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Note 7 - Risk Management | 12 Months Ended
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Dec. 31, 2018
Risk Management Abstract |
Risk Management Explanatory | 7. Risk management 7.1 General risk management and control model The BBVA Group has an overall risk management and control model (hereinafter 'the model') tailored to its business model, its organization and the geographies in which it operates, This model allows BBVA Group to develop its activity in accordance with the risk strategy and risk controls and management policies defined by the governing bodies of the Bank and to adapt to a changing economic and regula tory environment, tackling risk management globally and adapted to the circumstances at all times. The model establishes a system of appropriate risk management regarding risk profile and strategy of the Group. This model is applied comprehensively in the Group and consists of the basic elements listed below: Governance and organization. Risk Appetite Framework. Decisions and processes. Assessment, monitoring and reporting. Infrastructure. The Group promotes the development of a risk culture which aims to ensure consistent application of the risk management and control model i n the Group, so that the risk function is understood and assimilated at all levels of the organization. 7.1.1 Governance and organization BBVA Group´s risk governance model is characterized by a special involvement of its corporate bodies, both in setting the risk strategy and in the ongoing monitoring and supervision of its implementation. Thus, as developed below, the corporate bodies are the ones that approve this risk strate gy and corporate policies for the different types of risk. The risk function is responsible at management level for their implementation and development, and reporting to the governing bodies. The responsibility for the daily management of the risks lies o n the businesses which abide in the development of their activity to meet the policies, rules, procedures, infrastructures and controls, which are defined by the function risk on the basis of the framework set by the governing bodies. To perform this task properly, the risk function in the BBVA Group is configured as a single, global function with an independent role from commercial areas. Corporate bodies The BBVA Board of Directors (hereinafter also referred to as "the Board") approves the risk strategy a nd oversees the internal management and control systems. Specifically, in relation to the risk strategy, the Board approves the Group's risk appetite statement, the core metrics (and their statements) and the main metrics by type of risk, as well as the ge neral risk management and control model. The Board of Directors is also responsible for approving and monitoring the strategic and business plan, the annual budget and management goals, as well as the investment and funding policy, in a consistent way and in line with the approved Risk Appetite Framework. For this reason, the processes for defining the Risk Appetite Framework proposals and the strategic and budgetary planning at Group level are coordinated by the executive areas for submission to the Board. With the aim of integrating the Risk Appetite Framework into management, on the basis established by the Board of Directors, the Executive Committee approves the metrics by type of risk in relation to profitability and income recurrence and the Group's ba sic structure of limits by geographical area, risk type, asset type and portfolio level. This committee also approves specific corporate policies for each type of risk. Lastly, the Board has set up a Board committee specialized in risks, the Risk Committee, that assists the Board and the Executive Committee in determining the Group's risk strategy and the risk limits and policies, respectively, analyzing and assessing beforehand the proposals submitted to those bodies. The Board of Directors has the exclusi ve authority to amend the Group’s risk strategy and its elements, including the Risk Appetite Framework metrics within its scope of decision, while the Executive Committee is responsible for amending the metrics by type of risk within its scope of decision and the Group's basic structure of limits (core limits), when applicable. In both cases, the amendments follow the same decision-making process described above, so the proposals for amendment are submitted by the executive area (Chief Risk Officer, “CRO”) and analyzed by the Risk Committee, for later submission to the Board of Directors or to the Executive Committee, as appropriate. Moreover, the Risk Committee, the Executive Committee and the Board itself conduct adequate monitoring of the risk strategy i mplementation and of the Group's risk profile. The risk function regularly reports on the development of the Group's Risk Appetite Framework metrics to the Board and to the Executive Committee, after the analysis by the Risk Committee, whose role in this m onitoring and control work is particularly relevant. Risk Function: CRO. Organizational structure and committees The head of the risk function at executive level is the Group’s CRO, who carries out his functions independently and with the necessary authori ty, rank, experience, knowledge and resources. He is appointed by the Board as a member of its senior management and has direct access to its corporate bodies (Board, Executive Standing Committee and Risk Committee), to whom he reports regularly on the sta tus of risks in the Group. The CRO is supported in the exercise of his functions by a structure consisting of cross-sectional risk units in the corporate area and the specific risk units in the geographical and/or business areas of the Group. Each of the latter units is headed by a Chief Risk Officer for the geographical and/or business area who, within his/her area of responsibility, carries out risk management and control functions and is responsible for applying the corporate policies and rules approved at Group level in a consistent manner, adapting them if necessary to local requirements and reporting to the local corporate bodies. The Chief Risk Officers of the geographical and/or business areas report both to the Group's CRO and to the head of their geographical and/or business area. The aim of this dua l reporting system is that the local risk management function is independent from the operating functions and enable its alignment with the Group's corporate risk policies and goals. As explained above, the risk management function consists of risk units from the corporate area, which carry out cross-sectional functions, and risk units from the geographical and/or business areas. The corporate area's risk units develop and submit to t he Group CRO the proposal for the Group's Risk Appetite Framework, the corporate policies, rules and global procedures and infrastructures within the framework approved by t he corporate bodies; they monitor their application and report either directly or t hrough the CRO to the Bank's corporate bodies. Their functions include: - Management of the different types of risks at Group level in accordance with the strategy defined by the corporate bodies. - Risk planning aligned with the risk appetite framework p rinciples defined by the Group. - Monitoring and control of the Group's risk profile in relation to the risk appetite framework approved by the Bank's corporate bodies, providing accurate and reliable information with the required frequency and in the nece ssary format. - Prospective analyses to enable an evaluation of compliance with the risk appetite framework in stress scenarios and the analysis of risk mitigation mechanisms. - Management of the technological and methodological developments required for implementing the Model in the Group. - Design of the Group's Internal Control model and definition of the methodology, corporate criteria and procedures for identifying and prioritizing the risk inherent in each unit's activities and processes. - Validatio n of the models used and the results obtained by them in order to verify their adaptation to the different uses to which they are applied. The risk units in the business units develop and present to the Chief Risk Officer of the geographical and/or busines s area the risk appetite framework proposal applicable in each geographical and/or business area, independently and always within the Group's strategy/Risk Appe tite Framework. They also monitor that the corporate policies and rules are approved and applied consistently at a Group level, adapting them if necessary to local requirements; that they are provided with appropriate infrastructures for management and control of their risks, within the global risk infrastructure framework defined by the corporate ar eas; and that they report to their corporate bodies and/or to senior management, as appropriate. The local risk units thus work with the corporate area risk units in order to adapt to the risk strategy at Group level and share all the information necessary for monitoring the development of their risks. The risk function has a decision-making process to perform its functions, underpinned by a structure of committees, where the Global Risk Management Committee (GRMC) acts as the top-level committee within the risk function. It proposes, examines and, where applicable, approves, among others, the interna l risk regulatory framework and the procedures and infrastructures needed to identify, assess, measure and manage the material risks faced by the Group in carrying out its business, and the determination of risk limits by portfolio. The members of this Com mittee are the Group's CRO, the Heads of the main Areas of the GRM Front, the Heads of GRM Corporate Discipline Units and the Head of Risk Management Group of GRM. The GRMC carries out its functions assisted by various support committees which include: G lobal Credit Risk Management Committee: It is responsible for analyzing and decision-making related to wholesale credit risk admission. Wholesale Credit Risk Management Committee: its purpose is the analysis and decision-making regarding the admission of w holesale credit risk of certain customer segments of the BBVA Group. Work Out Committee: its purpose is to be informed about decisions taken under the delegation framework regarding risk proposals concerning clients on Watch List and clients classified as NPL of certain customer segments of the BBVA Group, as well the sanction of proposals regarding entries, exits and changes of Watch List, entries and exits in non-performing unlikely to pay and turns to written off. Asset Allocation Committee: The executiv e authority responsible for analyzing and deciding on credit risk issues related to processes aimed at achieving a portfolios combination and composition that, under the restrictions imposed by the Risk Appetite framework, allows to maximize the risk adjus ted return on equity. Risk Models Management Committee: It ensures an appropriate decision-making process regarding the planning, development, implementation, use, validation and monitoring of the models required to achieve an appropriate management of th e Model Risk in the BBVA Group. Global Markets Risk Unit Global