	Debt securities			Loans and Receivables	Derivatives		Total (*)	%
	Financial Assets Held-for-Trading	Available-for-Sale Financial Assets	Held-to-Maturity Investments		Direct Exposure	Indirect Exposure
Spain
Up to 1 Year	2,183	1,944	2	10,267	35	-	14,431	21.5%
1 to 5 Years	1,832	12,304	1,239	4,409	26	-	19,810	29.5%
Over 5 Years	1,007	5,503	5,228	11,948	224	5	23,915	35.6%
Rest of Europe
Up to 1 Year	2,564	46	33	367	7	-	3,019	4.5%
1 to 5 Years	952	190	1,927	34	(19)	(5)	3,079	4.6%
Over 5 Years	947	1,038	781	131	(11)	-	2,886	4.3%
Total Exposure to European Union Sovereign Counterparties	9,485	21,025	9,210	27,158	262	-	67,140	100.0%

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Maturities of sovereign risks European Union	Millions of Euros
	2011
	Debt securities			Loans and Receivables	Derivatives		Total (*)	%
	Financial Assets Held-for-Trading	Available-for-Sale Financial Assets	Held-to-Maturity Investments		Direct Exposure	Indirect Exposure
Spain
Up to 1 Year	2,737	779	36	9,168	1	-	12,721	21.4%
1 to 5 Years	1,025	11,630	1,078	4,265	67	-	18,065	30.5%
Over 5 Years	604	2,816	5,406	13,204	27	-	22,057	37.2%
Rest of Europe
Up to 1 Year	684	219	72	370	3	(1)	1,347	2.3%
1 to 5 Years	297	267	2,439	38	(1)	(17)	3,023	5.1%
Over 5 Years	414	718	865	137	(8)	(15)	2,111	3.6%
Total Exposure to European Union Sovereign Counterparties	5,761	16,429	9,896	27,182	89	(33)	59,324	100.0%

(*) Additionally, as of December 31, 2013, 2012 and 2011, there were undrawn lines of credit mainly with Spanish government, amounting to 1,942, 1,613 and 3,525 million euros, respectively.

Valuation and impairment methods

The valuation methods used to assess the instruments that are subject to sovereign risks are the same ones used for other instruments included in the relevant portfolios and are detailed in Note 8 to these consolidated financial statements. They take into account the exceptional circumstances that have taken place over the last two years in connection with the sovereign debt crisis in Europe.

Specifically, the fair value of sovereign debt securities of European countries has been considered equivalent to their listed price in active markets (Level 1 as defined in Note 8).

Risks related to the developer and real-estate sector in Spain

One of the main Group activities of the Group in Spain is focused on developer and mortgage loans. The policies and strategies established by the Group to deal with risks related to the developer and real-estate sector are explained below:

Policies and strategies established by the Group to deal with risks related to the developer and real-estate sector

BBVA has teams specializing in the management of the Real-Estate Sector risk, given its economic importance and specific technical component. This specialization is not only in the Risk-Acceptance teams, but throughout the handling, commercial, problem risks and legal, etc. It also includes the research department (BBVA Research), which helps determine the medium/long-term vision needed to manage this portfolio. Specialization has been increased and the management teams in the areas of recovery and the Real Estate Unit itself have been reinforced.

The policies established to address the risks related to the developer and real-estate sector, aim to accomplish, among others, the following objectives: to avoid concentration in terms of customers, products and regions; to estimate the risk profile for the portfolio; and to anticipate possible worsening of the portfolio.

Specific policies for analysis and admission of new developer risk transactions

In the analysis of new operations, the assessment of the commercial operation in terms of the economic and financial viability of the project has been one of the constant points that have helped ensure the success and transformation of construction land operations for customers’ developments.

As regards the participation of the Risk Acceptance teams, they have a direct link and participate in the committees of areas such as Recoveries and the Real Estate Unit. This guarantees coordination and exchange of information in all the processes.

The following strategies have been implemented with customers in the developer sector: avoidance of large corporate transactions, which had already reduced their share in the years of greatest market growth; non active participation in the second-home market; commitment to public housing financing; and participation in land operations with a high level of urban development security, giving priority to land open to urban development.

Risk monitoring policies

The base information for analyzing the real estate portfolios is updated monthly. The tools used include the so-called “watch-list”, which is updated monthly with the progress of each client under watch, and the different strategic plans for management of special groups. There are plans that involve an intensification of the review of the portfolio for financing land, while, in the case of ongoing promotions, they are classified based on the rate of progress of the projects.

These actions have enabled BBVA to identify possible impairment situations, by always keeping an eye on BBVA’s position with each customer (whether or not as first creditor). In this regard, key aspects include management of the risk policy to be followed with each customer, contract review, deadline extension, improved collateral, rate review (repricing) and asset purchase.

Proper management of the relationship with each customer requires knowledge of various aspects such as the identification of the source of payment difficulties, an analysis of the company’s future viability, the updating of the information on the debtor and the guarantors (their current situation and business course, economic-financial information, debt analysis and generation of funds), and the updating of the appraisal of the assets offered as collateral.

BBVA has a classification of debtors in accordance with legislation in force in each country, usually categorizing each one’s level of difficulty for each risk.

Based on the information above, a decision is made whether to use the refinancing tool, whose objective is to adjust the structure of the maturity of the debt to the generation of funds and the customer’s payment capacity.

As for the policies relating to risk refinancing with the developer and real-estate sector, they are the same as the general policies used for all of the Group’s risks (see Note7.1.8). In the developer and real estate sector, they are based on clear solvency and viability criteria for projects, with demanding terms for additional guarantees and legal compliance, given a refinancing tool that standardizes criteria and variables when considering any refinancing operation.

In the case of refinancing, the tools used for enhancing the Bank’s position are: the search for new intervening parties with proven solvency and initial payment to reduce the principal debt or outstanding interest; the improvement of the debt bond in order to facilitate the procedure in the event of default; the provision of new or additional collateral; and making refinancing viable with new conditions (period, rate and repayments), adapted to a credible and sufficiently verified business plan.

Policies applied in the management of real estate assets in Spain

The policy applied for managing these assets depends on the type of real-estate asset, as detailed below.

In the case of completed homes, the final aim is the sale of these homes to private individuals, thus diluting the risk and beginning a new business cycle. Here, the strategy has been to help subrogation (the default rate in this channel of business is notably lower than in any other channel of residential mortgages) and to support customers’ sales directly, using BBVA’s own channel (BBVA Services and our branches), creating incentives for sale and including sale orders for BBVA. In exceptional case we have even accepted partial haircuts, with the aim of making the sale easier.

In the case of ongoing construction work, the strategy has been to help and promote the completion of the works in order to transfer the investment to completed homes. The whole developer Works in Progress portfolio has been reviewed and classified into different stages with the aim of using different tools to support the strategy. This includes the use of developer accounts-payable financing as a form of payment control, the use of project monitoring supported by the Real Estate Unit itself, and the management of direct suppliers for the works as a complement to the developer’s own management.

With respect to land, the fact that the vast majority of the risk is urban land simplifies the management. Urban management and liquidity control to tackle urban planning costs are also subject to special monitoring.

Quantitative information on activities in the real-estate market in Spain

The following quantitative information on real-estate activities in Spain has been prepared using the reporting models required by Bank of Spain Circular 5/2011, of November 30.

As of December 31, 2013, 2012 and 2011, exposure to the construction sector and real-estate activities in Spain stood at €22,760, €23,656 and €28,287 million, respectively. Of that amount, risk from loans to construction and real-estate development activities accounted for €13,505, €15,358 and€14,158 million, representing 8.8%, 8.7% and 8.1% of loans and advances to customers of the balance of business in Spain (excluding the government and other government agencies) and 2.3%, 2.4% and 2.4% of the total assets of the Consolidated Group.

Lending for real estate development according to the purpose of the loans as of December 31, 2013, 2012 and 2011 is shown below:

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December 2013 Financing allocated to construction and real estate development and its coverage	Millions of Euros
	Gross Amount	Drawn Over the Guarantee Value	Specific coverage
Loans recorded by the Group’s credit institutions (Business in Spain)	13,505	5,723	5,237
Of which: Impaired assets	8,838	4,152	4,735
Of which: Potential problem assets	1,445	501	502
Memorandum item:
Write-offs	692

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December 2012 Financing allocated to construction and real estate development and its coverage	Millions of Euros
	Gross Amount	Drawn Over the Guarantee Value	Specific coverage
Loans recorded by the Group’s credit institutions (Business in Spain)	15,358	6,164	5,642
Of which: Impaired assets	6,814	3,193	3,123
Of which: Potential problem assets	2,092	911	731
Memorandum item:
Write-offs	347

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December 2011 Financing allocated to construction and real estate development and its coverage	Millions of Euros
	Gross Amount	Drawn Over the Guarantee Value	Specific coverage
Loans recorded by the Group’s credit institutions (Business in Spain)	14,158	4,846	1,441
Of which: Impaired assets	3,743	1,725	1,123
Of which: Potential problem assets	2,052	911	318
Memorandum item:
Write-offs	182

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Memorandum item: Consolidated Group Data (carrying amount)	Millions of Euros
	December 2013	December 2012	December 2011
Total loans and advances to customers, excluding the Public Sector (Business in Spain)	152,836	176,123	174,467
Total consolidated assets (total business)	582,575	621,072	582,838
Impairment losses determined collectively (total business)	2,698	3,279	3,027

The following is a description of the real estate credit risk based on the types of associated guarantees:

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Credit: Gross amount (Business in Spain)	Millions of Euros
	December 2013	December 2012	December 2011
Without secured loan	1,303	1,441	1,105
With secured loan	12,202	13,917	13,053
Terminated buildings	7,270	8,167	6,930
Homes	6,468	7,148	6,431
Other	802	1,019	499
Buildings under construction	1,238	1,716	2,448
Homes	1,202	1,663	2,374
Other	36	53	74
Land	3,694	4,034	3,675
Urbanized land	2,120	2,449	2,404
Rest of land	1,574	1,585	1,271
Total	13,505	15,358	14,158

As of December 31, 2013, 2012 and 2011, 63%, 64.3% and 66% of loans to developers were guaranteed with buildings (90.1%, 89.1% and 94% are homes), and only 27.4%, 26.3% and 26% by land, of which 57.4%, 60.7% and 65% is urbanized, respectively.

