9.2. Liquidity and funding prospects

Management of structural funding and liquidity within BBVA Group is based on the principle of financial autonomy of the entities that make it up. This approach helps prevent and limit liquidity risk by reducing the Group’s vulnerability during periods of high risk. This decentralized management prevents possible contagion from a crisis affecting only one or a few BBVA Group entities, which must act independently to meet their liquidity requirements in the markets where they operate. Liquidity Management Units (UGLs) are set up in the geographical areas where the main foreign subsidiaries operate, and also for the parent company BBVA S.A.

A basic principle of liquidity management in BBVA Group is therefore the financial independence of its subsidiaries. The aim is to ensure that price formation reflects the cost of liquidity correctly. For this reason, the Bank maintains a liquidity fund at the individual level: Banco Bilbao Vizcaya Argentaria S.A. and its subsidiaries, including BBVA Compass, BBVA Bancomer and the Latin American subsidiaries.

The table below shows the liquidity available by instrument as of December 31, 2014 for the most significant units:

TABLE 61: Types and amounts of instruments included in the liquidity fund of the most significant units
2014

(Millions of euros)

	BBVA Eurozone (1)	BBVA Bancomer	BBVA Compass	Other
Cash and deposits	7,967	5,069	1,606	6,337
Assets from credit transactions with central banks	44,282	4,273	21,685	7,234
Central government issues	18,903	1,470	4,105	6,918
Of which: Spanish government bonds	17,607	0	0	0
Other issues	25,379	2,803	1,885	316
Loans	0	0	15,695	0
Other non-eligible liquid assets	6,133	611	285	304
ACCUMULATED AVAILABLE BALANCE	58,382	9,953	23,576	13,875

(1) It includes BBVA S.A. and BBVA Portugal S.A.

2013

	BBVA Eurozone (1)	BBVA Bancomer	BBVA Compass	Other
Cash and deposits	10,826	6,159	1,952	6,843
Assets from credit transactions with central banks	32,261	3,058	9,810	7,688
Central government issues	16,500	229	904	7,199
Of which: Spanish government bonds	14,341	0	0	0
Other issues	15,761	2,829	2,224	489
Loans	0	0	6,682	0
Other non-eligible liquid assets	4,735	425	278	396
ACCUMULATED AVAILABLE BALANCE	47,823	9,642	12,040	14,927

(1) It includes BBVA S.A. and BBVA Portugal S.A.

As shown, the trend in available liquid assets has been favorable throughout the year, both in the euro zone, thanks to the increase in the available balance by more than €10,000 million due to the increase in the Fixed-Income Portfolio (essentially Available for Sale), and in the United States, where liquid assets have increased by more than €10,000 million due to the combined effect of growth in the portfolio of eligible loans and the release of the formerly pledged fixed-income portfolio.

In the case of Cash and Balances with Central Banks, the lower amount in the euro zone is offset by the larger amount of liquid assets available at Central Governments, given the reduced use of the policy.

The above shows that the Group has strengthened its liquidity position, increasing the stock of available liquid assets.

The Strategy and Finance area, through Balance Sheet Management, manages BBVA Group's liquidity and funding, planning and executing the funding of the structural long-term gap of each UGL and proposing to ALCO the actions to be taken on this matter, in accordance with the policies and limits established by the Executive Committee.

The Group's objective behavior, in terms of liquidity and funding risk, is measured through the Loan-to-Stable Customer Deposits (LtSCD) ratio. The aim is to preserve a stable funding structure in the medium term for each UGL making up BBVA Group, taking into account that maintaining an adequate volume of stable customer funds is key to achieving a sound liquidity profile.

In order to establish the target (maximum) levels of LtSCD in each UGL and provide an optimal funding structure reference in terms of risk appetite, the corporate Structural Risks unit of GRM identifies and assesses the economic and financial variables that condition the funding structures in the different geographical areas.

The second element in liquidity and funding risk management is achieving a proper diversification of the wholesale funding structure, avoiding excessive reliance on short-term funding by establishing a maximum level of short-term wholesale funding raising.

The third main element is promoting the short-term resistance of the liquidity risk profile, collateraling that each UGL has sufficient collateral to deal with the risk of the close of wholesale markets.

The basic capacity is the short-term liquidity risk management and control metric, which is defined as the ratio between the available explicit assets and the maturities of wholesale liabilities and volatile funds, at different terms, with special relevance being given to 30-day maturities.