Committee: It is responsible for formalizing, supervising and communicating the monitoring of trading desk risk in all the Global Markets business units, as well as coordinating and approving GMRU key decisions activity, and developing and proposing to GRMC the co rporate regulation of the unit. Operational Risk and Product Governance Corporate Admission Committee: It identifies, analyzes and assesses the operational risks associated initiative s related with new business, products or services, outsourcing, process transformation and new systems, prior to its launch. As well, it will verify that Product Governance normative requirements are met and will decide about the insurance scheme (global p olicies). Retail Credit Risk Committee: It provides for the analysis, discussion and decision support on all issues regarding the retail credit risk management that impact or potentially do in the practices, processes and corporate metrics established in the Policies, Rules and Operating Frameworks. Asset Management Global Risk Steering Committee: its purpose is to develop and coordinate the strategies, policies, procedures, and infrastructure necessary to identify, assess, measure and manage the material risks facing the bank in the operation of businesses linked to BBVA Asset Management. Global Insurance Risk Committee: its purpose is to monitor and promote the alignment and the communication between all the Insurance Risk Units in the BBVA Group. It will do this by promoting the application of standardized principles, policies, tools and risk metrics in the different regions with the aim of maintaining proper integration of insurance risk management in the Group. COPOR: its purpose is to analyze and make decision in relation to the operations of the various geographies in which Global Markets is present. Each geographical and/or business area has its own risk management committee (or committees), with objectives and contents similar to those of the corpora te area, which perform their duties consistently and in line with corporate risk policies and rules, whose decisions are reflected in the corresponding minutes. Under this organizational scheme, the risk management function monitors that the risk strategy, the regulatory framework, and standardized risk infrastructures and controls are integrated and applied across the entire Group. It also benefits from the knowledge and proximity to customers in each geographical and/or business area, and transmits the c orporate risk culture to the Group's different levels. Moreover, this organization enables the risks function to conduct and report to the corporate bodies integrated monitoring and control of the entire Group's risks. Internal Risk Control and Internal Va lidation The Group has a specific Internal Risk Control unit. Its main function is to manage that there is an adequate internal regulatory framework, a process and measures defined for each type of risk identified in the Group (and for those other types of risk that may potentially affect the Group). It controls their application and operation, as well as integrating the risk strategy into the Group's management. In this regard, the Internal Risk Control monitors verifies the performance of their duties by the units that develop the risk models, manage the processes and execute the controls. Its scope of action is global, from the geographical point of view and the type of risks. The Group's Head of Internal Risk Control is responsible for the function and reports on its activities and informs of its work plans to the CRO and to the Board's Risks Committee, assisting it in any matters where requested. For these purposes the Internal Risk Control department has a Technical Secretary's Office, which offers the Committee the technical support it need s to better perform its duties. In addition, the Group has an Internal Validation unit, which reviews the performance of its duties by the units that develop the risk models and of those that use them in management. Its functions include review and independent validation at internal level of the models used for management and control of risks in the Group. 7.1.2 Risk Appetite Framework The Group's Risk Appetite Framework, approved by the corporate bodies, determines the risks (and their level) that the Group is willing to assume to achieve its business objectives considering an organic evolution of its business. These are expressed in terms of solvency, profitability and liquidity and funding, which are reviewed peri odically as well as in case of material changes to the entity’s business or relevant corporate transactions. The definition of the risk appetite has the following goals: To express the maximum levels of risk it is willing to assume, at both Group and geogr aphical and/or business area level. To establish a set of guidelines for action and a management framework for the medium and long term that prevent actions from being taken (at both Group and geographical and/or business area level) that could compromise the future viability of the Group. To establish a framework for relations with the geographical and/or business areas that, while preserving their decision-making autonomy, monitors they act consistently, avoiding uneven behavior. To establish a common language throughout the organization and develop a compliance-oriented risk culture. Alignment with the new regulatory requirements, facilitating communication with regulators, investors and other stakeholders, thanks to an integrated and stable risk manag ement framework. Risk appetite framework is expressed through the following elements: Risk Appetite Statement It sets out the general principles of the Group's risk strategy and the target risk profile. The 2018 Group’s Risk appetite statement is as follow s: BBVA Group's Risk Policy is aimed to promote a multichannel and responsible universal banking model, based on principles, targeting sustainable growth, risk adjusted profitability and recurrent value creation. To achieve these objectives, the Risk Manag ement Model is oriented to maintain a moderate risk profile that allows the Group to keep strong financial fundamentals in adverse environments preserving our strategic goals, maintaining a prudent management, an integral view of risks, and a portfolio div ersification by geography, asset class and client segment, focusing on keeping a long term relationship with our customers. Core metrics Based on the risk appetite statement, statements are established to set down the general risk management principles i n terms of solvency, liquidity and funding, profitability and income recurrence. Solvency: a sound capital position, maintaining resilient capital buffer from regulatory and internal requirements that supports the regular development of banking activity ev en under stress situations. As a result, BBVA proactively manages its capital position, which is tested under different stress scenarios from a regular basis. Liquidity and funding: A sound balance-sheet structure to sustain the business model. Maintenance of an adequate volume of stable resources, a diversified wholesale funding structure, which limits the weight of short term funding and ensures the access to the different funding markets, optimizing the costs and preserving a cushion of liquid assets to overcome a liquidity survival period under stress scenarios. Profitability and income recurrence: A sound margin-generation capacity supported by a recurrent business model based on the diversification of assets, a stable funding and a customer focus; comb ined with a moderate risk profile that limits the credit losses even under stress situations; all focused on allowing income stability and maximizing the risk-adjusted profitability. The core metrics define, in quantitative terms, the principles and the ta rget risk profile set out in the risk appetite statement and are in line with the strategy of the Group. Each metric has three thresholds (traffic-light approach) ranging from a standard business management to higher deterioration levels: Management refere nce, Maximum appetite and Maximum capacity. The 2018 Group’s Core metrics are: By type of risk metrics Based on the core metrics, statements are established for each type of risk reflecting the main principles governing the management of that risk and several metrics are calibrated, compliance with which enables compliance with the core metrics and the risk appetite statement of the Group. The metrics by type of risk have a maximum appetite threshold. Basic limits structure (core limits) The purpose of the basic limits structure or core limits is to shape the Risk Appetite Framework at geographical area risk type, asset type and portfolio level, ensuring that the management of risks on an ongoing basis is within the thresholds set forth for by type of risk. In addition to this framework, there’s a level of management limits that is defined and managed by the risk function developing the core limits, in order to ensure that the anticipatory management of risks by subcategories or by subportfolios compli es with that core limits and, in general, with the Risk Appetite Framework. The corporate risk area works with the various geographical and/or business areas to define thei r risk appetite framework, which will be coordinated with and integrated into the Group's risk appetite to ensure that its profile fits as defined. The Risk Appetite Framework is integrated into the management and the processes for defining the Risk Appeti te Framework proposals and strategic and budgetary planning at Group level are coordinates. As explained above, the core metrics of BBVA Risk Appetite Framework measure Groups performance in terms of solvency, liquidity and funding, profitability and incom e recurrence; most of the core metrics are accounting related or regulatory metrics which are published regularly to the market in the BBVA Group annual report and in the quarterly financial reports. During 2018, the Group risk profile evolved in line with the Risk Appetite metrics. 