The information on the retail mortgage portfolio risk (housing mortgage) as of December 31, 2013, 2012 and 2011, is as follows:

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Housing-acquisition loans to households (Business in Spain)	Millions of Euros
	December 2013	December 2012	December 2011
With secured loan (gross amount)	82,680	87,224	79,043
of which: Impaired loans	5,088	3,163	2,371
Total	82,680	87,224	79,043

The loan to value (LTV) ratio of the above portfolio is as follows:

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December 2013 LTV Breakdown of secured loans to households for the purchase of a home (Business in Spain)	Millions of Euros
	Total risk over the amount of the last valuation available (Loan To Value-LTV)
	Less than or equal to 40%	Over 40% but less than or equal to 60%	Over 60% but less than or equal to 80%	Over 80% but less than or equal to 100%	Over 100%	Total
Gross amount	14,481	22,558	31,767	8,975	4,899	82,680
of which: Impaired loans	262	339	618	1,011	2,858	5,088

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December 2012 LTV Breakdown of secured loans to households for the purchase of a home (Business in Spain)	Millions of Euros
	Total risk over the amount of the last valuation available (Loan To Value-LTV)
	Less than or equal to 40%	Over 40% but less than or equal to 60%	Over 60% but less than or equal to 80%	Over 80% but less than or equal to 100%	Over 100%	Total
Gross amount	14,942	22,967	35,722	11,704	1,889	87,224
of which: Impaired loans	312	386	1,089	1,005	371	3,163

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December 2011 LTV Breakdown of secured loans to households for the purchase of a home (Business in Spain)	Millions of Euros
	Less than or equal to 40%	Over 40% but less than or equal to 60%	Over 60% but less than or equal to 80%	Over 80% but less than or equal to 100%	Over 100%	Total
Gross amount	12, 408	19,654	32,887	12,870	1,224	79,043
of which: Impaired loans	276	218	695	922	260	2,371

Outstanding home mortgage loans as of December 31, 2013, 2012 and 2011 had an average LTV of 50%, 51% and 50% respectively.

As of December 31, 2013, the Group also had a balance of €853 million in non-mortgage loans for the purchase of housing (of which €36 million, respectively, were NPA).

The breakdown of foreclosed, acquired, purchased or exchanged assets from debt from loans relating to business in Spain, as well as the holdings and financing to non-consolidated entities holding such assets is as follows:

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Information about assets received in payment of debts (Business in Spain)	Millions of Euros
	Gross Value	Provisions	Carrying Amount
Real estate assets from loans to the construction and real estate development sectors in Spain.	9,173	5,088	4,085
Terminated buildings	3,038	1,379	1,659
Homes	2,059	925	1,134
Other	979	454	525
Buildings under construction	845	439	406
Homes	819	423	396
Other	26	16	10
Land	5,290	3,270	2,020
Urbanized land	3,517	2,198	1,319
Rest of land	1,773	1,072	701
Real estate assets from mortgage financing for households for the purchase of a home	2,874	1,164	1,710
Rest of foreclosed real estate assets	918	411	507
Equity instruments, investments and financing to non-consolidated companies holding said assets	730	408	322
Total	13,695	7,071	6,624

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Information about assets received in payment of debts (Business in Spain)	Millions of Euros
	Gross Value	Provisions	Carrying Amount
Real estate assets from loans to the construction and real estate development sectors in Spain.	8,894	4,893	4,001
Terminated buildings	3,021	1,273	1,748
Homes	2,146	877	1,269
Other	875	396	479
Buildings under construction	908	528	380
Homes	881	512	369
Other	27	16	11
Land	4,965	3,092	1,873
Urbanized land	3,247	2,048	1,199
Rest of land	1,718	1,044	674
Real estate assets from mortgage financing for households for the purchase of a home	2,512	1,020	1,492
Rest of foreclosed real estate assets	653	273	380
Equity instruments, investments and financing to non-consolidated companies holding said assets	702	383	319
Total	12,761	6,569	6,192

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Information about assets received in payment of debts (Business in Spain)	Millions of Euros
	Gross Value	Provisions	Carrying Amount
Real estate assets from loans to the construction and real estate development sectors in Spain.	5,101	1,740	3,361
Terminated buildings	1,709	487	1,222
Homes	1,227	333	894
Other	482	154	328
Buildings under construction	360	115	245
Homes	357	114	243
Other	3	1	2
Land	3,032	1,138	1,894
Urbanized land	1,561	570	991
Rest of land	1,471	568	903
Real estate assets from mortgage financing for households for the purchase of a home	1,509	401	1,108
Rest of foreclosed real estate assets	403	167	236
Equity instruments, investments and financing to non-consolidated companies holding said assets	701	287	414
Total	7,714	2,595	5,119

As of December 31, 2013, 2012 and 2011, the gross book value of the Group’s real-estate assets from corporate financing of real-estate construction and development was €9,173 million, €8,894 million and €5,101 million, respectively, with an average coverage ratio of 55.4%, 55% and 34.1%, respectively.

The gross book value of real-estate assets from mortgage lending to households for home purchase as of December 31, 2013, 2012 and 2011, amounted to €2,874 million, €2,512 million and €1,509 million, respectively, with an average coverage ratio of 40.5%, 40.6% and 26.6% respectively.

As of December 31, 2013, 2012 and 2011, the gross book value of the BBVA Group’s total real-estate assets (business in Spain), including other real-estate assets received as debt payment, was €12,965 million, €12,059 million and €7,013 million, respectively. The coverage ratio was 51.4%, 51.3% and 32.9% respectively.

7.1.4 Credit quality of financial assets that are neither past due nor impaired

The BBVA Group has tools (“scoring” and “rating”) that enable it to rank the credit quality of its operations and customers based on an assessment and its correspondence with the probability of default (“PD”) scales. To analyze the performance of PD, the Group has a series of tracking tools and historical databases that collect the pertinent internally generated information, which can basically be grouped together into scoring and rating models.

Scoring

Scoring is a decision-making model that contributes to both the arrangement and management of retail loans: consumer loans, mortgages, credit cards for individuals, etc. Scoring is the tool used to decide to originate a loan, what amount should be originated and what strategies can help establish the price, because it is an algorithm that sorts transactions by their credit quality. This algorithm enables the BBVA Group to assign a score to each transaction requested by a customer, on the basis of a series of objective characteristics that have statistically been shown to discriminate between the quality and risk of this type of transactions. The advantage of scoring lies in its simplicity and homogeneity: all that is needed is a series of objective data for each customer, and this data is analyzed automatically using an algorithm.

There are three types of scoring, based on the information used and on its purpose:

• Reactive scoring: measures the risk of a transaction requested by an individual using variables relating to the requested transaction and to the customer’s socio-economic data available at the time of the request. The new transaction is approved or rejected depending on the score.
• Behavioral scoring: scores transactions for a given product in an outstanding risk portfolio of the entity, enabling the credit rating to be tracked and the customer’s needs to be anticipated. It uses transaction and customer variables available internally. Specifically, variables that refer to the behavior of both the product and the customer.
• Proactive scoring: gives a score at customer level using variables related to the individual’s general behavior with the entity, and to his/her payment behavior in all the contracted products. The purpose is to track the customer’s credit quality and it is used to pre-grant new transactions.

Rating

Rating tools, as opposed to scoring tools, do not assess transactions but focus on the rating of customers instead: companies, corporations, SMEs, public authorities, etc. A rating tool is an instrument that, based on a detailed financial study, helps determine a customer’s ability to meet his/her financial obligations. The final rating is usually a combination of various factors: on one hand, quantitative factors, and on the other hand, qualitative factors. It is a middle road between an individual analysis and a statistical analysis.

The main difference between ratings and scorings is that the latter are used to assess retail products, while ratings use a wholesale banking customer approach. Moreover, scorings only include objective variables, while ratings add qualitative information. And although both are based on statistical studies, adding a business view, rating tools give more weight to the business criterion compared to scoring tools.

For portfolios where the number of defaults is very low (sovereign risk, corporates, financial entities, etc.) the internal information is supplemented by “benchmarking” of the external rating agencies (Moody’s, Standard & Poor’s and Fitch). To this end, each year the PDs compiled by the rating agencies at each level of risk rating are compared, and the measurements compiled by the various agencies are mapped against those of the BBVA master rating scale.