The above metrics are completed with a series of indicators and thresholds designed to avoid the concentration of wholesale funding by product, counterparty, market and term, and also to promote diversification by geographical area. Reference thresholds are also established on a series of leading indicators to anticipate situations of stress in the markets and adopt preventive measures as necessary.

In addition, stress analyses are a fundamental element of the liquidity and funding risk monitoring scheme, as they enable deviations from the liquidity targets and limits set in the appetite to be anticipated. They also play a major role in the design of the Liquidity Contingency Plan and the definition of specific measures to be adopted to rectify the risk profile if necessary. For each scenario, it is verified whether the Entity has a sufficient stock of liquid assets to collateral its capacity to meet the liquidity commitments/outflows in the different periods analyzed. Four scenarios are considered in the analysis: 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 Entity's customers; and a mixed scenario, as a combination of the two aforementioned scenarios).

Each scenario considers the following factors: the liquidity existing in the market, customer behavior and sources of funding, impact of rating downgrades, market values of liquid assets and collateral, and the interaction between liquidity requirements and the development of the Bank's asset quality. The results of these stress tests conducted on a regular basis reveal that BBVA maintains a sufficient buffer of liquid assets to deal with the estimated liquidity outflows in a scenario resulting from the combination of a systemic crisis and an unexpected internal crisis, with a significant downgrade of the Entity's rating by up to three notches.

The following is a breakdown of maturities of wholesale issues on the euro balance sheet by the nature of the issues:

TABLE 62: Maturity of wholesale issues by nature
2014

(Millions of euros)

Maturities of wholesale issues	2015	2016	2017	After 2017	Total
Senior debt	6,273	3,377	393	4,245	14,288
Mortgage-covered bonds	4,279	4,928	7,074	10,210	26,491
Public-covered bonds	-	-	526	500	1,026
Regulatory capital instruments (1)	1,027	208	70	6,322	7,627
Other long-term financial instruments	-	151	250	860	1,261
Total general	11,579	8,664	8,313	22,137	50,693

(1) Regulatory capital instruments are classified in this table by terms according to their contractual maturity.

2013

Maturities of wholesale issues	2015	2016	2017	After 2017	Total
Senior debt	4,630	5,544	2,163	3,219	15,556
Mortgage-covered bonds	6,905	4,444	5,123	16,568	33,040
Public-covered bonds	1,305	-	150	984	2,439
Regulatory capital instruments (1)	-	63	207	4,789	5,059
Other long-term financial instruments	1	0	152	710	863
Total general	12,841	10,051	7,795	26,270	56,957

(1) Regulatory capital instruments are classified in this table by terms according to their contractual maturity.

As can be seen in the above tables, there is a decrease in wholesale funding of €6,500 million derived from the combined effect of the repayment of mortgage-covered and public-covered bonds for €8,000 million and the increase in regulatory capital instruments for €1,500 million.

In 2014, the wholesale funding markets, both long and short-term, have remained stable thanks to the positive trend in sovereign risk premiums and the setting of negative interest rates by the ECB in the marginal deposit facility, in an environment of heightened uncertainty over growth in the euro zone, which has prompted the ECB to take further measures. At its meeting on June 5, 2014, the ECB announced non-standard measures aimed at increasing inflation, boosting credit and improving the financial conditions for the European economy. The first two targeted longer-term refinancing operation (TLTRO) auctions took place in September and December 2014, at which BBVA borrowed €2,600 million at each one.

BBVA continues to maintain an adequate funding structure in the short, medium and long term, diversified by products. Over the year, issues for €8,613 million were completed and the position vis-à-vis the ECB was reduced significantly, with the early repayment of the total amount of the long-term refinancing operations (LTRO). In 2014, the Bank's improved liquidity and funding profile has enabled it to increase the survival period in each of the stress scenarios analyzed.

The situation of the rest of UGLs outside Europe has also been very positive, as the liquidity position has once again been bolstered in all the geographical areas where the Group operates. Special mention should be made of the senior debt issue completed by BBVA Compass, which after seven years away from the markets has placed a total of $1,000 million at 3 and 5 years.

In this context of improved access to the market, BBVA has maintained its objectives of, on the one hand, strengthening the funding structure of the Group's various franchises based on growing its self-funding from stable customer funds, and on the other, collateraling a sufficient buffer of fully available liquid assets, diversifying the different sources of funding and optimizing the generation of collateral to deal with situations of tension in the markets. In this regard, the exposure to liquidity risk has been kept within the risk appetite and the limits approved by the Board of Directors.