7.1.3 Decisions and processes The transfer of risk appetite framework to ordinary management is supported by three basic aspects: A standardized set of regulations. Risk planning. Comprehensive management of risks over their life cycle. Standardized regulatory framework The corporate risk area is responsible for the definition and proposal of the corporate policies, specific rules, procedures and schemes of delegation based on which risk decisions should be taken within the G roup. This process aims for the following objectives: Hierarchy and structure: well-structured information through a clear and simple hierarchy creating relations between documents that depend on each other. Simplicity: an appropriate and sufficient numbe r of documents. Standardization: a standardized name and content of document. Accessibility: ability to search for, and easy access to, documentation through the corporate risk management library. The approval of corporate policies for all types of risks i s the responsibility of the corporate bodies of the Bank, while the corporate risk area endorses the remaining regulations. Risk units of geographical and / or business areas comply with this set of regulations and, where necessary, adapt it to local requi rements for the purpose of having a decision process that is appropriate at local level and aligned with the Group policies. If such adaptation is necessary, the local risk area must inform the corporate area of GRM, who must ensure the consistency of the regulatory body at the Group level and, therefore, if necessary, give prior approval to the modifications proposed by the local risk areas. Risk planning Risk planning monitors that the risk appetite framework is integrated into management through a cascad e process for establishing limits and profitability adjusted to the risk profile, in which the function of the corporate area risk units and the geographical and/or business areas is to guarantee the alignment of this process with the Group's Risk Appetite Framework in terms of solvency, liquidity and funding, profitability and income recurrence. There are tools in place that allow the Risk Appetite Framework defined at aggregate level to be assigned and monitored by business areas, legal entities, types of risk, concentrations and any other level considered necessary. The risk planning process is aligned and taken into consideration within the rest of the Group's planning framework so as to ensure consistency. Comprehensive management All risks must be managed comprehensively during their life cycle, and be treated differently depending on the type. The risk management cycle is composed of five elements: Planning: with the aim of ensuring that the Group's activities are consistent with the target risk profile and guaranteeing solvency in the development of the strategy. Assessment: a process focused on identifying all the risks inherent to the activities carried out by the Group. Formalization: includes the risk origination, approval an d formalization stages. Monitoring and reporting: continuous and structured monitoring of risks and preparation of reports for internal and/or external (market, investors, etc.) consumption. Active portfolio management: focused on identifying business oppo rtunities in existing portfolios and new markets, businesses and products. 7.1.4 Assessment, monitoring and reporting Assessment, monitoring and reporting is a cross-cutting element that monitors that the Model has a dynamic and proactive vision to enabl e compliance with the risk appetite framework approved by the corporate bodies, even in adverse scenarios. The materialization of this process has the following objectives: Assess compliance with the risk appetite framework at the present time, through mon itoring of the core metrics, metrics by type of risk and the basic structure of limits. Assess compliance with the risk appetite framework in the future, through the projection of the risk appetite framework variables, in both a baseline scenario determin ed by the budget and a risk scenario determined by the stress tests. Identify and assess the risk factors and scenarios that could compromise compliance with the risk appetite framework, through the development of a risk repository and an analysis of the i mpact of those risks. Act to mitigate the impact in the Group of the identified risk factors and scenarios, ensuring this impact remains within the target risk profile. Supervise the key variables that are not a direct part of the risk appetite framework, but that condition its compliance. These can be either external or internal. This process is integrated in the activity of the risk units, both of the corporate area and in the business units, and it is carried out during the following phases: Identificati on of the risk factors that can compromise the performance of the Group or of the geographical and/or business areas in relation to the defined risk thresholds. Assessment of the impact of the materialization of the risk factors on the metrics that define the Risk Appetite Framework based on different scenarios, including stress scenarios. Response to unwanted situations and proposals for readjustment to enable a dynamic management of the situation, even before it takes place. Monitoring of the Group's risk profile and of the identified risk factors, through internal, competitor and market indicators, among others, to anticipate their future development. Reporting: Complete and reliable information on the development of risks for the corporate bodies and se nior management, with the frequency and completeness appropriate to the nature, significance and complexity of the reported risks. The principle of transparency governs al reporting of risk information. 7.1.5 Infrastructure The infrastructure is an element that must manage that the Group has the human and technological resources needed for effective management and supervision of risks in order to carry out the functions set out in the Group's risk Model and the achievement of their objectives. With r espect to human resources, the Group risk function has an adequate workforce, in terms of number, skills, knowledge and experience. With regards to technology, the Group risk function manages the integrity of management information systems and the provisio n of the infrastructure needed for supporting risk management, including tools appropriate to the needs arising from the different types of risks for their admission, management, assessment and monitoring. The principles that govern the Group risk technol ogy are: Standardization: the criteria are consistent across the Group, thus ensuring that risk handling is standardized at geographical and/or business area level. Integration in management: the tools incorporate the corporate risk policies and are applie d in the Group's day-to-day management. Automation of the main processes making up the risk management cycle. Appropriateness: provision of adequate information at the right time. Through the “Risk Analytics” function, the Group has a corporate framework i n place for developing the measurement techniques and models. It covers all the types of risks and the different purposes and uses a standard language for all the activities and geographical/business areas and decentralized execution to make the most of th e Group's global reach. The aim is to continually evolve the existing risk models and generate others that cover the new areas of the businesses that develop them, so as to reinforce the anticipation and proactiveness that characterize the Group's risk fun ction. Also the risk units of geographical and / or business areas have sufficient means from the point of view of resources, structures and tools to develop a risk management in line with the corporate model. 7.1.6 Risk culture The BBVA Group promotes t he development of a risk culture based on the observance and understanding of values, attitudes, and behaviors that allow the compliance with the regulations and frameworks that contribute to an appropriate risk management. At BBVA the Risk Governance Mode l is characterized by a special involvement of social bodies, as they define the risk culture that permeates the rest of the organization and has the following main elements: Our Purpose which defines our reason to be and with our values and behaviors guid e the performance of our organization and the people who are part of it. The Risk Appetite Framework which determines the risks and levels of risks that the Group is willing to assume in order to fulfill its goals. The Code of Conduct establishes the behav ior guidelines that we must follow to adjust our behavior to the BBVA values. The Risk Culture at BBVA is based on these levers: Communication: The BBVA Group promotes the dissemination of the principles and values that should govern the conduct and risk management in a comprehensive and consistent manner. To do this, the most appropriate channels of communication are used, to allow for the Risk culture to be integrated into the business activities at all levels of the organization. Training: The BBVA Grou p favors the understanding of the values, risk management model, and the code of conduct in all scenarios, ensuring standards in skills and knowledge. Motivation: The BBVA Group aims to define incentives for BBVA employees that support the risk culture at all levels. Among these incentives, the role of the Compensation policy and incentive programs stand out, as well as implementation of risk culture control mechanisms, including the complaint channels and the disciplinary committees. Monitoring: The BBVA G roup pursues at the highest levels of the organization a continuous evaluation and monitoring of the risk culture to guarantee its implementation and identification of areas for improvement. 7.2 Risk factors As mentioned earlier, BBVA has processes in place for identifying risks and analyzing scenarios that enable the Group to manage risks in a dynamic and proactive way. The risk identification processes are forward looking to ensure the identification of emerging risks and take into account the concern s of both the business areas, which are close to the reality of the different geographical areas, and the corporate areas and senior management. Risks are captured and measured consistently using the methodologies deemed appropriate in each case. Their me asurement includes the design and application of scenario analyses and stress testing and considers the controls to which the risks are subjected. As part of this process, a forward projection of the risk appetite framework variables in stress scenarios is conducted in order to identify possible deviations from the established thresholds. If any such deviations are detected, appropriate measures are taken to keep the variables within the target risk profile. To this extent, there are a number of emerging ri sks that could affect the Group’s business trends. These risks are described in the following main sections: Macroeconomic and geopolitical risks Global economic growth maintained robust in 2018 even if it slowed down more than expected during the second h alf of the year as a result of the worse development of the trade and the industrial sector as well as the strong increase in financial tensions, especially in developed economies due to the rise of uncertainties. To the worse economic development in Europ e and in China, it has to be added the downturn in Asian countries and the deterioration in the expansive cycle of the United States. In this context, both the Federal Reserve (Fed) and the ECB have demonstrated to be more prudent and patient at the time o f advancing with the normalization of their monetary policies and their future decisions will depend on the economic evolution. The main risk at sort-term continues to be protectionism not only for the direct effect on global trade, but also for the indire ct impact of lower confidence and financial volatility. To this, it has to be added the concerns about the degree of the impact on the economic activities in the United States and China in the following quarters have to be added as well as the increased po litical uncertainty in Europe. In summary, the uncertainty related to the economic perspectives continues to be elevated due to the fear of a protectionist escalation and a higher perception of the risk related to the global economic growth. Regulatory an d reputational risks Financial institutions