4.7.1. Hedging based on netting operations on and off the balance sheet
Within the limits established by the rules on netting in each one of the countries in which it operates, the Group negotiates with its customers the assignment of the derivatives business to master agreements (e.g., ISDA or CMOF) that include the netting of off-balance sheet transactions.
The text of each agreement in each case determines the transactions subject to netting.
The mitigation of counterparty risk exposure stemming from the use of mitigation techniques (netting plus the use of collateral agreements) leads to a reduction in overall exposure (current market value plus potential risk).
4.7.2. Hedging based on collaterals
Management and valuation policies and procedures
The procedures for management and valuation of collateral are included in the Policies and Procedures for Retail and Wholesale Credit Risk.
These Policies and Procedures lay down the basic principles of credit risk management, which includes the management of the collateral assigned in transactions with customers. Accordingly, the risk management model jointly values the existence of a suitable cash flow generation by the obligor that enables them to service the debt, together with the existence of suitable and sufficient guarantees that ensure the recovery of the credit when the obligor’s circumstances render them unable to meet their obligations.
The valuation of collateral is governed by principles of prudence that entail the use of appraisals in real-estate collateral, the market price in market securities, the trading price of shares in mutual funds, etc. These principles of prudence set out the milestones under which collateral valuations need to be updated, according to local regulations.
With respect to the entities that carry out the valuation of the collateral, principles are in place in accordance with local regulations that govern their level of relationship and dependence with the Group and their recognition by the local regulator. These valuations will be updated by statistical methods, indices or appraisals of goods, which shall be carried out under the generally accepted standards in each market and in accordance with local regulations.
All collateral assigned are to be properly instrumented and recorded in the corresponding register, as well as receiving the approval of the Group’s legal units.
Types of collaterals
As collateral for the purpose of calculating equity, the Group uses the coverage established in the Solvency Circular. The following are the main collaterals available in the Group:
- Mortgage collateral: The collateral is the property upon which the loan is arranged.
Outstanding home mortgage loans as of December 31, 2013 and 2012 had an average LTV of 50% and 51% respectively.
-
Financial guarantees: Their object is any one of the following financial assets, as per the specifications of Rule Thirty-nine in the Solvency Circular:
- Cash deposits, deposit certificates or similar securities.
- Debt securities issued for the different categories.
- Shares or convertible bonds.
-
Other property and rights used as collateral: The following property and rights are considered to be acceptable as collateral:
- Cash deposits, deposit certificates or similar instruments held in third-party institutions other than the lending credit institution, when these are pledged in favor of the latter.
- Life insurance policies pledged in favor of the lending credit institution.
- Debt securities issued by other institutions, provided that these securities are to be repurchased at a pre-set price by the issuing institutions at the request of the holder of the securities.
The exposures covered by financial collateral and other eligible collaterals eligible under the advanced measurement approach stand at €105,545 million and €80,008 million as of December 31, 2013 and 2012, respectively.
The value of the exposure covered with financial collateral and other collateral calculated using the standardized approach is as follows:
Table 35. Exposure covered with financial collateral and other collateral calculated using the standardized approach
2013
(Millions of euros)
|
|
Type of collateral | ||
|---|---|---|---|
| Categories of exposure | Exposure covered by financial colateral | Exposure covered by other eligible colateral | Eligible collateral of a financial nature after volatility adjustments |
| Central governments and central banks | 0 | 0 | 8,441 |
| Regional governments and local authorities | 24 | 19 | 1 |
| Public-sector institutions and other public entities | 169 | 0 | 1 |
| Multilateral development banks | 0 | 0 | 0 |
| International organizations | 0 | 0 | 0 |
| Institutions | 679 | 30 | 36 |
| SMEs | 1,441 | 358 | 250 |
| Retail | 851 | 96 | 289 |
| Collateralized with real-estate property | 22 | 305 | 31 |
| Default status | 14 | 15 | 14 |
| High risk | 0 | 0 | 4 |
| Guaranteed bonds | 0 | 0 | 0 |
| Short-term to institutions and corporates | 0 | 0 | 0 |
| Collective Investment Institutions | 0 | 0 | 554 |
| Other exposures | 0 | 0 | 4 |
| TOTAL EXPOSURE VALUE AFTER GUARANTEES | 3,202 | 824 | 9,625 |
2012
(Millions of euros)
|
|
Type of collateral | ||
|---|---|---|---|
| Categories of exposure | Exposure covered by financial colateral | Exposure covered by other eligible colateral | Eligible collateral of a financial nature after volatility adjustments |
| Central governments and central banks | 0 | 0 | 15,270 |
| Regional governments and local authorities | 19 | 32 | 0 |
| Public-sector institutions and other public entities | 241 | 0 | 30 |
| Multilateral development banks | 0 | 0 | 0 |
| International organizations | 0 | 0 | 0 |
| Institutions | 671 | 1 | 51 |
| SMEs | 2,038 | 257 | 334 |
| Retail | 1,043 | 167 | 579 |
| Collateralized with real-estate property | 38 | 1,115 | 14 |
| Default status | 55 | 27 | 10 |
| High risk | 0 | 4 | 10 |
| Guaranteed bonds | 0 | 0 | 0 |
| Short-term to institutions and corporates | 11 | 0 | 0 |
| Collective Investment Institutions | 0 | 0 | 0 |
| Other exposures | 0 | 0 | 7 |
| TOTAL EXPOSURE VALUE AFTER GUARANTEES | 4,115 | 1,602 | 16,306 |
4.7.3. Hedging based on personal guarantees
According to the Solvency Circular, signature guarantees are personal guarantees, including those arising from credit insurances, that have been awarded by the providers of coverage defined in Rule Forty in the Solvency Circular.
As of year-end 2013 and 2012, the Group did not use credit derivatives as collateral.
In the category of Retail exposure under the advanced measurement approach, guarantees impact on the PD and do not reduce the amount of the credit risk in EAD.
The total value of the exposure covered with personal guarantees is as follows:
Table 36. Exposure covered by personal guarantees. Standardized and advanced approach
(Millions of euros)
|
|
Exposure covered by personal guarantees | |
|---|---|---|
| Categories of exposure | 2013 | 2012 |
| Central governments and central banks | 0 | 0 |
| Regional governments and local authorities | 2,329 | 2,307 |
| Public-sector institutions and other public entities | 123 | 11 |
| Multilateral development banks | 0 | 0 |
| International organizations | 0 | 0 |
| Institutions | 0 | 69 |
| SMEs | 3,456 | 3,603 |
| Retail | 1,541 | 1,357 |
| Collateralized with real-estate property | 974 | 1,648 |
| Default status | 1,896 | 748 |
| High risk | 182 | 144 |
| Guaranteed bonds | 0 | 0 |
| Institutions and corporates with credit quality, short-term | 0 | 0 |
| Collective Investment Institutions | 0 | 0 |
| Other exposures | 303 | 1,468 |
| TOTAL EXPOSURE VALUE AFTER COLLATERAL UNDER STANDARDIZED APPROACH |
10,804 | 11,356 |
| Central governments and central banks | 581 | 497 |
| Institutions | 1,026 | 592 |
| SMEs | 6,184 | 6,043 |
| TOTAL EXPOSURE VALUE AFTER COLLATERAL UNDER ADVANCED APPROACH |
7,791 | 7,132 |
| TOTAL | 18,595 | 18,488 |
4.7.4. Risk concentration
Within the context of credit risk mitigation operations, there are no concentrations of counterparty risk, given the risk management policies applied and the netting and collateral agreements entered into with the main counterparties.