3.7. Liquidity risk

3.7.1. Scope and nature of the liquidity risk measurement and reporting systems

Liquidity and funding risk management aims to ensure in the short term that a bank does not have any difficulties in duly meeting its payment commitments, and that it does not have to resort to funding under difficult conditions which may harm the bank’s image or reputation.

In the medium term the aim is to ensure that the Group’s financing structure is ideal and that it is moving in the right direction with respect to the economic situation, the markets and regulatory changes. Management of structural funding and short- term liquidity is decentralized in BBVA Group.

Management of structural funding and liquidity within the BBVA Group is based on the principle of financial self-sufficiency 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.

As regards liquidity and funding management, the BBVA Group is organized around eleven Liquidity Management Units (UGL) made up of the parent company and the banking subsidiaries in each geographical area, plus their dependent branches, even when these branches raise funding in different currencies.

The BBVA Group’s policy for managing liquidity and funding risk is also the basis of the model’s robustness in terms of planning and integration of risk management into the budgeting process of each UGL, according to the appetite for funding risk it decides to assume in its business.

In order to implement this principle of anticipation, limits are set on an annual basis for the main management metrics that form part of the budgeting process for the liquidity balance. This framework of limits contributes to the planning of the joint evolutionary performance of:

The loan book, considering the types of assets and their degree of liquidity, a well as their validity as collateral in collateralized funding.
Stable customer funds, based on the application of a methodology for establishing which segments and customer balances are considered to be stable or volatile funds based on the principle of sustainability and recurrence of these funds.
The credit gap projection, in order to require a degree of self-funding that is defined in terms of the difference between the loan-book and stable customer funds.
Incorporating the planning of securities portfolios into the banking book, which include both fixed-interest and equity securities, and are classified as available- for-sale or held-to-maturity portfolios, and additionally on trading portfolios.
The structural gap projection, as a result of assessing the funding needs generated both from the credit gap and by the securities portfolio in the banking book, together with the rest of on-balance- sheet wholesale funding needs, excluding trading portfolios. This gap therefore needs to be funded with customer funds that are not considered stable or on wholesale markets.

As a result of these funding needs, the BBVA Group plans in each UGL the target wholesale funding structure according to the tolerance set. Thus, once the structural gap has been identified and after resorting to wholesale markets, the amount and composition of wholesale structural funding is established in subsequent years, in order to maintain a diversified funding mix and guarantee that there is not a high reliance on short-term funding (short-term wholesale funding plus volatile customer funds).

In practice, the execution of the principles of planning and self-funding at the different UGLs results in the Group’s main source of funding being customer deposits, which consist mainly of demand deposits, savings deposits and time deposits.

As sources of funding, customer deposits are complemented by access to the interbank market and the domestic and international capital markets in order to address additional liquidity requirements, implementing domestic and international programs for the issuance of commercial paper and medium and long-term debt.

3.7.2. Governance and monitoring

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. In this regard, the Liquidity Management Units (or UGL) in the geographical areas where the main foreign subsidiaries operate, and also for the parent company BBVA S.A. in the Euro Zone where it operates, including BBVA Portugal and the recent acquisition of Catalunya Banc.

The 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. These stable resources in each UGL are calculated by analyzing the performance of the balances in the different customer segments identified as eligible to provide stability to the funding structure; prioritizing customer loyalty and applying greater haircuts to the funding lines for less stable customers.

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 funding structure, avoiding excessive reliance on short-term funding by establishing a maximum level of short-term funding raising, comprising wholesale funding and less stable resources from non-retail customers.

The third main element is promoting the short-term resistance of the liquidity risk profile, guaranteeing 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 for establishing 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, and establish tolerance ranges in the different management areas. 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 Bank has a sufficient stock of liquid assets to guarantee 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.

In addition to the performance of the main indicators for all the UGLs of the Group, and within the plan for adapting risk management to regulatory ratios, BBVA has established a required Liquidity Coverage Ratio (LCR) compliance level for the entire Group and for each individual UGL. The required internal levels aim to comply efficiently and sufficiently in advance with the implementation of the 2018 regulatory requirement at a level above 100%.

3.7.3. Liquidity and funding performance in 2015

During 2015, the BBVA Group has maintained a robust and dynamic funding structure with a clearly retail nature, where customer resources represent the main source of funding.

Thus, the performance of the indicators show that the robustness of the funding structure remained steady during 2015, in the sense that all UGLs held self-funding levels with stable customer resources above the requirements.

The stress tests conducted on a regular basis reveal that BBVA maintains a sufficient buffer of liquid assets (stress buffer) to deal with the estimated liquidity outflows in a scenario resulting from the combination of a systemic crisis and an unexpected internal crisis, during a period of longer than 5 months for all UGLs, including the scenario of a significant downgrade of the Bank’s rating by up to three notches.