are exposed to a complex and ever-changing regulatory environment defined by governments and regulators. This can affect their ability to grow and the capacity of certain businesses to develop, and result in stri cter liquidity and capital requirements with lower profitability ratios. The Group constantly monitors changes in the regulatory framework that allow for anticipation and adaptation to them in a timely manner, adopt industry practices and more efficient an d rigorous criteria in its implementation. The financial sector is under ever closer scrutiny by regulators, governments and society itself. In the course of activities, situations which might cause relevant reputational damage to the entity could raise an d might affect the regular course of business. The attitudes and behaviors of the Group and its members are governed by the principles of integrity, honesty, long-term vision and industry practices through, inter alia, internal control Model, the Code of C onduct, tax strategy and Responsible Business Strategy of the Group. Business, operational and legal risks New technologies and forms of customer relationships: Developments in the digital world and in information technologies pose significant challenges f or financial institutions, entailing threats (new competitors, disintermediation…) but also opportunities (new framework of relations with customers, greater ability to adapt to their needs, new products and distribution channels...). Digital transformatio n is a priority for the Group as it aims to lead digital banking of the future as one of its objectives. Technological risks and security breaches: The Group is exposed to new threats such as cyber-attacks, theft of internal and customer databases, fraud i n payment systems, etc. that require major investments in security from both the technological and human point of view. The Group gives great importance to the active operational and technological risk management and control. One example was the early adop tion of advanced models for management of these risks (AMA - Advanced Measurement Approach). The financial sector is exposed to increasing litigiousness, such that financial institutions face a large number of proceedings of every kind -civil, criminal, ad ministrative and otherwise-, as well as supervisory investigations, in multiple jurisdictions, the consequences of which are difficult to determine (including those proceedings where an undetermined number of claimants is involved, where damages claimed ar e not easy to estimate, where exorbitant amounts are claimed, where novel legal questions are introduced using new, creative legal theories and where proceedings are at a very early stage). In Spain, in many current proceedings claimants seek, both at Span ish courts and through preliminary rulings sought from the European Union Court of Justice, that various clauses typically included within mortgage loan agreements with credit institutions be declared abusive (including clauses related to mortgage fees, ea rly termination rights, reference interest rates and arrangement fees). Unfavorable resolutions of such proceedings against the Group or against other banking entities may directly or indirectly affect the Group. The BBVA Group is under regulatory investi gations in several countries which may give rise to sanctions and claims for damages by third parties. The Group may likewise be subject to investigations by legal authorities, of which we have not heretofore received formal notice to such effect, in rela tion with the contracting of supposedly irregular services, that may have a negative reputational or economic impact on the Bank. The Bank is undertaking a forensic investigation, led by PwC, through the Bank’s external legal counsel Garrigues, together wi th Uría, the scope or duration of which it is not currently possible to predict, nor is it possible to predict the outcome or implications for the Group of any such investigation by the legal authorities. The BBVA Group undertakes constant management and m onitoring of legal and regulatory investigations, proceedings and actions where its interests may be defended, and allocates (on the basis of the number of disputes, rulings and the state of proceedings or actions) what we believe are the appropriate provi sions where necessary. Nevertheless, the results of judicial or regulatory investigations, proceedings or actions, whether to which the Bank is currently party, to which it may be party in the future, or to which other banking entities are party, are diffi cult to predict, and if jurisprudential criteria are modified or unexpected results occur, such allocated provisions may prove insufficient. 7.3 Credit risk Credit risk arises from the probability that one party to a financial instrument will fail to meet its contractual obligations for reasons of insolvency or inability to pay and cause a financial loss for the other party. It is the most important risk for the Group and includes counterparty risk, issuer risk, settlement risk and country risk management. The principles underpinning credit risk management in BBVA are as follows: Availability of basic information for the study and proposal of risk, and supporting documentation for approval, which sets out the conditions required by the internal relevant body. Sufficient generation of funds and asset solvency of the customer to assume principal and interest repayments of loans owed. Establishment of ade quate and sufficient guarantees that allow effective recovery of the transaction, this being considered a secondary and exceptional method of recovery when the first has failed. Credit risk management in the Group has an integrated structure for all its fu nctions, allowing decisions to be taken objectively and independently throughout the life cycle of the risk. At Group level: frameworks for action and standard rules of conduct are defined for handling risk, specifically, the circuits, procedures, structu re and supervision. At the business area level: they are responsible for adapting the Group's criteria to the local realities of each geographical area and for direct management of risk according to the decision-making circuit: - Retail risks: in general, the decisions are formalized according to the scoring tools, within the general framework for action of each business area with regard to risks. The changes in weighting and variables of these tools must be validated by the GRM area. - Wholesale risks: in general, the decisions are formalized by each business area within its general framework for action with regard to risks, which incorporates the delegation rule and the Group's corporate policies. 7.3.1 Measurement Expected Credit Loss (ECL) IFRS 9 req uires determining the expected credit loss of a financial instrument in a way that reflects an unbiased estimation removing any conservatism or optimism, the time value of money and a forward looking perspective (including the economic forecast). Therefore the recognition and measurement of expected credit losses (ECL) is highly complex and involves the use of significant analysis and estimation including formulation and incorporation of forward-looking economic conditions into ECL. Risk Parameters Adjusted by Macroeconomic Scenarios Expected Credit Loss must include forward looking information, in accordance with IFRS 9, which states that the comprehensive credit risk information must incorporate not only historical information but also all relevant credit information, including forward-looking macroeconomic information. BBVA uses the classical credit risk parameters PD, LGD and EAD in order to calculate the ECL for the credit portfolios. BBVA´s methodological approach in order to incorporate the forward loo king information aims to determine the relation between macroeconomic variables and risk parameters following three main steps: Step 1: Analysis and transformation of time series data. Step 2: For each dependent variable find conditional forecasting models that are economically consistent. Step 3: Select the best conditional forecasting model from the set of candidates defined in Step 2, based on their out of sample forecasting performance. How economic scenarios are reflected in calculation of ECL The forw ard looking component is added through the introduction of macroeconomic scenarios as an input. Inputs would highly depend on the particular combination of region and portfolio, so inputs are adapted to available data. Based on economic theory and analysis, the macroeconomic variables most directly relevant for explaining and forecasting the selected risk parameters (PD, LGD) are: a) The net income of families, corporates or public administrations. b) The payment amounts on the principal and interest on the outstanding loans. c) The value of the collateral assets pledge to the loan. BBVA Group approximates these variables by using a proxy indicator from the set included in the macroeconomic scenario s provided by the economic research department. Only a single specific indicator for each of the three categories can be used and only core macroeconomic indicators should be chosen as first choice: for a) using Real GDP Growth for the purpose of condition al forecasting can be seen as the single sufficient “factor” required for capturing the influence of all potentially relevant macro-financial scenario on internal PDs and LGD ; for b) using the most representative short term interest rate (typically the po licy rate or the most liquid sovereign yield or interbank rate or EMBI) or exchange rates expressed in real terms and for c) using a comprehensive index of the price of real estate properties also expressed in real terms in the case of mortgage loans and a representative index of the price of the relevant commodity (in real terms) for corporate loan portfolios concentrated in exporters or producer of such commodity. Real GDP growth is given priority over any other indicator not only because it is the most c omprehensive indicator of income and economic activity but also because it is the central variable in the generation of macroeconomic scenarios. Multiple scenario approach under IFRS 9 IFRS 9 requires calculating an unbiased probability weighted measuremen t of expected credit losses (“ECL”) by evaluating a range of possible outcomes, including forecasts of future economic conditions. The BBVA Research teams within the BBVA Group produce forecasts of the macroeconomic variables under the baseline scenario, w hich are used in the rest of the related processes of the bank, such as budgeting, ICAAP and risk appetite framework, stress testing, etc. Additionally, the BBVA Research teams produced alternative scenarios to the baseline scenario so as to meet the requi rements under the IFRS 9 standard. Alternative macroeconomic scenarios For each of the macro-financial variables, BBVA Research produces three scenarios. Each of these scenarios corresponds to the expected value of a different area of the probabilistic di stribution of the possible projections of the economic variables. The approach in BBVA consists on using the scenario that is the most likely scenario, which is the baseline scenario, consistent with the rest of internal processes (ICAAP, Budgeting…) and t hen applying an overlay adjustment that is calculated by taking into account the weighted average of the ECL determined by each of the scenarios. It is important to note that in general, it is expected that the effect of the overlay is to increase the ECL. It is possible to obtain an overlay that does not have that effect, whenever the relationship between macro scenarios and losses is linear. However, the overlay is not expected to reduce the ECL. 7.3.2 Credit risk exposure In accordance with IFRS 7 “Fi nancial Instruments: Disclosures”, the BBVA Group’s maximum credit risk exposure (see definition below) by headings in the balance sheets as of December 31, 2018 is provided below. It does not consider the availability of collateral or other credit enhance ments to guarantee compliance with payment obligations. The details are broken down by financial instruments and counterparties.