Once the probability of default of a transaction or customer has been calculated, a "business cycle adjustment" is carried out. This is a means of establishing a measure of risk that goes beyond the time of its calculation. The aim is to capture representative information of the behavior of portfolios over a complete economic cycle. This probability is linked to the Master Rating Scale prepared by the BBVA Group to enable uniform classification of the Group’s various asset risk portfolios.

The table below shows the abridged scale used to classify the BBVA Group’s outstanding risk as of December 31, 2013:

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External rating Standard&Poor's List	Internal rating Reduced List (22 groups)	Probability of Default (basic points)
		Average	Minimum from >=	Maximum
AAA	AAA	1	-	2
AA+	AA+	2	2	3
AA	AA	3	3	4
AA-	AA-	4	4	5
A+	A+	5	5	6
A	A	8	6	9
A-	A-	10	9	11
BBB+	BBB+	14	11	17
BBB	BBB	20	17	24
BBB-	BBB-	31	24	39
BB+	BB+	51	39	67
BB	BB	88	67	116
BB-	BB-	150	116	194
B+	B+	255	194	335
B	B	441	335	581
B-	B-	785	581	1,061
CCC	CCC+	1,191	1,061	1,336
CCC	CCC	1,500	1,336	1,684
CCC	CCC-	1,890	1,684	2,121
CCC	CC+	2,381	2,121	2,673
CCC	CC	3,000	2,673	3,367
CCC	CC-	3,780	3,367	4,243

The table below outlines the distribution of exposure, including derivatives, by internal ratings, to corporates, financial entities and institutions (excluding sovereign risk), of the main BBVA Group entities as of December 31, 2013 and 2012:

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Credit Risk Distribution by Internal Rating	2013		2012
	"Amount (Millions of Euros)"	%	"Amount (Millions of Euros)"	%
AAA/AA+/AA/AA-	23,541	10.34%	24,091	9.95%
A+/A/A-	65,834	28.92%	73,526	30.37%
BBB+	24,875	10.93%	31,951	13.20%
BBB	23,953	10.52%	23,410	9.67%
BBB-	29,692	13.04%	26,788	11.07%
BB+	19,695	8.65%	15,185	6.27%
BB	10,273	4.51%	10,138	4.19%
BB-	6,198	2.72%	8,493	3.51%
B+	6,792	2.98%	8,504	3.51%
B	6,111	2.68%	8,246	3.41%
B-	4,804	2.11%	5,229	2.16%
CCC/CC	5,875	2.58%	6,501	2.69%
Total	227,643	100.00%	242,064	100.00%

These different levels and their probability of default were calculated by using as a reference the rating scales and default rates provided by the external agencies Standard & Poor’s and Moody’s. These calculations establish the levels of probability of default for the BBVA Group’s Master Rating Scale. Although this scale is common to the entire Group, the calibrations (mapping scores to PD sections/Master Rating Scale levels) are carried out at tool level for each country in which the Group has tools available.

7.1.5 Financial assets past due but not impaired

The table below provides details of financial assets past due as of December 31, 2013, 2012 and 2011, but not considered to be impaired, listed by their first past-due date:

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Financial Assets Past Due but Not Impaired 2013	Millions of Euros
	Less than 1 Month Past-Due	1 to 2 Months Past-Due	2 to 3 Months Past-Due
Loans and advances to credit institutions	-	-	-
Loans and advances to customers	659	46	161
Government	56	3	6
Other sectors	603	43	155
Debt securities	-	-	-
Total	659	46	161

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Financial Assets Past Due but Not Impaired 2012	Millions of Euros
	Less than 1 Month Past-Due	1 to 2 Months Past-Due	2 to 3 Months Past-Due
Loans and advances to credit institutions	21	-	-
Loans and advances to customers	1,067	620	310
Government	90	213	6
Other sectors	977	407	304
Debt securities	-	-	-
Total	1,088	620	310

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Financial Assets Past Due but Not Impaired 2011	Millions of Euros
	Less than 1 Month Past-Due	1 to 2 Months Past-Due	2 to 3 Months Past-Due
Loans and advances to credit institutions	-	-	-
Loans and advances to customers	1,973	386	361
Government	186	47	23
Other sectors	1,787	339	338
Debt securities	-	-	-
Total	1,973	386	361

7.1.6 Impaired assets and impairment losses

The table below shows the composition of the impaired financial assets and risks as of December 31, 2013, 2012 and 2011, broken down by heading in the accompanying consolidated balance sheet:

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Impaired Risks. Breakdown by Type of Asset and by Sector	Millions of Euros
	2013	2012	2011
Asset Instruments Impaired
Available-for-sale financial assets	90	96	125
Debt securities	90	96	125
Loans and receivables	25,477	20,001	15,452
Loans and advances to credit institutions	29	26	26
Loans and advances to customers	25,445	19,960	15,416
Debt securities	4	15	10
Total Asset Instruments Impaired (1)	25,568	20,097	15,577
Contingent Risks Impaired
Contingent Risks Impaired (2)	410	312	217
Total impaired risks (1) + (2)	25,978	20,409	15,793
Of which:
Government	170	165	135
Credit institutions	48	71	81
Other sectors	25,350	19,861	15,359
Mortgage	18,327	13,761	9,615
With partial secured loans	49	48	52
Rest	6,974	6,052	5,693
Contingent Risks Impaired	410	312	217
Total impaired risks (1) + (2)	25,978	20,409	15,793

All doubtful or impaired risks fall into this category individually, either by default or nonperforming criteria, or for reasons other than its default. The BBVA group classification as impaired financial assets is as follows::

• The classification of financial assets impaired due to customer default is objective and individualized to the following criteria:
  • The total amount of debt instruments, whoever the holder and collateral, which have principal, interest or fees amounts past due for more than 90 days as contractually agreed following objective criteria through aging calculation systems, unless directly classified as charged off.
  • Contingent risks where the third party collateral individual becomes impaired.
• The classification of financial assets impaired by reasons other than customer default is performed individually for all risks whose individual amount is material where there is reasonable doubt about their full repayment on contractually agreed terms as they show objective evidence of impairment adversely affected by the expected cash flows of the financial instrument. Objective evidence of impairment of an asset or group of financial assets includes observable data about the following:
  • Debtor’s material financial difficulties.
  • Continuous delay in interest of principal payments.
  • Refinancing of credit conditions by the counterparty.
  • Probable bankruptcy or other reorganization / liquidation.
  • Lack of an active market for a financial asset because of financial difficulties.
  • Observable data indicating a reduction in future cash flows from the initial recognition such as: a. Adverse changes in the payment status of the counterparty (delays in payments, provisions for credit cards to the limit, etc.).
  • National or local economic conditions that are correlated with “defaults” (unemployment, falling property prices, etc.).

The breakdown of impaired loans for default or reasons other than delinquency as of December 31, 2013.

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December 2013	Millions of Euros
	Impaired	Allowance for impaired porfolio
Balance of impaired loans - Past due	16,558	8,503
Balance of impaired loans - Other than past due	9,010	2,760
TOTAL	25,568	11,263
Of which:
No risk	235	122
Mortgage loans	18,327	6,688
Secured loans, except mortgage	49	20
Other	6,957	4,433

Provisions related to impaired loans secured by mortgage basically correspond to the difference between the fair value of the collateral and the carrying value.

Below are the details of the impaired financial assets as of December 31, 2013, 2012 and 2011, classified by geographical area and by the time since their oldest past-due amount or the period since they were deemed impaired:

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Impaired Assets by Geographic Area and Time Since Oldest Past-Due Amount 2013	Millions of Euros
	Less than 6 Months Past-Due	6 to 9 Months Past-Due	9 to 12 Months Past-Due	More than 12 Months Past-Due	Total
Spain	9,930	1,873	1,375	8,599	21,777
Rest of Europe	383	25	38	239	685
Mexico	795	148	114	410	1,467
South America	854	68	58	116	1,096
The United States	481	16	8	38	543
Total	12,443	2,130	1,593	9,402	25,568

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Impaired Assets by Geographic Area and Time Since Oldest Past-Due Amount 2012	Millions of Euros
	Less than 6 Months Past-Due	6 to 9 Months Past-Due	9 to 12 Months Past-Due	More than 12 Months Past-Due	Total
Spain	6,476	1,703	1,534	6,399	16,112
Rest of Europe	380	47	28	168	623
Mexico	941	112	153	289	1,495
South America	837	115	41	116	1,109
The United States	639	26	13	80	758
Total	9,273	2,003	1,770	7,052	20,097

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Impaired Assets by Geographic Area and Time Since Oldest Past-Due Amount 2011	Millions of Euros
	Less than 6 Months Past-Due	6 to 9 Months Past-Due	9 to 12 Months Past-Due	More than 12 Months Past-Due	Total
Spain	4,640	1,198	1,187	4,482	11,507
Rest of Europe	149	26	33	91	299
Mexico	809	141	130	199	1,280
South America	767	66	38	109	980
The United States	634	211	117	549	1,511
Total	7,000	1,642	1,505	5,429	15,577

