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 its operating countries, 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).
As pointed out above, financial assets and liabilities may be the object of netting, in other words presentation for a net amount on the balance sheet, only when the Group's entities comply with the provisions of IAS 32 - Paragraph 42, and thus have the legal right to offset the amounts recognized, and the intention to settle the net amount or to divest the asset and pay the liability at the same time.
4.7.2. Hedging based on collaterals
4.7.2.1. 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 collaterals that ensure the recovery of the credit when the obligor’s circumstances render them unable to meet their obligations.
The valuation of the collateral is governed by prudential principles that involve the use of appraisal for real-estate collaterals, market price for shares, quoted value of shares in a mutual fund, etc.
The milestones under which the valuations of the collaterals must be updated in accordance with local regulation are established under these prudential principles.
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 is to be properly instrumented and recorded in the corresponding register, and approved by the Group’s legal units.
4.7.2.2. Types of collaterals
As collateral for the purpose of calculating equity, the Group uses the coverage established in the solvency regulations. The following are the main collaterals available in the Group:
- Mortgage collateral: The collateral is the property upon which the loan is arranged.
-
Financial collateral: Their object is any one of the following financial assets, as per articles 197 and 198 of the solvency regulations.
- 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 acceptable as collateral as per article 200 of the solvency regulations.
- 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 value of the exposure covered with financial collateral and other collateral calculated using the standardized approach is as follows:
TABLE 44: Exposure covered with financial collateral and other collateral calculated using the standardized approach
2014
(Millions of euros)
| Categories of Exposure | STANDARDIZED APPROACH | ADVANCED MEASUREMENT APPROACH | ||
|---|---|---|---|---|
| Exposure covered by financial collateral | Exposure covered by other eligible collateral | Exposure covered by financial collateral | Exposure covered by other eligible collateral | |
| Central governments or central banks | 3,000 | 0 | 1 | 7 |
| Regional governments or local authorities | 14 | 0 | 0 | 0 |
| Public sector entities | 362 | 38 | 0 | 0 |
| Multilateral Development Banks | 0 | 0 | 0 | 0 |
| International organizations | 0 | 0 | 0 | 0 |
| Institutions | 391 | 2 | 59,901 | 1,670 |
| Corporates | 3,219 | 145 | 38,878 | 4,549 |
| Retail | 1,276 | 59 | 0 | 0 |
| Secured by mortgages on immovable property | 129 | 306 | 0 | 0 |
| Exposures in default | 98 | 15 | 0 | 0 |
| Items associated with particularly high risk | 2 | 0 | 0 | 0 |
| Covered bonds | 0 | 0 | 0 | 0 |
| Short-term claims on institutions and corporate | 229 | 0 | 0 | 0 |
| Collective investments undertakings (CIU) | 74 | 0 | 0 | 0 |
| Other exposures | 3 | 0 | 0 | 0 |
| TOTAL EXPOSURE VALUE AFTER GUARANTEES | 8,796 | 564 | 98,781 | 6,225 |
2013
(Millions of euros)
| Categories of Exposure | STANDARDIZED APPROACH | ADVANCED MEASUREMENT APPROACH | ||
|---|---|---|---|---|
| Exposure covered by financial collateral | Exposure covered by other eligible collateral | Exposure covered by financial collateral | Exposure covered by other eligible collateral | |
| Central governments or central banks | 8,443 | 0 | 7 | 0 |
| Regional governments or local authorities | 25 | 19 | 0 | 0 |
| Public sector entities | 170 | 0 | 0 | 0 |
| Multilateral Development Banks | 0 | 0 | 0 | 0 |
| International organizations | 0 | 0 | 0 | 0 |
| Institutions | 716 | 30 | 36,657 | 1,348 |
| Corporates | 1,823 | 358 | 9,724 | 57,810 |
| Retail | 1,345 | 96 | 0 | 0 |
| Secured by mortgages on immovable property | 58 | 305 | 0 | 0 |
| Exposures in default | 34 | 15 | 0 | 0 |
| Items associated with particularly high risk | 5 | 0 | 0 | 0 |
| Covered bonds | 0 | 0 | 0 | 0 |
| Short-term claims on institutions and corporate | 0 | 0 | 0 | 0 |
| Collective investments undertakings (CIU) | 554 | 0 | 0 | 0 |
| Other exposures | 10 | 0 | 0 | 0 |
| TOTAL EXPOSURE VALUE AFTER GUARANTEES | 13,183 | 824 | 46,387 | 59,158 |
4.7.3. Hedging based on personal collaterals
According to the solvency regulations, signature collaterals are personal collaterals, including those arising from credit insurance, that have been granted by the providers of coverage defined in articles 201 and 202 of the solvency regulations.
For the purpose of hedge accounting, on December 31, 2014 the Group had a residual amount of €20 million in credit derivatives used for the lending portfolio.
In the category of Retail exposure under the advanced measurement approach, collaterals 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 collaterals is as follows:
TABLE 45: Exposure covered by personal collaterals. Standardized and advanced approach
(Millions of euros)
| Categories of Exposure | Exposure covered by personal guarantees | |
|---|---|---|
| 2014 | 2013 | |
| Central governments or central banks | 0 | 0 |
| Regional governments or local authorities | 86 | 2,329 |
| Public sector entities | 2,661 | 123 |
| Multilateral Development Banks | 0 | 0 |
| International organizations | 0 | 0 |
| Institutions | 1 | 0 |
| Corporates | 2,238 | 3,456 |
| Retail | 996 | 1,541 |
| Secured by mortgages on immovable property | 1,229 | 974 |
| Exposures in default | 514 | 1,896 |
| Items associated with particularly high risk | 139 | 182 |
| Covered bonds | 0 | 0 |
| Institutions and corporates with credit quality, short-term | 0 | 0 |
| Collective investments undertakings (CIU) | 0 | 0 |
| Other exposures | 1,230 | 303 |
| TOTAL EXPOSURE VALUE AFTER COLLATERAL UNDER STANDARDIZED APPROACH | 9,094 | 10,804 |
| Central governments or central banks | 649 | 581 |
| Institutions | 847 | 1,026 |
| Corporates | 5,948 | 6,184 |
| TOTAL EXPOSURE VALUE AFTER COLLATERAL UNDER ADVANCED APPROACH | 7,444 | 7,791 |
| TOTAL | 16,538 | 18,595 |
4.7.4. Risk concentration
BBVA has established the measurement, monitoring and reporting criteria for the analysis of large credit exposures that could represent a risk of concentration, with the aim of collateraling their alignment with the risk appetite defined in the Group.
In particular, measurement and monitoring criteria are established for large exposures at the level of individual concentrations, concentrations of retail portfolios and wholesale sectors, and geographical concentrations.
A quarterly measurement and monitoring process has been established for reviewing the risks of concentration.