Maximum Credit Risk Exposure (Millions of euros)
| Notes | 2018 |  |  |
Financial assets held for trading |  | 59,581 |  |  |
Debt securities | 10 | 25,577 |  |  |
Equity instruments | 10 | 5,254 |  |  |
Loans and advances | 10 | 28,750 |  |  |
Non-trading financial assets mandatorily at fair value through profit or loss |  | 5,135 |  |  |
Loans and advances | 11 | 1,803 |  |  |
Debt securities | 11 | 237 |  |  |
Equity instruments | 11 | 3,095 |  |  |
Financial assets designated at fair value through profit or loss | 12 | 1,313 |  |  |
Derivatives (trading and hedging) |  | 38,249 | Stage 1 | Stage 2 | Stage 3
Financial assets at fair value through other comprehensive income |  | 56,332 | 56,329 | 3 | -
Debt securities | 13.1 | 53,737 | 53,734 | 3 | -
Equity instruments | 13.1 | 2,595 | 2,595 | - | -
Financial assets at amortized cost |  | 431,927 | 384,632 | 30,902 | 16,394
Loans and advances to central banks |  | 3,947 | 3,947 | - | -
Loans and advances to credit institutions |  | 9,175 | 9,131 | 34 | 10
Loans and advances to customers |  | 386,225 | 339,204 | 30,673 | 16,348
Debt securities |  | 32,580 | 32,350 | 195 | 35
Total financial assets risk |  | 592,538 | 440,960 | 30,905 | 16,394
Total loan commitments and financial guarantees | 33 | 170,511 | 161,404 | 8,120 | 987
Total maximum credit exposure |  | 763,049 |  |  |
There was no similar breakdown before the implementation of IFRS 9 on January 1, 2018 (see Note 2.1). The maximum credit exposure presented in the table above is determined by type of financial asset as explained below: In the case of financial assets recognized in the consolidated balance sheets, exposure to credit risk is considered equal to its carry ing amount (not including impairment losses), with the sole exception of derivatives and hedging derivatives. The maximum credit risk exposure on financial guarantees granted is the maximum that the Group would be liable for if these guarantees were called in, and that is their amount. The calculation of risk exposure for derivatives is based on the sum of two factors: the derivatives fair value and their potential risk (or "add-on"). - The first factor, fair value, reflects the difference between original commitments and fair values on the reporting date (mark-to-market). - The second factor, potential risk (‘add-on’), is an estimate of the maximum increase to be expected on risk exposure over a derivative fair value (at a given statistical confidence level) as a result of future changes in the fair value over the remaining term of the derivatives. - The consideration of the potential risk ("add-on") relates the risk exposure to the exposure level at the time of a customer’s default. The exposure level will depend on the customer’s credit quality and the type of transaction with such customer. Given the fact that default is an uncertain event which might occur any time during the life of a contract, the BBVA Group has to consider not only the credit exp osure of the derivatives on the reporting date, but also the potential changes in exposure during the life of the contract. This is especially important for derivatives, whose valuation changes substantially throughout their terms, depending on the fluctua tion of market prices. The breakdown by counterparty and product of loans and advances, net of impairment losses, as well as the gross carrying amount by type of product, classified in the different headings of the assets, as of December 3 1, 2018, 2017 and 2016 is shown below
December 2018 (Millions of Euros)
| Central banks | General governments | Credit institutions | Other financial corporations | Non-financial corporations | Households | Total | Provisions | Gross carrying amount
By product |  |  |  |  |  |  |  |  |
On demand and short notice | - | 10 | - | 151 | 2,833 | 648 | 3,641 | (193) | 3,834
Credit card debt | - | 8 | 1 | 2 | 2,328 | 13,108 | 15,446 | (1,048) | 16,495
Trade receivables |  | 948 | - | 195 | 16,190 | 103 | 17,436 | (280) | 17,716
Finance leases | - | 226 | - | 3 | 8,014 | 406 | 8,650 | (427) | 9,077
Reverse repurchase loans | - | 293 | 477 | - | - | - | 770 | (1) | 772
Other term loans | 3,911 | 26,839 | 2,947 | 7,030 | 133,573 | 157,760 | 332,060 | (10,204) | 342,264
Advances that are not loans | 29 | 1,592 | 5,771 | 2,088 | 984 | 498 | 10,962 | (63) | 11,025
Loans and advances | 3,941 | 29,917 | 9,196 | 9,468 | 163,922 | 172,522 | 388,966 | (12,217) | 401,183
By secured loans |  |  |  |  |  |  |  |  |
of which: mortgage loans collateralized by immovable property |  | 1,056 | 15 | 219 | 26,784 | 111,809 | 139,883 | (4,122) | 144,005
of which: other collateralized loans | - | 7,179 | 285 | 1,389 | 31,393 | 6,835 | 47,081 | (774) | 47,855
By purpose of the loan |  |  |  |  |  |  |  |  |
of which: credit for consumption |  |  |  |  |  | 40,124 | 40,124 | (2,613) | 42,736
of which: lending for house purchase |  |  |  |  |  | 111,007 | 111,007 | (1,945) | 112,952
By subordination |  |  |  |  |  |  |  |  |
of which: project finance loans |  |  |  |  | 13,973 |  | 13,973 | (312) | 14,286
December 2017 (Millions of euros)
| Central banks | General governments | Credit institutions | Other financial corporations | Non-financial corporations | Households | Total
On demand and short notice | - | 222 | - | 270 | 7,663 | 2,405 | 10,560
Credit card debt | - | 6 | - | 3 | 1,862 | 13,964 | 15,835
Trade receivables |  | 1,624 | - | 497 | 20,385 | 198 | 22,705
Finance leases | - | 205 | - | 36 | 8,040 | 361 | 8,642
Reverse repurchase loans | 305 | 1,290 | 13,793 | 10,912 | - | - | 26,300
Other term loans | 6,993 | 26,983 | 4,463 | 5,763 | 125,228 | 155,418 | 324,848
Advances that are not loans | 2 | 1,964 | 8,005 | 1,044 | 1,459 | 522 | 12,995
Loans and advances | 7,301 | 32,294 | 26,261 | 18,525 | 164,637 | 172,868 | 421,886
of which: mortgage loans (Loans collateralized by immovable property) |  | 998 | - | 308 | 37,353 | 116,938 | 155,597
of which: other collateralized loans |  | 7,167 | 13,501 | 12,907 | 24,100 | 9,092 | 66,767
of which: credit for consumption |  |  |  |  |  | 40,705 | 40,705
of which: lending for house purchase |  |  |  |  |  | 114,709 | 114,709
of which: project finance loans |  |  |  |  | 16,412 |  | 16,412
December 2016 (Millions of euros)
| Central banks | General governments | Credit institutions | Other financial corporations | Non-financial corporations | Households | Total
On demand and short notice | - | 373 | - | 246 | 8,125 | 2,507 | 11,251
Credit card debt | - | 1 | - | 1 | 1,875 | 14,719 | 16,596
Trade receivables |  | 2,091 | - | 998 | 20,246 | 418 | 23,753
Finance leases | - | 261 | - | 57 | 8,647 | 477 | 9,442
Reverse repurchase loans | 81 | 544 | 15,597 | 6,746 | - | - | 22,968
Other term loans | 8,814 | 29,140 | 7,694 | 6,878 | 136,105 | 167,892 | 356,524
Advances that are not loans | - | 2,410 | 8,083 | 2,082 | 1,194 | 620 | 14,389
Loans and advances | 8,894 | 34,820 | 31,373 | 17,009 | 176,192 | 186,633 | 454,921
of which: mortgage loans [Loans collateralized by immovable property] |  | 4,722 | 112 | 690 | 44,406 | 132,398 | 182,328
of which: other collateralized loans |  | 3,700 | 15,191 | 8,164 | 21,863 | 6,061 | 54,979
of which: credit for consumption |  |  |  |  |  | 44,504 | 44,504
of which: lending for house purchase |  |  |  |  |  | 127,606 | 127,606
of which: project finance loans |  |  |  |  | 19,269 |  | 19,269
7.3.3 Mitigation of credit risk, collateralized credit risk and other credit enhancements In most cases, maximum credit risk exposure is reduced by collateral, credit enhancements and other actions which mitigate the Group’s exposure. The BBVA Group applies a credit risk hedging and mitigation policy deriving from a banking approach focused on relationship banking. The existenc e of guarantees could be a necessary but not sufficient instrument for accepting risks, as the assumption of risks by the Group requires prior evaluation of the debtor’s capacity for repayment, or that the debtor can generate sufficient resources to allow the amortization of the risk incurred under the agreed terms. The policy of accepting risks is therefore organized into three different levels in the BBVA Group: Analysis of the financial risk of the transaction, based on the debtor’s capacity for repaymen t or generation of funds. The constitution of guarantees that are adequate, or at any rate generally accepted, for the risk assumed, in any of the generally accepted forms: monetary, secured, personal or hedge guarantees; and finally Assessment of the repa yment risk (asset liquidity) of the guarantees received. The procedures for the management and valuation of collateral are set out in the Corporate Policies (retail and wholesale), which establish the basic principles for credit risk management, including the management of collaterals 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 the collaterals received must be correctly assigned 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 o f collateral for each financial instrument class: Financial instruments held for trading: The guarantees or credit enhancements obtained directly from the issuer or counterparty are implicit in the clauses of the instrument. Derivatives and hedging derivat ives: 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 guarantees and collatera ls, depending on counterparty solvency and the nature of the transaction. The summary of the compensation effect (via netting and collateral) for derivatives and securities operations is presented in Note 7.4.3. Other financial assets designated at fair v alue through profit or loss and financial assets at fair value through other comprehensive income: The guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent to the structure of the instrument. At December 31, 2018, BBVA Group had no credit risk exposure of impaired financial assets at fair value through other comprehensive income at December 31, 2018 (see Note 7.3.2). Financial assets at amortized cost: - Loans and advances to credit institutions: These usually only have the counterparty’s personal guarantee. - Loans and advances to customers: Most of these loans and advances are backed by personal guarantees extended by the customer. 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: The guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent t o the structure of the instrument. The disclosure of impaired financial assets at amortized cost covered by collateral (see Note 7.3.2), by type of collateral, at December 31, 2018, is the following:
December 2018 (Millions of Euros)
| Maximum exposure to credit risk | Of which secured by collateral
| Residential properties | Commercial properties | Cash | Others | Financial
Impaired financial assets at amortized cost | 16,394 | 3,484 | 1,255 | 13 | 317 | 502
Total | 16,394 | 3,484 | 1,255 | 13 | 317 | 502
Financial guarantees, other con tingent risks and drawable by third parties: These have the counterparty’s personal guarantee. The maximum credit risk exposure of impaired financial guarantees and other commitments at December 31, 2018 amounts to €987 million (see Note 7.3.2). 7.3.4 Cr edit quality of financial assets that are neither past due nor impaired The BBVA Group has tools (“scoring” and “rating”) that enable it to rank the credit quality of its transactions and customers based on an assessment and its correspondence with the pro bability of default (“PD”) scales. To analyze the performance of PD, the Group has a series of tracking tools and historical databases that collect the pertinent internally generated information. These tools can be grouped together into scoring and rating models. Scoring Scoring is a decision-making model that contributes to both the arrangement and management of retail loans: consumer loans, mortgages, credit cards for individuals, etc. Scoring is the tool used to decide to originate a loan, what amount sh ould be originated and what strategies can help establish the price, because it is an algorithm that sorts transactions by their credit quality. This algorithm enables the BBVA Group to assign a score to each transaction requested by a customer, on the bas is of a series of objective characteristics that have statistically been shown to discriminate between the quality and risk of this type of transactions. The advantage of scoring lies in its simplicity and homogeneity: all that is needed is a series of obj ective data for each customer, and this data is analyzed automatically using an algorithm. There are three types of scoring, based on the information used and on its purpose: Reactive scoring: measures the risk of a transaction requested by an individual using variables relating to the requested transaction and to the customer’s socio-economic data available at the time of the request. The new transaction is approved or rejected depending on the score. Behavioral scoring: scores transactions for a given pr oduct in an outstanding risk portfolio of the entity, enabling the credit rating to be tracked and the customer’s needs to be anticipated. It uses transaction and customer variables available internally. Specifically, variables that refer to the behavior o f both the product and the customer. Proactive scoring: gives a score at customer level using variables related to the individual’s general behavior with the entity, and to his/her payment behavior in all the contracted products. The purpose is to track th e customer’s credit quality and it is used to pre-approved new transactions. Rating Rating tools, as opposed to scoring tools, do not assess transactions but focus on the rating of customers instead: companies, corporations, SMEs, general governments, etc. A rating tool is an instrument that, based on a detailed financial study, helps determine a customer’s ability to meet his/her financial obligations. The final rating is usually a combination of various factors: on one hand, quantitative factors, and on t he other hand, qualitative factors. It is a middle road between an individual analysis and a statistical analysis. The main difference between ratings and scorings is that the latter are used to assess retail products, while ratings use a wholesale banking customer approach. Moreover, scorings only include objective variables, while ratings add qualitative information. And although both are based on statistical studies, adding a business view, rating tools give more weight to the business criterion compared to scoring tools. For portfolios where the number of defaults is low (sovereign risk, corporates, financial entities, etc.) the internal information is supplemented by “benchmarking” of the external rating agencies (Moody’s, Standard & Poor’s and Fitch). To this end, each year the PDs compiled by the rating agencies at each level of risk rating are compared, and the measurements compiled by the various agencies are mapped against those of the BBVA master rating scale. Once the probability of default of a t ransaction or customer has been calculated, a "business cycle adjustment" is carried out. This is a means of establishing a measure of risk that goes beyond the time of its calculation. The aim is to capture representative information of the behavior of po rtfolios over a complete economic cycle. This probability is linked to the Master Rating Scale prepared by the BBVA Group to enable uniform classification of the Group’s various asset risk portfolios. The table below shows the abridged scale used to classi fy the BBVA Group’s outstanding risk as of December 31, 2018:
External rating | Internal rating | Probability of default(basis points)
Standard&Poor's List | Reduced List (22 groups) | Average | Minimum from >= | Maximum
AAA | AAA | 1 | - | 2
AA+ | AA+ | 2 | 2 | 3
AA | AA | 3 | 3 | 4
AA- | AA- | 4 | 4 | 5
A+ | A+ | 5 | 5 | 6
A | A | 8 | 6 | 9
A- | A- | 10 | 9 | 11
BBB+ | BBB+ | 14 | 11 | 17
BBB | BBB | 20 | 17 | 24
BBB- | BBB- | 31 | 24 | 39
BB+ | BB+ | 51 | 39 | 67
BB | BB | 88 | 67 | 116
BB- | BB- | 150 | 116 | 194
B+ | B+ | 255 | 194 | 335
B | B | 441 | 335 | 581
B- | B- | 785 | 581 | 1,061
CCC+ | CCC+ | 1,191 | 1,061 | 1,336
CCC | CCC | 1,500 | 1,336 | 1,684
CCC- | CCC- | 1,890 | 1,684 | 2,121
CC+ | CC+ | 2,381 | 2,121 | 2,673
CC | CC | 3,000 | 2,673 | 3,367
CC- | CC- | 3,780 | 3,367 | 4,243
These different levels and their probability of default were calculated by using as a reference the rating scales and default rates provided by the external agencies Stan dard & Poor’s and Moody’s. These calculations establish the levels of probability of default for the BBVA Group’s Master Rating Scale. Although this scale is common to the entire Group, the calibrations (mapping scores to PD sections/Master Rating Scale le vels) are carried out at tool level for each country in which the Group has tools available. The table below outlines the distribution by probability of default within 12 months and stages of the gross carrying amount of loans and advances to customers in percentage of BBVA Group as of December 31, 2018 is shown below:
| December 2018
| Subject to 12 month ECL (Stage 1) | Subject to lifetime ECL (Stage 2)
Probability of default(basis points) | % | %
0 to 2 | 9.6 | 0.0
2 to 5 | 10.8 | 0.1
5 to 11 | 6.3 | 0.0
11 to 39 | 20.9 | 0.4
39 to 194 | 30.1 | 1.8
194 to 1,061 | 12.2 | 3.6
1,061 to 2,121 | 1.6 | 1.2
> 2,021 | 0.2 | 1.2
Total | 91.7 | 8.3
There was no similar breakdown before the implementation of IFRS 9 on January 1, 2018 (see Note 2.1). 7.3.5 Past due but not impaired and impaired secured loans r isks The tables below provides details by counterpart and by product of past due risks but not considered to be impaired, as of December 31, 2018, 2017 and 2016, listed by their first past-due date; as well as the breakdown of the debt sec urities and loans and advances individually and collectively estimated (see Note 2.2.1):
December 2018 (Millions of euros)
| Assets without significant increase in credit risk since initial recognition (Stage 1) | Assets with significant increase in credit risk since initial recognition but not credit-impaired (Stage 2) | Credit-impaired assets (Stage 3)
| <= 30 days | > 30 days <= 90 days | > 90 days | <= 30 days | > 30 days <= 90 days | > 90 days | <= 30 days | > 30 days <= 90 days | > 90 days
Debt securities | - | - | - | - | - | - | - | - | 5
Loans and advances | 4,191 | 454 | - | 4,261 | 3,228 | - | 407 | 900 | 2,769
General governments | 95 | 7 | - | 5 | 1 | - | 5 | 5 | 26
Credit institutions | 3 | - | - | - | - | - | - | - | -
Other financial corporations | 117 | 224 | - | 2 | - | - | - | - | 5
Non-financial corporations | 1,140 | 158 | - | 1,282 | 1,180 | - | 149 | 276 | 1,333
Households | 2,835 | 64 | - | 2,971 | 2,047 | - | 254 | 618 | 1,404
TOTAL | 4,191 | 454 | - | 4,261 | 3,228 | - | 407 | 900 | 2,774
Loans and advances by product, by collateral and by subordination |  |  |  |  |  |  |  |  |
On demand (call) and short notice (current account) | 127 | - | - | 25 | 47 | - | 3 | 4 | 52
Credit card debt | 182 | 10 | - | 598 | 102 | - | 24 | 25 | 120
Trade receivables | 46 | 12 | - | 20 | 106 | - | 2 | 11 | 50
Finance leases | 307 | 16 | - | 43 | 102 | - | 10 | 20 | 110
Other term loans | 3,421 | 325 | - | 3,575 | 2,869 | - | 369 | 840 | 2,433
Advances that are not loans | 108 | 89 | - | - | 1 | - | - | - | 4
of which: mortgage loans collateralized by immovable property | 1,681 | 38 | - | 1,598 | 1,745 | - | 251 | 712 | 1,365
of which: other collateralized loans | 255 | 14 | - | 742 | 99 | - | 22 | 21 | 103
of which: credit for consumption | 910 | 27 | - | 1,278 | 424 | - | 49 | 49 | 281
of which: lending for house purchase | 1,365 | 24 | - | 1,394 | 1,404 | - | 170 | 507 | 839
of which: project finance loans | 1 | - | - | - | 382 | - | - | - | 71
December 2017 (Millions of euros) (*)
| Past due but not impaired | Impaired assets | Carrying amount of the impaired assets | Specific allowances for financial assets, individually and collectively estimated | Collective allowances for incurred but not reported losses | Accumulated write-offs
| ≤ 30 days | > 30 days ≤ 60 days | > 60 days ≤ 90 days
Debt securities | - | - | - | 66 | 38 | (28) | (21) | -
Loans and advances | 3,432 | 759 | 503 | 19,401 | 10,726 | (8,675) | (4,109) | (29,938)
General governments | 75 | 3 | 13 | 171 | 129 | (42) | (69) | (27)
Credit institutions | - | - | - | 11 | 5 | (6) | (30) | (5)
Other financial corporations | 2 | - | - | 12 | 6 | (7) | (19) | (5)
Non-financial corporations | 843 | 153 | 170 | 10,791 | 5,192 | (5,599) | (1,939) | (18,988)
Households | 2,512 | 603 | 319 | 8,417 | 5,395 | (3,022) | (2,052) | (10,913)
TOTAL | 3,432 | 759 | 503 | 19,467 | 10,764 | (8,703) | (4,130) | (29,938)
Loans and advances by product, by collateral and by subordination |  |  |  |  |  |  |  |
On demand (call) and short notice (current account) | 77 | 12 | 11 | 389 | 151 | (238) |  |
Credit card debt | 397 | 66 | 118 | 629 | 190 | (439) |  |
Trade receivables | 115 | 8 | 9 | 515 | 179 | (336) |  |
Finance leases | 138 | 66 | 47 | 431 | 155 | (276) |  |
Other term loans | 2,705 | 606 | 317 | 17,417 | 10,047 | (7,370) |  |
Advances that are not loans | 1 | - | 1 | 20 | 3 | (16) |  |
of which: mortgage loans (Loans collateralized by immovable property) | 1,345 | 360 | 164 | 11,388 | 7,630 | (3,757) |  |
of which: other collateralized loans | 592 | 137 | 43 | 803 | 493 | (310) |  |
of which: credit for consumption | 1,260 | 248 | 207 | 1,551 | 457 | (1,093) |  |
of which: lending for house purchase | 1,034 | 307 | 107 | 5,730 | 4,444 | (1,286) |  |
of which: project finance loans | 13 | - | 25 | 1,165 | 895 | (271) |  |
(*) Figures originally reported in the year 2017 in accordance to the applicable regulation, without restatements.