Below are the details of the impaired financial assets as of December 31, 2013, 2012 and 2011, classified by type of loan according to its associated guarantee, and by the time since their oldest past-due amount or the period since they were deemed impaired:

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Impaired Assets by Type of Guarantees and Time Since Oldest Past-Due Amount 2013	Millions of Euros
	Less than 6 Months Past-Due	6 to 9 Months Past-Due	9 to 12 Months Past-Due	More than 12 Months Past-Due	Total
	Unsecured loans	4,689	529	375	1,364	6,957
Mortgage	7,470	1,601	1,218	8,038	18,327
Residential mortgage	3,250	406	432	2,390	6,478
Commercial mortgage (rural properties in operation and offices, and industrial buildings)	1,194	248	163	1,352	2,957
Other than those currently use as a family residential property of the borrower	938	225	323	2,029	3,515
Plots and other real estate assets	2,088	722	300	2,267	5,377
Other partially secured loans	49	-	-	-	49
Others	235	-	-	-	235
Total	12,443	2,130	1,593	9,402	25,568

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Impaired Assets by Type of Guarantees and Time Since Oldest Past-Due Amount 2012	Millions of Euros
	Less than 6 Months Past-Due	6 to 9 Months Past-Due	9 to 12 Months Past-Due	More than 12 Months Past-Due	Total
	Unsecured loans	4,145	539	409	1,195	6,288
Mortgage	5,080	1,464	1,360	5,857	13,761
Residential mortgage	1,570	516	457	1,796	4,339
Commercial mortgage (rural properties in operation and offices, and industrial buildings)	715	251	190	1,111	2,267
Other than those currently use as a family residential property of the borrower	732	330	318	1,162	2,542
Plots and other real estate assets	2,063	367	395	1,788	4,613
Other partially secured loans	48	-	-	-	48
Others	-	-	-	-	-
Total	9,273	2,003	1,770	7,052	20,097

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Impaired Assets by Type of Guarantees and Time Since Oldest Past-Due Amount 2011	Millions of Euros
	Less than 6 Months Past-Due	6 to 9 Months Past-Due	9 to 12 Months Past-Due	More than 12 Months Past-Due	Total
	Unsecured loans	3,382	588	528	1,411	5,910
Mortgage	3,567	1,054	977	4,016	9,615
Residential mortgage	1,081	390	357	1,373	3,202
Commercial mortgage (rural properties in operation and offices, and industrial buildings)	629	210	160	795	1,794
Rest of residential mortgage	489	137	166	653	1,445
Plots and other real estate assets	1,369	316	294	1,194	3,174
Other partially secured loans	52	-	-	-	52
Others	-	-	-	-	-
Total	7,000	1,642	1,505	5,429	15,577

The breakdown of impaired loans by sector as of December 31, 2012 and 2013 is shown below:

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Impaired loans by sector	Millions of Euros
	2013			2012
	Impaired Loans	Loan Loss Reserve	Impaired Loans as a % of Loans by Type	Impaired Loans	Loan Loss Reserve	Impaired Loans as a % of Loans by Type
Domestic:
Government	158	(11)	0.71%	145	(10)	0.57%
Credit institutions	-	-	0.00%	6	-	-
Other sectors:	20,826	(10,268)	12.60%	15,013	(7,120)	8.25%
Agriculture	142	(70)	11.18%	123	(44)	8.65%
Industrial	1,804	(886)	13.10%	914	(387)	5.56%
Real estate and construction	10,387	(6,084)	41.02%	8,032	(4,660)	26.19%
Commercial and other financial	1,103	(579)	7.10%	989	(350)	5.74%
Loans to individuals	5,745	(1,660)	6.36%	3,733	(1,171)	3.88%
Other	1,645	(988)	8.67%	1,222	(508)	6.09%
Total Domestic	20,985	(10,279)	10.89%	15,164	(7,130)	7.20%
Foreign:
Government	11	(4)	0.11%	20	(1)	0.21%
Credit institutions	33	(26)	0.19%	29	(22)	0.13%
Other sectors:	4,449	(2,290)	3.20%	4,787	(2,242)	3.47%
Agriculture	170	(137)	4.59%	178	(92)	5.43%
Industrial	288	(159)	1.93%	146	(109)	1.02%
Real estate and construction	1,734	(715)	11.44%	1,661	(469)	9.98%
Commercial and other financial	269	(166)	0.85%	703	(471)	2.05%
Loans to individuals	1,202	(646)	2.02%	1,937	(961)	3.50%
Other	785	(467)	5.54%	162	(140)	1.14%
Total Foreign	4,493	(2,320)	2.69%	4,836	(2,265)	2.85%
General reserve	-	(2,396)		-	(4,764)
Total impaired loans	25,478	(14,995)		20,000	(14,159)

The table below represents the accumulated financial income accrued as of December 31, 2013, 2012 and 2011 with origin in the impaired assets that, as mentioned in Note 2.2.1, are not recognized in the accompanying consolidated income statements as there are doubts as to the possibility of collection:

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	Millions of Euros
	2013	2012	2011
Financial Income from Impaired Assets	3,360	2,405	1,908

The changes in the year ended December 31, 2013, 2012 and 2011 in the impaired financial assets and contingent risks are as follows:

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Changes in Impaired Financial Assets and Contingent Risks	Millions of Euros
	2013	2012	2011
Balance at the beginning	20,409	15,793	15,936
Additions (A)	17,708	14,318	13,001
Decreases (B)	(7,692)	(8,236)	(8,953)
Cash collections and return to performing	(6,593)	(5,968)	(5,726)
Foreclosed assets (1)	(1,025)	(1,098)	(1,404)
Real estate assets received in lieu of payment (2)	(74)	(1,170)	(1,823)
Net additions (A)+(B)	10,016	6,081	4,048
Amounts written-off	(3,825)	(4,372)	(4,093)
Exchange differences and other (including Unnim)	(622)	2,906	(98)
Balance at the end	25,978	20,409	15,793

(1) Reflects the total amount of impaired loans derecognized from the balance sheet throughout the period as a result of mortgage foreclosures. This is equivalent to the “Foreclosed assets auctioned” derecognized from inflows (€928, €1,037 and €1,313 million in 2013, 2012 and 2011, respectively) and the inflows corresponding to "Foreclosed assets from finance leases" (€84, €61 and €91 million in 2013, 2012 and 2011, respectively). See Note 16 to the consolidated financial statements for additional information. (2) Reflects the total amount of impaired loans derecognized from the balance sheet throughout the period as a result of real estate assets received in lieu of payment. Does not reflect the acquisitions of real estate assets from customers with loans not yet impaired.

The changes in the year ended December 31, 2013, 2012 and 2011 in financial assets derecognized from the accompanying consolidated balance sheet as their recovery is considered unlikely (hereinafter “write-offs”) is shown below:

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Changes in Impaired Financial Assets Written-Off from the Balance Sheet	Millions of Euros
	2013	2012	2011
Balance at the beginning	19,265	15,870	13,367
Increase:	4,450	4,363	4,251
Decrease:	(2,319)	(1,753)	(1,863)
Re-financing or restructuring	(1)	(9)	(4)
Cash recovery	(362)	(337)	(326)
Foreclosed assets	(96)	(133)	(29)
Sales of written-off	(1,000)	(283)	(809)
Debt forgiveness	(685)	(541)	(604)
Time-barred debt and other causes	(175)	(450)	(91)
Net exchange differences	(645)	785	114
Balance at the end	20,752	19,265	15,870

As indicated in Note 2.2.1, although they have been derecognized from the balance sheet, the BBVA Group continues to attempt to collect on these write-offs, until the rights to receive them are fully extinguished, either because it is time-barred debt, the debt is forgiven, or other reasons.

7.1.7 Impairment losses

Below is a breakdown of the provisions recognized on the accompanying consolidated balance sheets to cover estimated impairment losses as of December 31, 2013, 2012 and 2011 in financial assets and contingent risks, according to the different headings under which they are classified in the accompanying consolidated balance sheet:

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Impairment losses and provisions for contingent risks		Millions of Euros
	Notes	2013	2012	2011
Available-for-sale portfolio	12	198	339	566
Loans and receivables	13	14,995	14,159	9,139
Loans and advances to customers	13.2	14,950	14,115	9,091
Loans and advances to credit institutions	13.1	40	29	38
Debt securities	13.3	5	15	11
Held to maturity investment	14	-	-	1
Impairment losses		15,192	14,498	9,705
Provisions to Contingent Risks and Commitments	25	346	322	266
Total		15,538	14,820	9,971
Of which:
For impaired portfolio		12,969	9,861	6,883
For currently non-impaired portfolio		2,569	4,959	3,088

Below are the changes in the years ended December 31, 2013, 2012 and 2011 in the estimated impairment losses, broken down by the headings in the accompanying consolidated balance sheet:

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		Millions of Euros
2013	Notes	Available-for-sale portfolio	Loans and receivables	Contingent Risks and Commitments	Total
Balance at the beginning		339	14,159	322	14,820
Increase in impairment losses charged to income		55	10,816	85	10,955
Decrease in impairment losses credited to income		(19)	(4,878)	(46)	(4,944)
Impairment losses (net)(*)	48-49	36	5,938	38	6,011
Entities incorporated/disposed in the year		-	(30)	(1)	(31)
Transfers to written-off loans		(164)	(3,673)	-	(3,838)
Exchange differences and other		(12)	(1,398)	(13)	(1,424)
Balance at the end		198	14,995	346	15,538