Table 60. Loan to Stable Customer Deposits (LtSCD)

	LTSCD per UGL
	31-dec-15	31-dec-14
Grupo Med. Pond	116%	124%
Eurozone	116%	131%
Bancomer	110%	114%
Compass	112%	110%
Garanti	128%
Rest of UGLs	111%	113%

Additionally, each Group entity maintains a liquidity fund at the individual level: Banco Bilbao Vizcaya Argentaria S.A. and its subsidiaries, including BBVA Compass, BBVA Bancomer, Garanti Bank and the Latin American subsidiaries. The table below shows the liquidity available by instrument as of December 31, 2015 for the most significant units:

Table 61. Types and amounts of instruments included in the liquidity fund of the most significant units

(Million euros)

December 2015	BBVA Eurozone⁽¹⁾	BBVA Bancomer	BBVA Compass	Garanti Bank	Others
Cash and balances at Central Banks	10,939	6,936	3,214	6,585	7,122
Assets from credit transactions with central banks	51,811	5,534	22,782	4,302	4,559
Central government issues	31,314	2,303	8,086	4,186	3,654
Of which: Spanish government bonds	25,317	-	-	-	-
Other issues	20,497	3,231	479	116	905
Loans	-	-	14,217	-	-
Other non-eligible liquid assets	5,760	757	20	1,680	229
ACCUMULATED AVAILABLE BALANCE	68,510	13,227	26,016	12,567	11,910
AVERAGE AVAILABLE BALANCE	67,266	12,222	24,282	12,418	10,863

(1) This includes Banco Bilbao Vizcaya Argentaria, S.A., Catalunya Banc, S.A. and Banco Bilbao Vizcaya Argentaria (Portugal), S.A.

Throughout 2015, the LCR level for the BBVA Group was estimated as remaining steady above 100%. At the European level, the LCR entered into force on October 1, 2015, with an initial requirement level of 60%, and a phasing of up to 100% in 2018, with pending legislative developments by European authorities insofar as the information to submit to the supervisor and publication.

Based on prudential supervisory information, the following matrix is presented by contractual terms with residual maturity as of December 31, 2015:

Table 62. Liquidity inflows

(Million euros)

December 2015	Demand deposits	Up to one month	1 month - 3 months	3 months - 6 months	6 months - 9 months	9 months - 1 year	1 year - 2 years	2 years - 3 years	3 years - 5 years	More than 5 years	Total
Cash and balances at Central Banks	34,796										34,796
Loans and advances to credit institutions	1,077	4,594	766	260	70	42	520	6	950	3,988	12,273
Loans to other financial institutions	7	1,246	401	628	595	526	448	495	977	275	5,600
Temporal acquisitions of securities and security lending	-	12,348	853	546	201	2,323	10	84	125	370	16,859
Loans	1,364	21,639	25,624	23,777	16,750	18,477	40,512	33,835	54,790	140,602	377,371
Securities portfolio settlement	484	2,001	4,014	7,073	7,835	4,129	11,944	14,722	20,366	59,755	132,324

Table 63. Liquidity outflows

(Million euros)

December 2015 Additions- Contractual residual maturities	Demand deposits	Up to one month	1 month - 3 months	3 months - 6 months	6 months - 9 months	9 months - 1 year	1 year - 2 years	2 years - 3 years	3 years - 5 years	More than 5 years	Total
Issues and deposit certificates	7	5,106	9,093	5,751	2,222	5,160	15,856	7,845	11072	33840	95,953
Loans and advances to credit institutions	4,932	6,271	2,064	2,783	995	1,952	2,314	1,110	1,283	4,270	27,975
Loans to other financial institutions	13,380	8,907	6,494	2,939	2,442	2,217	205	12	7	274	36,877
Financing of the rest of the clients	193,079	29,003	22,846	15,983	13,517	13,751	14,076	4,615	1,447	1,190	309,508
Financing with collateral securities	-	50,042	11,166	1,197	495	966	2,253	15,045	1,815	1,103	84,081
Derivatives (net)	1	–2,621	–208	–21	–253	–74	120	–220	14	–95	–3,357

There is a clear retail nature of the funding structure, in which the loan portfolio is mostly based upon deposits by the remaining customer base. The outgoing demand section primarily contains current accounts of the retail customer base, whose behavior displays an elevated stability and, according to internal methods, are considered with a minimum permanence of over three years.

Turning to the performance of wholesale funding markets, for both the short as well as long terms, they have displayed stability during 2015. The ECB has held quarterly auctions, targeted longer-term refinancing operations (TLTRO), with a view to fostering the channeling of credit and improving the financial conditions of the European economy as a whole. In these auctions, the Euro UGL has drawn €8,000 million in 2015. Additionally, for the entire year, the Euro UGL has made issues on the public market for €3,850 million and $1,000 million.

The liquidity position of all the subsidiaries outside Europe have remained in a comfort zone, holding a solid position of liquidity in all jurisdictions where which the Group operates. These subsidiaries’ access to capital markets was also maintained with recurrent issues in the local and American markets, prominently the subordinate debt by BBVA Compass and BBVA Colombia for $700 and $400 million respectively over a term of 10 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, guaranteeing 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.

3.7.4. Liquidity and funding prospects

The BBVA Group has entered 2016 with a comfortable liquidity status across its entire global footprint. The financing structure slanting toward the long term and proven access capacity to capital markets enables to comfortably meet the moderate volume of maturities expected for the upcoming quarters.

The following is a breakdown of the maturities of the Group’s wholesale issues by the nature of the issues:

Table 64. Maturity of wholesale issues of BBVA Group by nature
2015

(Million euros)

Type of issues	2016	2017	2018	After 2018	Total
Senior debt	5,709	4,748	3,355	10,774	24,586
Mortgage-covered bonds	7,051	8,358	781	12,907	29,097
Public-covered bonds	-	576	-	500	1,076
Regulatory capital instruments ⁽¹⁾	258	392	1,465	13,434	15,550
Total	13,018	14,074	5,601	37,615	70,308