The liquidity and planning strategy in the BBVA Group is executed with segregation of roles and responsibilities, with the areas involved optimizing risk management and decision-making being properly escalated to the various governing bodies. The areas and bodies that exercise the most relevant functions in managing liquidity and funding risk are determined.
The Assets and Liabilities Committee (ALCO) makes decisions based on the proposals submitted by the Balance-Sheet Management unit, which designs and executes the strategies to be implemented, using the internal risk metrics in accordance with the corporate model. The evaluation and execution of the actions in each one of the UGLs are carried out by ALCO and the Management units corresponding to these UGLs.
The Global Risk Management (GRM) corporate area acts as an independent unit that is responsible for monitoring and analyzing risks, standardizing risk management metrics and providing tools that can anticipate potential deviations from targets. It also monitors the level of compliance with the risk limits established by the Executive Committee and reports regularly to the Risk Management Committee, the Board of Directors’ Risk Committee and the Executive Committee, in accordance with the current corporate policy.
The liquidity and funding risk metrics designed by GRM preserve a risk profile appropriate for the BBVA Group’s Liquidity and Funding Risk Appetite Framework, as per the retail business model that governs its activity. To this end, objectives are specified and integrated into the decision-making process for managing liquidity and funding risk. These metrics are monitored individually for each UGL and target profiles are established based on internal methodologies that consider both the activity of each individual UGL, within the context of the situation of the economy and the financial sector it belongs to, and the prospects in terms of business capacity and risks in their activity. These metrics include:
- The Loan to Stable Customer Deposit ratio becomes one of the main elements of management, ensuring that adequate self-funding levels exist at all times for the on-balance-sheet loan book. The objectives of this ratio have been established in the 100%-125% range based on the UGL and according to the methodology in place. In 2013 there have been no overruns for any UGL in relation to the limits established for this ratio, and significant progress has been made in reaching the target set for all the UGLs.
- Supplementing the self-funding levels established for the balance sheet, the second element involves promoting proper diversification of the wholesale funding structure, avoiding excessive reliance on short-term funding. The maximum accumulated amounts acceptable for resorting to short-term funding are established by intervals of time. In general, all the UGLs have maintained this resorting within the acceptable limits and in the specific case of the Euro UGL the margin has been kept at close to 50%.
- In order to maintain control over short-term liquidity management, the internal metrics promote short-term resistance of the liquidity risk profile, guaranteeing that each UGL has sufficient collateral to deal with the risk of an unexpected change in the behavior of the markets or wholesale counterparties that prevents access to funding or requires the UGL to access funding at unreasonable prices. The requirements are established for a time horizon of up to 12 months and according to intervals of time. In the case of the Euro UGL, in 2013 the sufficiency of collateral was above 125% as an annual average for all the intervals of time up to 12 months.
In addition, stress analyses are an essential element for monitoring liquidity and funding risk, since they make it possible to anticipate deviations from the liquidity targets and limits established by the Risk Appetite Framework. They also play a fundamental role in the design of the Liquidity Contingency Plan and the definition of the measures to be adopted to rectify the risk profile if necessary. Because of their proactive nature, the results of the stress tests play a key role in the design of contingency plans and the definition of the strategies to be implemented to deal with a liquidity stress event.
Stress analysis considers four scenarios, one central and three crisis-related: systemic crisis; unexpected internal crisis with a considerable rating downgrade and/or affecting the ability to issue in wholesale markets and the perception of business risk by the banking intermediaries and the bank’s customers; and a mixed scenario, as a combination of the two aforementioned scenarios. Each scenario considers the following factors: liquidity existing on the market, customer behavior and sources of funding, impact of rating downgrades, market values of liquid assets and collateral in a situation of stress, and the interaction between liquidity requirements and the evolution of the bank’s asset quality.
In short, the stress scenarios cover a wide range of events and degrees of severity in order to reveal the vulnerabilities of the funding structure to a full test on the entire balance sheet. In the specific case of the Euro UGL, these stress results show that throughout 2013 it maintained a sufficient buffer of assets to cover the estimated liquidity outflows in a combined scenario of a systemic crisis and an unexpected internal crisis.
To sum up, for the BBVA Group’s UGLs as a whole, 2013 saw a strengthening of the funding and short-term liquidity management structures that reduce the vulnerability of the balance sheets to situations of stress. In specific cases, such as the Euro Balance Sheet, after recent years characterized by an environment of adaptation to the demand of activity and the reinforcement of the lines of finance, the most significant aspect in 2013 was the gradual improvement in the stability of wholesale funding markets. As a result of the positive evolution of the sovereign risk premiums in Europe and the improved growth forecasts for the euro zone, the Euro balance sheet has also benefited from the high liquidity available in the markets. In this context, BBVA has managed to reinforce the liquidity position and improve its funding structure on the basis of the growth of its self-funding from stable customer funds, reducing by 7 percentage points the weight of funding needs on the entire liquidity balance of the Euro UGL. It also closed the Structural Gap at around €40bn, which came mostly from the improvement in the Credit Gap (€33bn).
As for the new regulatory framework, the BBVA Group is continuing to develop a orderly plan to adapt to the regulatory ratios that will allow it to adopt best practices and the most effective and strictest criteria for their implementation sufficiently in advance. In January 2013, some aspects of the document published by the Committee on Banking Supervision in December 2010 in relation to the Liquidity Coverage Ratio (LCR) were updated and made more flexible. One of these aspects is that the ratio will be included as a regulatory requirement as of January 1, 2015, associated with a demand for 60% compliance, which should reach 100% by January 2019. This reference was exceeded throughout 2013 in the successive calculations of the LCR for the BBVA Group and maintained above 100%.
In addition, the Committee on Banking Supervision has once again begun to review the Net Stable Funding Ratio (NSFR), which seeks to increase the weight of medium and long-term funding on the banks’ balance sheets. It will be under review until mid-2016 and will become a regulatory requirement starting on January 1, 2018. This review has had a positive effect on the calculations obtained for the BBVA Group, similarly to other banks predominantly engaged in retail activities, which provides ratio levels slightly above the required reference.