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		Millions of Euros
2012	Notes	Available-for-sale portfolio	Loans and receivables	Contingent Risks and Commitments	Total
Balance at the beginning		566	9,138	266	9,970
Increase in impairment losses charged to income		71	10,419	91	10,581
Decrease in impairment losses credited to income		(30)	(2,266)	(36)	(2,331)
Impairment losses (net)(*)	48-49	41	8,153	55	8,250
Entities incorporated/disposed in the year		1	2,066	5	2,073
Transfers to written-off loans		(18)	(4,107)	-	(4,125)
Exchange differences and other		(251)	(1,092)	(4)	(1,348)
Balance at the end		339	14,159	322	14,821

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		Millions of Euros
2011	Notes	Available-for-sale portfolio	Loans and receivables	Contingent Risks and Commitments	Total
Balance at the beginning		619	9,473	264	10,356
Increase in impairment losses charged to income		60	5,963	16	6,038
Decrease in impairment losses credited to income		(37)	(1,473)	(24)	(1,534)
Impairment losses (net)(*)	48-49	23	4,490	(8)	4,504
Entities incorporated/disposed in the year		-	32	-	32
Transfers to written-off loans		(75)	(4,039)	-	(4,114)
Exchange differences and other		(1)	(818)	11	(808)
Balance at the end		566	9,138	266	9,972

(*) Includes impairment losses on financial assets (Note 49) and the provisions for contingent risks (Note 48).

7.1.8 Refinancing and restructuring operations

Group policies and principles with respect to refinancing or restructuring operations

Refinancing/restructuring operations (see definition in the Glossary) are carried out with customers who have requested such an operation in order to meet their current debt payments if they are expected, or may be expected, to experience financial difficulty in making the payments in the future.

The basic aim of a refinanced/restructured operation is to provide the customer with a situation of financial viability over time by adapting repayment of the debt incurred with the Group to the customer’s new situation of fund generation. The use of refinancing or restructuring with for other purposes, such as for delaying loss recognition, is contrary to BBVA Group policies.

The BBVA Group’s refinancing/restructuring policies are based on the following general principles:

• Refinancing and restructuring is authorized according to the capacity of customers to pay the new installments. This is done by first identifying the origin of the payment difficulties and then carrying out an analysis of the customers’ viability, including an updated analysis of their economic and financial situation and capacity to pay and generate funds. If the customer is a company, the analysis also covers the situation of the sector in which it operates.
• With the aim of increasing the solvency of the operation, new guarantees and/or guarantors of demonstrable solvency are obtained where possible. An essential part of this process is an analysis of the effectiveness of both the new and original guarantees submitted.
• This analysis is carried out from the overall customer or group perspective, and not only from the perspective of a specific operation.
• Refinancing and restructuring operations do not in general increase the amount of the customer’s debt, except for the expenses inherent to the operation itself.
• The capacity to refinance and restructure debt is not delegated to the branches, but decided on by the risk units.
• The decisions adopted are reviewed from time to time with the aim of checking full compliance with refinancing and restructuring policies.

These general principles are adapted in each case according to the conditions and circumstances of each geographical area in which the Group operates, and to the different types of customers involved.

In the case of retail customers (private individuals), the main aim of the BBVA Group’s policy on refinancing/restructuring debt is to avoid default arising from a customer’s temporary liquidity problems by implementing structural solutions that do not increase the customer’s debt. The solution required is adapted to each case and the debt repayment is made easier, in accordance with the following principles:

• Analysis of the viability of operations based on the customer’s willingness and ability to pay, which may be reduced, but should nevertheless be present. The customer must therefore repay at least the interest on the operation in all cases. No arrangements may be concluded that involve a grace period for both capital and interest.
• No refinancing/restructuring operations may be concluded on debt that is not incurred with the BBVA Group.
• Customers subject to refinancing or restructuring operations are excluded from commercial campaigns of any kind.

In the case of wholesale customers (basically businesses and corporations), refinancing/restructuring is authorized according to an economic and financial viability plan based on:

• Forecast future income, margins and cash flows over a sufficiently long period (around five years) to allow entities to implement cost adjustment measures (industrial restructuring) and a business development plan that can help reduce the level of leverage to sustainable levels (capacity to access the financial markets).
• Where appropriate, the existence of a divestment plan for assets and/or business segments that can generate cash to assist the deleveraging process.
• The capacity of shareholders to contribute capital and/or guarantees that can support the viability plan.

In accordance with the Group’s policy, the conclusion of a debt refinancing/restructuring operation does not imply the debt is reclassified from "impaired" or "substandard" to outstanding risk; such a reclassification must be based on the analysis mentioned earlier of the viability and effectiveness of the new guarantees submitted.

The Group maintains the policy of including risks related to refinanced/restructured assets as either:

• "Doubtful assets", as although the customer is up to date with payments, they are classified as impaired for reasons other than their default when there are significant doubts that the terms of their refinancing may not be met;.
• "Substandard assets", because there is some material doubt as to possible non-compliance with the refinanced operation; or.
• "Normal-risk assets" (although as mentioned in the table in the following section, they continue to be classified as "normal-risk assets with special monitoring" until the conditions established for their consideration as outstanding risk are met).

The conditions established for “normal-risk assets with special monitoring” to be reclassified out of this special monitoring category are as follows:

• The customer must have paid past-due amounts (principal and interest) since the date of the renegotiation or restructuring of the operation;
• At least two years must have elapsed since the renegotiation or restructuring of the operation;
• The customer must have paid at least 20% of the outstanding principal amount of the loan as well as all the past-due amounts (principal and interest) that were outstanding as of the date of the renegotiation or restructuring of the operation; and
• It is unlikely that the borrower will have financial difficulties and, therefore, it is expected that the borrower will be able to meet its debt payment obligations (principal and interest) in a timely manner.

The BBVA Group’s refinancing/restructuring policy provides for the possibility of multiple modifications, which shall be approved on an individual basis based on the risk profile of the relevant customer and its degree of compliance with the prior payment calendar.

The internal models used to determine allowances for loan losses consider the restructuring or renegotiation of a loan, as well as re-defaults on a loan, by assigning a lower internal rating to restructured/renegotiated loans than the average internal rating assigned to non-restructured/renegotiated loans. This downgrade results in an increase in the probability of default (PD) assigned to restructured/renegotiated loans (with the resulting PD being higher than the average PD of the non- renegotiated loans in the same portfolios).”

Quantitative information on refinancing and restructuring operations:

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BBVA GROUP DECEMBER 2013 BALANCE OF FORBEARANCE (Millions of Euros)
	NORMAL
	Real estate mortgage secured		Rest of secured loans (a)		Unsecured loans
	Number of operations	Gross amount	Number of operations	Gross amount	Number of operations	Gross amount
1 Government agencies	4	466	13	45	29	811
2 Other legal entities and individual entrepreneurs	7,289	2,108	1,121	204	22,531	2,380
Of which: Financing the construction and property development	1,131	635	72	20	306	199
3 Other individuals	60,366	2,587	5,506	643	87,169	414
4 Total	67,659	5,161	6,640	892	109,729	3,605

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	POTENTIAL PROBLEM LOANS
	Real estate mortgage secured		Rest of secured loans (a)		Unsecured loans		Specific coverage
	Number of operations	Gross amount	Number of operations	Gross amount	Number of operations	Gross amount
1 Government agencies	1	1	-	-	2	25	1
2 Other legal entities and individual entrepreneurs	3,014	1,381	867	468	8,158	1,497	641
Of which: Financing the construction and property development	640	623	131	178	142	123	322
3 Other individuals	31,883	1,987	5,681	837	22,496	231	218
4 Total	34,898	3,369	6,548	1,304	30,656	1,753	860

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	IMPAIRED
	Real estate mortgage secured		Rest of secured loans (a)		Unsecured loans		Specific coverage
	Number of operations	Gross amount	Number of operations	Gross amount	Number of operations	Gross amount
1 Government agencies	1	1	4	13	13	2	0
2 Other legal entities and individual entrepreneurs	8,446	4,998	4,529	3,066	16,761	2,001	4,821
Of which: Financing the construction and property development	3,264	3,370	2,508	2,441	1,146	580	3,435
3 Other individuals	34,248	2,094	13,111	2,314	59,463	347	1,243
4 Total	42,695	7,093	17,644	5,392	76,237	2,349	6,065

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	TOTAL
	Real estate mortgage secured		Rest of secured loans (a)		Unsecured loans		Specific coverage
	Number of operations	Gross amount	Number of operations	Gross amount	Number of operations	Gross amount
1 Government agencies	6	468	17	58	44	838	1
2 Other legal entities and individual entrepreneurs	18,749	8,488	6,517	3,737	47,450	5,878	5,463
Of which: Financing the construction and property development	5,035	4,629	2,711	2,640	1,594	901	3,757
3 Other individuals	126,497	6,667	24,298	3,793	169,128	991	1,462
4 Total	145,252	15,623	30,832	7,588	216,622	7,707	6,925

(a) Includes mortgage-backed real estate operations with loan to values greater than 1, and secured operations, other than transactions secured by real estate mortgage whatever their loan to value.