December 2016 (Millions of euros) (*)
| Past due but not impaired | Impaired assets | Carrying amount of the impaired assets | Specific allowances for financial assets, individually and collectively estimated | Collective allowances for incurred but not reported losses | Accumulated write-offs
| <= 30 days | > 30 days <= 60 days | > 60 days <= 90 days
Debt securities | - | - | - | 272 | 128 | (144) | (46) | (1)
Loans and advances | 3,384 | 696 | 735 | 22,925 | 12,133 | (10,793) | (5,224) | (29,346)
General governments | 66 | - | 2 | 295 | 256 | (39) | (13) | (13)
Credit institutions | 3 | - | 82 | 10 | 3 | (7) | (36) | (5)
Other financial corporations | 4 | 7 | 21 | 34 | 8 | (25) | (57) | (6)
Non-financial corporations | 968 | 209 | 204 | 13,786 | 6,383 | (7,402) | (2,789) | (18,020)
Households | 2,343 | 479 | 426 | 8,801 | 5,483 | (3,319) | (2,329) | (11,303)
TOTAL | 3,384 | 696 | 735 | 23,197 | 12,261 | (10,937) | (5,270) | (29,347)
Loans and advances by product, by collateral and by subordination |  |  |  |  |  |  |  |
On demand (call) and short notice (current account) | 79 | 15 | 29 | 562 | 249 | (313) |  |
Credit card debt | 377 | 88 | 124 | 643 | 114 | (529) |  |
Trade receivables | 51 | 15 | 13 | 424 | 87 | (337) |  |
Finance leases | 188 | 107 | 59 | 516 | 252 | (264) |  |
Reverse repurchase loans | - | - | 82 | 1 | - | (1) |  |
Other term loans | 2,685 | 469 | 407 | 20,765 | 11,429 | (9,336) |  |
Advances that are not loans | 5 | - | 21 | 14 | 2 | (12) |  |
of which: mortgage loans (Loans collateralized by immovable property) | 1,202 | 265 | 254 | 16,526 | 9,008 | (5,850) |  |
of which: other collateralized loans | 593 | 124 | 47 | 1,129 | 656 | (275) |  |
of which: credit for consumption | 1,186 | 227 | 269 | 1,622 | 455 | (1,168) |  |
of which: lending for house purchase | 883 | 194 | 105 | 6,094 | 4,546 | (1,548) |  |
of which: project finance loans | 138 | - | - | 253 | 105 | (147) |  |
(*) Figures originally reported in the year 2016 in accordance to the applicable regulation, without restatements. The breakdown of loans and advances, within financial assets at amortized cost, impaired and accumulated impairment by sectors as of December 31, 2018, 2017 and 2016 is as follows:
December 2018 (Millions of euros) |  |  |
| Non-performing loans and advances | Accumulated impairment | Non-performing loans and advances as a % of the total
General governments | 128 | (84) | 0.4%
Credit institutions | 10 | (12) | 0.1%
Other financial corporations | 11 | (22) | 0.1%
Non-financial corporations | 8,372 | (6,260) | 4.9%
Agriculture, forestry and fishing | 122 | (107) | 3.3%
Mining and quarrying | 96 | (70) | 1.9%
Manufacturing | 1,695 | (1,134) | 4.6%
Electricity, gas, steam and air conditioning supply | 585 | (446) | 4.2%
Water supply | 19 | (15) | 1.8%
Construction | 1,488 | (1,007) | 12.5%
Wholesale and retail trade | 1,624 | (1,259) | 6.3%
Transport and storage | 459 | (374) | 4.7%
Accommodation and food service activities | 315 | (204) | 4.0%
Information and communication | 113 | (72) | 2.1%
Financial and insurance activities | 147 | (128) | 2.1%
Real estate activities | 834 | (624) | 4.8%
Professional, scientific and technical activities | 204 | (171) | 4.0%
Administrative and support service activities | 128 | (125) | 4.0%
Public administration and defense, compulsory social security | 5 | (7) | 1.6%
Education | 31 | (31) | 3.4%
Human health services and social work activities | 63 | (63) | 1.4%
Arts, entertainment and recreation | 59 | (41) | 4.5%
Other services | 386 | (382) | 3.9%
Households | 7,838 | (5,833) | 4.4%
LOANS AND ADVANCES | 16,359 | (12,211) | 4.1%
December 2017 (Millions of euros)
| Non-performing loans and advances | Accumulated impairment or Accumulated changes in fair value due to credit risk | Non-performing loans and advances as a % of the total
General governments | 171 | (111) | 0.5%
Credit institutions | 11 | (36) | 0.3%
Other financial corporations | 12 | (26) | 0.1%
Non-financial corporations | 10,791 | (7,538) | 6.3%
Agriculture, forestry and fishing | 166 | (123) | 4.3%
Mining and quarrying | 177 | (123) | 3.7%
Manufacturing | 1,239 | (955) | 3.6%
Electricity, gas, steam and air conditioning supply | 213 | (289) | 1.8%
Water supply | 29 | (11) | 4.5%
Construction | 2,993 | (1,708) | 20.1%
Wholesale and retail trade | 1,706 | (1,230) | 5.9%
Transport and storage | 441 | (353) | 4.2%
Accommodation and food service activities | 362 | (222) | 4.3%
Information and communication | 984 | (256) | 17.0%
Real estate activities | 1,171 | (1,100) | 7.9%
Professional, scientific and technical activities | 252 | (183) | 3.8%
Administrative and support service activities | 188 | (130) | 6.3%
Public administration and defense, compulsory social security | 4 | (6) | 1.9%
Education | 31 | (25) | 3.4%
Human health services and social work activities | 75 | (68) | 1.7%
Arts, entertainment and recreation | 69 | (38) | 4.6%
Other services | 690 | (716) | 4.3%
Households | 8,417 | (5,073) | 4.7%
LOANS AND ADVANCES | 19,401 | (12,784) | 4.5%
December 2016 (Millions of euros)
| Non-performing | Accumulated impairment or Accumulated changes in fair value due to credit risk | Non-performing loans and advances as a % of the total
General governments | 295 | (52) | 0.8%
Credit institutions | 10 | (42) | 0.0%
Other financial corporations | 34 | (82) | 0.2%
Non-financial corporations | 13,786 | (10,192) | 7.4%
Agriculture, forestry and fishing | 221 | (188) | 5.1%
Mining and quarrying | 126 | (83) | 3.3%
Manufacturing | 1,569 | (1,201) | 4.5%
Electricity, gas, steam and air conditioning supply | 569 | (402) | 3.2%
Water supply | 29 | (10) | 3.5%
Construction | 5,358 | (3,162) | 26.3%
Wholesale and retail trade | 1,857 | (1,418) | 6.2%
Transport and storage | 442 | (501) | 4.5%
Accommodation and food service activities | 499 | (273) | 5.9%
Information and communication | 112 | (110) | 2.2%
Real estate activities | 1,441 | (1,074) | 8.7%
Professional, scientific and technical activities | 442 | (380) | 6.0%
Administrative and support service activities | 182 | (107) | 7.3%
Public administration and defense, compulsory social security | 18 | (25) | 3.0%
Education | 58 | (31) | 5.4%
Human health services and social work activities | 89 | (88) | 1.8%
Arts, entertainment and recreation | 84 | (51) | 5.1%
Other services | 691 | (1,088) | 4.2%
Households | 8,801 | (5,648) | 4.6%
LOANS AND ADVANCES | 22,925 | (16,016) | 5.0%
The changes during the years 2018, 2017 and 2016 of impaired financial assets and contingent risks are as follow:
Changes in Impaired Financial Assets and Contingent Risks (Millions of euros)
| 2018 | 2017 | 2016
Balance at the beginning | 20,590 | 23,877 | 26,103
Additions | 9,792 | 10,856 | 11,133
Decreases (*) | (6,909) | (7,771) | (7,633)
Net additions | 2,883 | 3,085 | 3,500
Amounts written-off | (5,076) | (5,758) | (5,592)
Exchange differences and other | (1,264) | (615) | (134)
Balance at the end | 17,134 | 20,590 | 23,877
(*) Reflects the total amount of impaired loans derecognized from the consolidated balance sheet throughout the year as a result of mortgage foreclosures and real estate assets received in lieu of payment as well as monetary recoveries (see Notes 19 and 20 to the Consolidated Financial Statement for additional information). The changes during the years 2018, 2017 and 2016 in financial assets derecognized from the accompanying consolidated ba lance sheet as their recovery is considered unlikely (hereinafter "write-offs"), is shown below:
Changes in Impaired Financial Assets Written-Off from the Balance Sheet (Millions of Euros)
| Notes | 2018 | 2017 | 2016
Balance at the beginning |  | 30,139 | 29,347 | 26,143
