In most cases, maximum exposure to credit risk is reduced by collateral, credit enhancements and other actions which mitigate the Group’s exposure. The Group applies a credit risk protection and mitigation policy deriving from its business model focused on relationship banking.
On this basis, the provision of collaterals may be a necessary instrument but one that is not sufficient when taking risks; this is because for the Group to assume risks, it needs to verify the payment or resource generation capacity to comply with repayment of the risk incurred under the agreed conditions.
This is carried out through a prudent risk management policy which involves analyzing the financial risk in a transaction, based on the repayment or resource generation capacity of the credit receiver, the provision of collaterals -in any of the generally accepted ways (monetary, collateral or personal collaterals and hedging)- appropriate to the risk borne, and lastly on the valuation of the recovery risk (the asset’s liquidity) of the collaterals received.
The procedures for the management and valuation of collateral 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 collateral 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 collateral 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:
- Trading book: The collaterals 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 collaterals, depending on counterparty solvency and the nature of the transaction.
- Other financial assets and liabilities designated at fair value through profit or loss and available-for-sale financial assets: Collaterals or credit enhancements obtained directly from the issuer or counterparty are inherent in the structure of the instrument.
- Loans and receivables:
- Loans and advances to credit institutions: These usually only have the counterparty’s personal collateral.
- Loans and advances to customers: Most of these operations are backed by personal collaterals extended by the counterparty. There may also be collateral to secure loans and advances to customers (such as mortgages, cash collaterals, pledged securities and other collateral), or to obtain other credit enhancements (bonds, hedging, etc.).
- Debt securities: Collaterals or credit enhancements obtained directly from the issuer or counterparty are inherent in the structure of the instrument.