In addition to these restructuring and refinancing transactions mentioned in this section, loans that were not considered impaired or renegotiated have been modified based on the criteria set out in paragraph 59 (c) of IAS 39. These loans have not been classified as renegotiated or impaired, since they were modified for commercial or competitive reasons (for instance, to improve our relationship with the client) rather than for economic or legal reasons relating to the borrower's financial situation.

NPL Ratio by type of renegotiated loan

The non performing ratio of the renegotiated portfolio is defined as the impaired balance of renegotiated loans that shows signs of difficulties as of the closing of the reporting period, divided by the total payment outstanding in that portfolio.

As of December 31, 2013, the non performing ratio for each of the portfolios of renegotiated loans is as follows:

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December 2013 NPL ratio renegotiated loan portfolio
Government agencies	1%
Commercial	56%
Of which: Construction and developer	78%
Other consumer	42%

45% of the renegotiated loans classified as doubtful was for reasons other than default (delinquency).

7.2 Market risk

Most of the headings on the Group's balance sheet that are subject to market risk are positions whose main metric for measuring their market risk is VaR.

Trading portfolio activities

The activity of each of the Group's trading floors is controlled and monitored by the risk unit. Measurement procedures are established in terms of the possible impact of negative market conditions on the trading portfolio of the Group's Global Markets units, both under ordinary circumstances and in situations of heightened risk factors.

The measurement model used to assess market risk is Value at Risk (VaR), which provides a forecast with a 99% probability of the maximum loss that can be incurred by the market positions of trading portfolios in a one-day horizon, stemming from fluctuations in equity prices, interest rates, foreign-exchange rates and commodity prices. In addition, for some positions, other risks also need to be considered, such as credit spread risk, basis risk, volatility and correlation risk.

BBVA and BBVA Bancomer have received approval from the Bank of Spain to use a model developed by the BBVA Group to calculate bank capital requirements for market risk. This model estimates VaR in accordance with the “historical simulation” methodology, which involves estimating the losses or gains that would have been produced in the current portfolio if the changes in market conditions occurring over a specific period of time were repeated. Using this information, it infers the maximum foreseeable loss in the current portfolio with a given level of confidence. It has the advantage of precisely reflecting the historical distribution of the market variables and not requiring any assumption of specific probability distribution. The historical period used in this model is two years.

In addition, the Bank follows the guidelines set out by Spanish and European authorities regarding other metrics to meet the Bank of Spain’s regulatory requirements. The new measurements of market risk for the trading portfolio include the calculation of stressed VaR (which quantifies the level of risk in extreme historical situations) and the quantification of default risks and downgrading of credit ratings of bonds and credit portfolio derivatives.

The limits structure of the BBVA Group's market risk determines a system of VaR and economic capital limits by market risk for each operating segment, with specific ad-hoc sub-limits by type of risk, activity and trading desk.

Validity tests are performed periodically on the risk measurement models used by the Group. They estimate the maximum loss that could have been incurred in the positions assessed with a certain level of probability (backtesting), as well as measurements of the impact of extreme market events on risk positions (stress testing). As an additional control measure, backtesting is conducted at trading desk level in order to enable more specific monitoring of the validity of the measurement models.

Trends in market risk

The changes in the BBVA Group’s market risk in 2013, measured as VaR without smoothing, with a 99% confidence level and a 1-day horizon, are as follows:

By geographical area, and as an annual average in 2013, 49.2% of the market risk corresponds to Global Markets (GM) Europe and GM Compass and 50.8% to the Group’s banks in Latin America, of which 35.0% is in GM Bancomer.

The average VaR in 2013 stood at €23 million, compared with €22 million in 2012 and €24 million in 2011. The number of risk factors currently used to measure portfolio risk is around 3,600. This number is dynamic and varies according to the possibility of doing business in other underlying assets and markets.

As of December 30, 2013, 2012 and 2011 VaR amounted to €22 million, €30 million and €18 million, respectively. These figures can be broken down as follows:

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VaR by Risk Factor	Millions of Euros
	Interest/Spread risk	Currency risk	Stock-market risk	Vega/Correlation risk	Diversification effect(*)	Total
2013
VaR average in the period						23
VaR max in the period	39	4	2	13	(24)	34
VaR min in the period	19	3	2	11	(18)	17
End of period VaR	22	4	3	11	(18)	22
2012
VaR average in the period						22
VaR max in the period	35	2	3	11	(21)	31
VaR min in the period	21	3	1	11	(21)	15
End of period VaR	35	3	3	9	(19)	30
2011
VaR average in the period						24
VaR max in the period						36
VaR min in the period						16
End of period VaR	27	3	7	4	(23)	18

(*) The diversification effect is the difference between the sum of the average individual risk factors and the total VaR figure that includes the implied correlation between all the variables and scenarios used in the measurement.

By type of market risk assumed by the Group’s trading portfolio, as of December 31, 2013, the main risks were interest-rate and credit spread risks, which declined by €13 million on the figure for December 31, 2012. Currency risk increased by €1 million and volatility and correlation risk increased by €2 million. Equity risk remained without significant changes with respect to the close of 2012.

The average daily change in VaR in 2013 on 2012 is basically due to Global Market Bancomer and Global Market South America increasing their average risk by 57% and 7% respectively in 2013 (with an average daily VaR of €8 million and €4 million, respectively). Global Market Europe reduced its average risk by 18% (with an average daily VaR in 2013 of €11 million).

Model validation

The internal market risk model is validated periodically by backtesting, both in BBVA, S.A. and in Bancomer.

The aim of backtesting is to validate the quality and precision of the internal model used by the BBVA Group to estimate the maximum daily loss of a portfolio, at a 99% level of confidence and a 250-day time horizon, by comparing the Group's results and the measurements of risk generated by the model. These tests showed that the internal market risk model of both BBVA, S.A. and Bancomer is adequate and precise.

Two types of backtesting were carried out in 2013:

1. "Hypothetical" backtesting: the daily VaR is compared with the results obtained, not taking into account the intraday results or the changes in the portfolio positions. This validates the appropriateness of the market risk metrics for the end-of-day position.

2. "Real" backtesting: the daily VaR is compared with the total results, including intraday transactions, but discounting the possible minimum charges or fees involved. This type of backtesting includes the intraday risk in portfolios.

In addition, each of these two types of backtesting was carried out at the level of risk factor or business type, thus making a deeper comparison of the results with respect to risk measurements.

In 2013, Bancomer carried out backtesting of the internal calculation model of VaR, comparing the daily results obtained with the estimated risk level estimated by the VaR calculation model. At the end of the year the comparison showed the model was functioning correctly, within the "green" zone (0-4 exceptions), thus validating the model, as has occurred each year since the internal market risk model was approved for the Group.

Backtesting in BBVA, S.A. did not reveal any exception in the year 2013. The sovereign debt and Spanish corporate credit spreads continued to narrow during the year and the equity markets have in general moved upward. To sum up, the backtesting carried out in 2013, both at the global group level and at the level of risk factor, did not detect any type of anomaly in the VaR calculation model.

In the case of Bancomer, portfolio losses only exceeded the daily VaR on one occasion, thus also validating the correct operation of the model according to Basel criteria.

Backtesting of the market risk model for BBVA SA	Backtesting of the market risk model for BBVA Bancomer

Estimated VaR without smoothing versus daily results

Stress test analysis

A number of stress tests are carried out on the BBVA Group's trading portfolios. First, global and local historical scenarios are used that replicate the behavior of an extreme past event, such as for example the collapse of Lehman Brothers or the "Tequilazo" crisis. These stress tests are complemented with simulated scenarios, where the aim is to generate scenarios that have a significant impact on the different portfolios, but without being anchored to any specific historical scenario. Finally, for some portfolios or positions, fixed stress tests are also carried out that have a significant impact on the market variables affecting these positions.

Historical scenarios

The historical benchmark stress scenario for the BBVA Group is Lehman Brothers, whose sudden collapse in September 2008 led to a significant impact on the behavior of financial markets at a global level. The following are the most relevant effects of this historical scenario:

• Credit shock: reflected mainly in the increase of credit spreads and downgrades in credit ratings.
• Increased volatility in most of the financial markets (giving rise to a great deal of variation in the prices of different assets (currency, equity, debt).
• Liquidity shock in the financial systems, reflected by a major movement in interbank curves, particularly in the shortest sections of the euro and dollar curves.

Simulated scenarios

Unlike the historical scenarios, which are fixed and thus do not adapt to the composition of portfolio risks at any one time, the scenario used to carry out the economic stress tests are based on a resampling methodology. This methodology uses dynamic scenarios that are recalculated regularly according to the main risks in the trading portfolios at any time. A simulation exercise is carried out on a window of data that is sufficiently extensive to include different periods of stress (data are taken from January 1, 2008 through to today), using a resampling of the historical observations. This generates a distribution of losses and gains that provides an analysis of the most extreme events occurred within the selected historical window. The advantage of this methodology is that the stress period is not pre-established, but rather a function of the portfolio held at any time. As it makes a high number of simulations (10,000) it can analyze the expected shortfall with greater richness of information than that available in the scenarios included in the VaR calculation.

The main characteristics of this methodology are the following:

• The simulations generated respect the data correlation structure.
• There is flexibility in terms of inclusion of new risk factors.
• It allows a great deal of variability to be introduced into the simulations (desirable for considering extreme events).

Structural risk

Structural interest-rate risk

The aim of on-balance-sheet interest-rate risk management is to maintain the BBVA Group’s exposure to market interest-rate fluctuations at levels in keeping with its risk strategy and profile. In pursuance of this, the BBVA Group undertakes active balance-sheet management through operations intended to optimize the levels of risk assumed against expected earnings and respect the maximum levels of accepted risk. The Asset and Liabilities Committee (ALCO) is the body that makes the decisions to act according to the proposals of the Balance-Sheet Management unit, which designs and executes the strategies to be implemented, using internal risk metrics in accordance with the corporate model.

The Corporate Risk Management (CRM) area acts as an independent unit responsible for monitoring and analyzing risks, standardizing risk management metrics and providing tools that can anticipate potential deviations from targets. In addition, it monitors the level of compliance with the risk limits established by the Executive Committee, reporting regularly to the Risk Management Committee (RMC), the Board's Risk Committee and the Executive Committee, in particular in case of significant levels of risk assumed, in accordance with current corporate policy.

The interest-rate risk metrics designed by the CRM area periodically quantify the impact that a variation of 100 basis points in market interest rates would have on the BBVA Group’s net interest income and economic value (see Glossary). This is complemented with metrics in probabilistic terms; "economic capital" (maximum estimated loss in economic value) and the "risk margin" (the maximum estimated loss in net interest income). In all cases, the metrics are calculated as originated by the structural interest-rate risk of banking activity (excluding trading floor activity), based on simulation models of interest-rate curves. With the same frequency, the Group performs stress tests and scenario analyses to complement its assessment of its interest-rate risk profile.

The BBVA Group's corporate risk model allows hypotheses to be established on the behavior of certain products, particularly those without explicit or contractual expiry. These assumptions are based on studies that calculate the relationship between the return on these products and market rates. They enable specific balances to be disaggregated into "trend-based" (long-term) and "seasonal or volatile" (short-term residual maturity) balances.

In 2013, the weakness of the economic recovery, together with the fiscal adjustments and risks of deflation, have maintained interest rates in Europe and the U.S. at all-time lows. At the same time, the growth of emerging markets has slowed as a result of the fall in commodity prices and tougher financing conditions, leading to more expansive policies by central banks. In this interest-rate situation, the BBVA Group's structural interest-rate risk has remained under control, within the limits established by the Executive Committee. The current levels of the euro and US dollar, which are exceptionally low, also constitute a barrier to the Group's exposure, which has a favorable position with respect to rises in market rates.

Below are the average interest-rate risk exposure levels in terms of sensitivity of the main geographical areas of the BBVA Group in 2013:

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	Impact on Net Interest Income (*)		Impact on Economic Value (**)
Sensitivity to interest-rate analysis - December 2013	100 Basis-Point Increase	100 Basis-Point Decrease	100 Basis-Point Increase	100 Basis-Point Decrease
Europe	6.41%	(7.80)%	1.58%	(1.92)%
Mexico	2.27%	(2.27)%	(1.39)%	1.59%
The United States	6.27%	(8.11)%	1.60%	(6.51)%
South America	1.53%	(1.39)%	(2.93)%	3.01%
BBVA Group	3.42%	(3.90)%	0.80%	(1.66)%

(*) Percentage of "1 year" net interest income forecast for each unit. (**) Percentage of core capital for each unit.

Structural currency risk

Structural currency risk is basically caused by exposure to variations in foreign-currency exchange rates that arise in the BBVA Group’s foreign subsidiaries and foreign branches financed in a different currency to that of the investment.

Structural exchange-rate risk management in BBVA aims to minimize the potential negative impact from fluctuations in exchange rates on the capital ratios and on the contribution to earnings of international investments maintained on a long-term basis by the Group.

The Asset and Liabilities Committee (ALCO) is the body that makes the decisions to act according to the proposals of the Balance-Sheet Management unit, which designs and executes the strategies to be implemented, using internal risk metrics in accordance with the corporate model.

The Corporate Risk Management (CRM) area acts as an independent unit responsible for monitoring and analyzing risks, standardizing risk management metrics and providing tools that can anticipate potential deviations from targets. In addition, it monitors the level of compliance with the risk limits established by the Executive Committee, reporting regularly to the Risk Management Committee (RMC), the Board's Risk Committee and the Executive Committee, in particular in case of significant levels of risk assumed, in accordance with current corporate policy.

The corporate measurement model is based on the simulation of exchange-rate scenarios, using their historical change and evaluating impacts in three core management areas: capital ratio, equity and the Group's income statement. The risk mitigation measures aimed at reducing exchange-rate risk exposures are considered in calculating risk estimates. The diversification resulting from investment in different geographical areas is also taken into account. In addition, in order to complement the metrics in the three core management areas, the risk measurements are complemented with analyses of scenarios, stress testing and backtesting, thus giving a more complete overview of the Group’s exposure.

In 2013, in an environment characterized by uncertainty and volatility in currency markets, the risk mitigation level of the carrying value of the BBVA Group's holdings in foreign currency remained at 39%. The estimated exposure coverage of 2013 earnings in foreign currency has been 43%.

In 2013, the average asset exposure sensitivity to a 1% depreciation in exchange rates against the euro in the main currencies to which BBVA is exposed stood at €200 million, with 34% in the Mexican peso, 26% in South American currencies, 23% in Asian and Turkish currencies, and 15% in the US dollar.

Structural equity risk

The BBVA Group's exposure to structural equity risk is basically derived from investments in industrial and financial companies with medium- and long-term investment horizons. This exposure is mitigated through net short positions held in derivatives of their underlying assets, used to limit portfolio sensitivity to potential falls in prices.

The Corporate Risk Management (CRM) area acts as an independent unit responsible for monitoring and analyzing risks, standardizing risk management metrics and providing tools that can anticipate potential deviations from targets. In addition, it monitors the level of compliance with the risk limits established by the Executive Committee, reporting regularly to the Risk Management Committee (RMC), the Board's Risk Committee and the Executive Committee, in particular in case of significant levels of risk assumed, in accordance with current corporate policy.

The structural equity risk metrics designed by CRM according to the corporate model contribute to the effective monitoring of risk by estimating the sensitivity figures and the capital necessary to cover possible unexpected losses due to variations in the value of the companies making up the Group’s equity portfolio, at a confidence level that corresponds to the institution’s target rating, and taking into account the liquidity of the positions and the statistical performance of the assets under consideration. These figures are supplemented by periodic stress tests, backtesting and scenario analyses.

The aggregate sensitivity of the BBVA Group's consolidated equity to a 1% fall in the price of shares stood at €31 million as of December 31, 2013, and the sensitivity of pre-tax profit is estimated at €1 million. These figures are estimated taking into account the exposure in shares valued at market prices, or if not applicable, at fair value (except for the positions in the Treasury Area portfolios) and the net delta-equivalent positions in options on their underlyings.

7.3 Liquidity risk

The aim of liquidity risk management, tracking and control is to ensure, in the short term, that the payment commitments of the BBVA Group entities can be duly met without having to resort to borrowing funds under burdensome terms, or damaging the image and reputation of the entities. In the medium term the aim is to ensure that the Group’s financing structure is ideal and that it is moving in the right direction with respect to the economic situation, the markets and regulatory changes.

Management of liquidity and structural finance within the BBVA Group is based on the principle of the financial autonomy of the entities that make it up. This approach helps prevent and limit liquidity risk by reducing the Group’s vulnerability in periods of high risk. This decentralized management avoids possible contagion due to a crisis that could affect only one or various BBVA Group entities, which must cover their liquidity needs independently in the markets where they operate. Liquidity Management Units have been set up for this reason in the geographical areas where the main foreign subsidiaries operate, and also for the parent BBVA S.A.

Thus a core principle of the BBVA Group’s liquidity management is the financial independence of its banking subsidiaries. This aims to ensure that the cost of liquidity is correctly reflected in price formation. Accordingly, a liquidity pool is maintained at an individual entity level, both in Banco Bilbao Vizcaya Argentaria, S.A. and in the banking subsidiaries, including BBVA Compass, BBVA Bancomer and the Latin American subsidiaries. The only exception to this principle is Banco Bilbao Vizcaya Argentaria (Portugal), S.A., which is funded by Banco Bilbao Vizcaya Argentaria, S.A. Banco Bilbao Vizcaya Argentaria (Portugal), S.A. accounted for 0.91% of total consolidated assets and 0.56% of total consolidated liabilities as of December 31, 2013.

The Group's main source of funds is the customer deposit base, which consists primarily of demand, savings and time deposit accounts. In addition to relying on customer deposits, the Group also accesses the interbank market (overnight and time deposits) and domestic and international capital markets for our additional liquidity requirements. To access the capital markets, a series of domestic and international programs are in place for the issuance of commercial paper and medium- and long-term debt. A diversified liquidity pool of liquid assets and securitized assets are also generally maintained an individual entity level. Another source of liquidity is generation of cash flow from operations. Finally, funding requirements are supplemented with borrowings from the Bank of Spain and the European Central Bank (ECB) or the respective central banks of the countries where the subsidiaries are located.

The table below shows the types and amounts of instruments included in the liquidity pool of the most significant units:

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2013	Millions of Euros
	BBVA Eurozone (1)	BBVA Bancomer	BBVA Compass	Others
Cash and balances with central banks	10,826	6,159	1,952	6,843
Assets for credit operations with central banks	32,261	3,058	9,810	7,688
Central governments issues	16,500	229	904	7,199
Of Which: Spanish government securities	14,341	-	-	-
Other issues	15,761	2,829	2,224	489
Loans	-	-	6,682	-
Other non-eligible liquid assets	4,735	425	278	396
ACCUMULATED AVAILABLE BALANCE	47,822	9,642	12,040	14,927

(1) Included Banco Bilbao Vizcaya Argentaria, S.A. y Banco Bilbao Vizcaya Argentaria (Portugal), S.A.

The Asset and Liabilities Committee (ALCO) is the body that makes the decisions to act according to the proposals of the Balance-Sheet Management unit, which designs and executes the strategies to be implemented, using internal risk metrics in accordance with the corporate model. Both the evaluation and execution of actions in each of the Liquidity Management Units are carried out by ALCO and the management unit corresponding to these Liquidity Management Units.

The Corporate Risk Management (CRM) area acts as an independent unit responsible for monitoring and analyzing risks, standardizing risk management metrics and providing tools that can anticipate potential deviations from targets. In addition, it monitors the level of compliance with the risk limits established by the Executive Committee, reporting regularly to the Risk Management Committee (RMC), the Board's Risk Committee and the Executive Committee, in particular in case of significant levels of risk assumed, in accordance with current corporate policy.

The liquidity and funding risk metrics designed by CRM maintain an adequate risk profile for the BBVA Group's Liquidity and Funding Risk Appetite Framework, in accordance with the retail model on which its business activity is based. The objectives included in the decision-making process for managing liquidity and funding risk are specified for this purpose. Among the metrics, the loan-to-stable-customer-deposit ratio is one of the core management tools. It ensures that there are adequate levels of self-funding for lending on the balance sheet at all times. Once the levels of self-funding of the balance sheet have been established, the second core element is the correct diversification of the structure of wholesale funding, to avoid the excessive dependence on short-term funding. In addition, the internal metrics promote the short-term resistance of the liquidity risk profile, guaranteeing that each Liquidity Management Unit has sufficient collateral to face the risk of an unexpected change in the behavior of markets or wholesale counterparties that prevents access to funding or forces access at unreasonable prices.

In addition, the stress analyses are a fundamental element in the scheme of tracking liquidity risk and funding, as they anticipate deviations from the liquidity targets and limits established by the Risk Appetite Framework. They also play a key role in the design of the Liquidity Contingency Plan and in defining the measures for action that would be adopted to realign the risk profile should this be necessary. The stress scenarios cover a whole range of events and levels of severity, with the aim of revealing the vulnerability of the funding structure in the event of a comprehensive test on the whole of the balance sheet.

These stress results carried out regularly by CRM reveal that BBVA has a sufficient buffer of liquid assets to face the estimated liquidity shocks in a scenario such as a combination of a systemic crisis and an internal crisis with a major downgrade in the entity's rating (up to three notches).

In 2013, one of the most significant aspects has been a steady improvement in the stability of the wholesale funding markets in Europe as a result of the positive trend in sovereign risk premiums, in an environment of improving growth expectations for the Eurozone and high market liquidity. In this context, BBVA has managed to strengthen its liquidity position and improve its funding structure based on the growth of self-funding from stable customer funds.

With respect to the new regulatory framework, the BBVA Group has continued to develop an orderly plan to adapt to the regulatory ratios so as to allow it to adopt best practices and the most effective and strict criteria for their implementation sufficiently in advance. In January 2013 some of the aspects of the document published by the Banking Supervisory Committee published in December 2010 on the Liquidity Coverage Ratio (LCR) were updated and made more flexible. They include incorporating the ratio as a regulatory requirement on January 1, 2015, with a 60% demand for compliance, to be increased to 100% by January 2019.

In addition, the Bank Supervisory Committee has initiated once more the review of the “Net Stable Funding Ratio” (NSFR), which aims to increase the weight of medium- and long-term funding on the banks' balance sheets. It will be under review until mid-2016 and become a regulatory requirement starting on January 1, 2018.

The BBVA Group has continued to develop a plan to adapt to the regulatory ratios so as to allow it to adopt best practices and the most effective and strict criteria for their implementation sufficiently in advance.

7.4 Residual maturity

Below is a breakdown by contractual maturity of the balances of certain headings in the accompanying consolidated balance sheets, excluding any valuation adjustments or impairment losses:

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Contractual Maturities 2013	Millions of Euros
	Demand	Up to 1 Month	1 to 3 Months	3 to 12 Months	1 to 5 Years	Over 5 years	Total
Asset -
Cash and balances with central banks	30,851	2,200	706	734	396	-	34,887
Loans and advances to credit institutions	3,641	11,474	2,637	1,552	2,389	1,098	22,791
Loans and advances to customers	27,428	26,551	19,930	43,295	87,828	131,833	336,865
Debt securities	146	2,991	1,944	14,793	45,846	40,463	106,183
Derivatives (trading and hedging)	-	1,081	1,435	3,589	12,705	21,359	40,169
Total	62,066	44,297	26,652	63,963	149,164	194,753	540,895
Liabilities -
Deposits from central banks	82	13,722	1,350	1,015	14,525	-	30,694
Deposits from credit institutions	3,314	22,796	8,911	5,570	8,897	2,766	52,254
Deposits from customers	140,846	55,418	14,692	44,575	33,080	10,994	299,605
Debt certificates (including bonds)	-	4,039	383	9,901	35,581	12,640	62,544
Subordinated liabilities	-	38	1	993	1,389	7,847	10,268
Other financial liabilities	316	4,253	404	297	367	21	5,658
Short positions	7,528	-	-	-	-	-	7,528
Derivatives (trading and hedging)	-	904	1,448	3,749	12,778	21,032	39,912
Total	152,086	101,170	27,189	66,100	106,617	55,300	508,463
Contingent Liabilities	-	-	-	-	-	-	-
Financial guarantees	751	1,455	212	1,561	3,059	432	7,471

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Contractual Maturities 2012	Millions of Euros
	Demand	Up to 1 Month	1 to 3 Months	3 to 12 Months	1 to 5 Years	Over 5 years	Total
Asset -
Cash and balances with central banks	31,488	2,514	605	364	505	-	35,477
Loans and advances to credit institutions	3,351	14,459	1,479	1,732	3,367	984	25,372
Loans and advances to customers	23,005	33,029	22,157	41,892	92,784	142,352	355,218
Debt securities	198	3,243	4,464	11,156	46,217	40,024	105,301
Derivatives (trading and hedging)	-	1,318	1,361	3,765	15,655	31,444	53,544
Total	58,041	54,563	30,066	58,910	158,529	214,804	574,912
Liabilities -
Deposits from central banks	18	8,095	3,232	-	34,495	350	46,190
Deposits from credit institutions	3,839	29,488	2,136	7,137	8,937	3,909	55,446
Deposits from customers	136,039	45,859	14,758	50,202	26,578	8,251	281,687
Debt certificates (including bonds)	-	6,065	4,115	17,991	38,966	14,787	81,924
Subordinated liabilities	-	50	-	724	3,242	7,090	11,106
Other financial liabilities	4,263	1,813	383	253	844	34	7,590
Short positions	6,580	-	-	-	-	-	6,580
Derivatives (trading and hedging)	-	1,085	1,260	3,804	15,314	30,759	52,222
Total	150,739	92,455	25,884	80,111	128,377	65,179	542,744

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Contractual Maturities 2011	Millions of Euros
	Demand	Up to 1 Month	1 to 3 Months	3 to 12 Months	1 to 5 Years	Over 5 years	Total
Asset -
Cash and balances with central banks	27,070	1,393	636	319	411	-	29,829
Loans and advances to credit institutions	2,599	7,083	1,307	3,492	7,137	2,783	24,401
Loans and advances to customers	17,539	37,705	22,276	44,594	90,649	137,476	350,239
Debt securities	806	2,199	2,643	7,684	37,919	32,744	83,995
Derivatives (trading and hedging)	-	1,795	1,873	4,694	16,200	27,310	51,872
Total	48,014	50,175	28,735	60,783	152,316	200,313	540,336
Liabilities -
Deposits from central banks	3	19,305	2,609	-	10,950	1	32,868
Deposits from credit institutions	2,101	26,009	4,173	5,315	15,228	3,500	56,326
Deposits from customers	112,877	67,324	16,521	39,964	27,957	6,624	271,267
Debt certificates (including bonds)	-	2,012	1,861	11,246	45,440	16,971	77,530
Subordinated liabilities	-	-	109	37	4,856	9,427	14,429
Other financial liabilities	4,667	1,194	330	456	1,167	1,217	9,031
Short positions	4,611	-	-	-	-	-	4,611
Derivatives (trading and hedging)	-	1,683	1,632	5,219	15,494	25,249	49,277
Total	124,259	117,527	27,235	62,237	121,092	62,989	515,339