Increase: |  | 6,164 | 5,986 | 5,699
Decrease: |  | (4,210) | (4,442) | (2,384)
Re-financing or restructuring |  | (10) | (9) | (32)
Cash recovery | 47 | (589) | (558) | (541)
Foreclosed assets |  | (625) | (149) | (210)
Sales of written-off |  | (1,805) | (2,284) | (45)
Debt forgiveness |  | (889) | (1,121) | (864)
Time-barred debt and other causes |  | (292) | (321) | (692)
Net exchange differences |  | 250 | (752) | (111)
Balance at the end |  | 32,343 | 30,139 | 29,347
As indicated in Note 2.2.1, although they have been derecognized from the consolidated balance sheet, the BBVA Group continues to atte mpt to collect on these written-off financial assets, until the rights to receive them are fully extinguished, either because it is time-barred financial asset, the financial asset is condoned, or other reasons. 7.3.6 Impairment losses B elow are the changes in the years ended December 31, 2018, 2017 and 2016, in the provisions recognized on the accompanying consolidated balance sheets to cover estimated impairment losses in loans and advances and debt securities measured at amortized cost and financial assets at fair value through other comprehensive income as well as the loan commitment and financial guarantees:
Financial assets at amortized cost. December 2018 (Millions of Euros)
| Not credit-impaired | Credit-impaired | Total
| Stage 1 | Stage 2 | Credit-impaired (Stage 3) | Purchased/originated credit-impaired (Stage 3)
| Loss allowances | Loss allowances (collectively assessed) | Loss allowances (individually assessed) | Loss allowances | Loss allowances | Loss allowances
Opening balance (under IFRS 9) | (2,237) | (1,827) | (525) | (9,371) | - | (13,960)
Transfers from Stage 1 to Stage 2 (not credit-impaired) | 208 | (930) | (218) | - | - | (940)
Transfers from Stage 2 (not credit - impaired) to Stage 1 | (125) | 619 | 50 | - | - | 544
Transfers to Stage 3 | 55 | 282 | 564 | (2,127) | - | (1,226)
Transfers from Stage 3 to Stage 1 or 2 | (7) | (126) | (68) | 333 | - | 132
Changes without transfers between Stages | 358 | (53) | (260) | (3,775) | - | (3,730)
New financial assets originated | (1,072) | (375) | (244) | - | - | (1,692)
Disposals | 2 | 3 | - | 110 | - | 115
Repayments | 641 | 432 | 118 | 1,432 | - | 2,623
Write-offs | 13 | 14 | 2 | 4,433 | - | 4,461
Foreign exchange | (84) | 72 | (93) | 343 | - | 239
Modifications that result in derecognition | 5 | 10 | 25 | 98 | - | 138
Modifications that do not result in derecognition | 3 | (8) | 1 | (362) | - | (366)
Other | 135 | 133 | 20 | 1,111 | - | 1,399
Closing balance | (2,106) | (1,753) | (628) | (7,777) | - | (12,264)
Financial assets at fair value through other comprehensive income. December 2018 (Millions of Euros)
| Not credit-impaired | Credit-impaired | Total
| Stage 1 | Stage 2 | Credit-impaired (Stage 3) | Purchased/originated credit-impaired (Stage 3)
| Loss allowances | Loss allowances (collectively assessed) | Loss allowances (individually assessed) | Loss allowances | Loss allowances | Loss allowances
Opening balance (under IFRS 9) | (20) | (1) | - | (14) | - | (35)
Changes without transfers between Stages | (7) | - | - | 16 | - | 9
New financial assets originated | (3) | - | - | - | - | (3)
Repayments | 5 | - | - | - | - | 5
Foreign exchange | 2 | - | - | - | - | 2
Modifications that do not result in derecognition | - | - | - | (11) | - | (11)
Other | (5) | 1 | - | 8 | - | 4
Closing balance | (28) | - | - | - | - | (28)
Loan commitments and financial guarantees. December 2018 (Millions of Euros)
| Not credit-impaired | Credit-impaired | Total
| Stage 1 | Stage 2 | Credit-impaired (Stage 3) | Purchased/originated credit-impaired (Stage 3)
| Loss allowances | Loss allowances (collectively assessed) | Loss allowances (individually assessed) | Loss allowances | Loss allowances | Loss allowances
Opening balance (under IFRS 9) | (200) | (135) | (84) | (285) | - | (704)
Transfers from Stage 1 to Stage 2 (not credit-impaired) | 14 | (84) | (11) | - | - | (81)
Transfers from Stage 2 (not credit - impaired) to Stage 1 | (8) | 65 | 1 | - | - | 58
Transfers to Stage 3 | 1 | 4 | 16 | (48) | - | (27)
Transfers from Stage 3 to Stage 1 or 2 | (3) | (3) | - | 20 | - | 14
Changes without transfers between Stages | 14 | 12 | 6 | 35 | - | 67
New financial assets originated | (102) | (32) | (20) | - | - | (154)
Disposals | - | - | - | 1 | - | 1
Repayments | 47 | 58 | 24 | 73 | - | 202
Foreign exchange | 11 | 1 | (2) | 6 | - | 16
Modifications that do not result in derecognition | - | - | - | (32) | - | (32)
Other | (6) | (13) | 10 | 13 | - | 4
Closing balance | (232) | (127) | (60) | (217) | - | (636)
December 2017 (Millions of euros) (*)
| Opening balance | Increases due to amounts set aside for estimated loan losses during the period | Decreases due to amounts reversed for estimated loan losses during the period | Decreases due to amounts taken against allowances | Transfers between allowances | Other adjustments | Closing balance | Recoveries recorded directly to the statement of profit or loss
Equity instruments |  |  |  |  |  |  |  |
Specific allowances for financial assets, individually and collectively estimated | (10,937) | (7,484) | 2,878 | 4,503 | 1,810 | 526 | (8,703) | 558
Debt securities | (144) | (26) | 6 | - | 123 | 13 | (28) | -
Credit institutions | (15) | (5) | 4 | - | 16 | - | - | -
Other financial corporations | (26) | (4) | 2 | - | - | 13 | (16) | -
Non-financial corporations | (103) | (17) | - | - | 107 | - | (12) | -
Loans and advances | (10,793) | (7,458) | 2,872 | 4,503 | 1,687 | 513 | (8,675) | 558
General governments | (39) | (70) | 37 | 14 | 1 | 15 | (42) | 1
Credit institutions | (7) | (2) | 2 | - | - | 1 | (6) | -
Other financial corporations | (25) | (287) | 3 | 38 | 227 | 38 | (7) | -
Non-financial corporations | (7,402) | (3,627) | 1,993 | 3,029 | (228) | 636 | (5,599) | 345
Households | (3,319) | (3,472) | 837 | 1,422 | 1,687 | (177) | (3,022) | 212
Collective allowances for incurred but not reported losses on financial assets | (5,270) | (1,783) | 2,159 | 1,537 | (1,328) | 557 | (4,130) | -
Debt securities | (46) | (8) | 30 | 1 | - | 3 | (21) | -
Loans and advances | (5,224) | (1,776) | 2,128 | 1,536 | (1,328) | 554 | (4,109) | -
Total | (16,206) | (9,267) | 5,037 | 6,038 | 482 | 1,083 | (12,833) | 558
(*) Figures originally report ed in the year 2017 in accordance to the applicable regulation, without restatements.
December 2016 (Millions of euros)
| Opening balance | Increases due to amounts set aside for estimated loan losses during the period | Decreases due to amounts reversed for estimated loan losses during the period | Decreases due to amounts taken against allowances | Transfers between allowances | Other adjustments | Closing balance | Recoveries recorded directly to the statement of profit or loss
Equity instruments |  |  |  |  |  |  |  |
Specific allowances for financial assets, individually and collectively estimated | (12,866) | (6,912) | 2,708 | 5,673 | (123) | 583 | (10,937) | 540
Debt securities | (35) | (167) | 6 | 64 | (10) | (2) | (144) | -
Credit institutions | (20) | - | - | 5 | - | - | (15) | -
Other financial corporations | (15) | (29) | 3 | 26 | (10) | (1) | (26) | -
Non-financial corporations | - | (138) | 3 | 33 | - | (1) | (103) | -
Loans and advances | (12,831) | (6,745) | 2,702 | 5,610 | (113) | 585 | (10,793) | 540
General governments | (37) | (2) | 20 | 6 | (27) | 2 | (39) | 1
Credit institutions | (17) | (2) | 3 | - | 10 | (3) | (7) | -
Other financial corporations | (38) | (34) | 9 | 22 | 10 | 6 | (25) | -
Non-financial corporations | (9,225) | (3,705) | 2,158 | 3,257 | (278) | 391 | (7,402) | 335
Households | (3,514) | (3,002) | 511 | 2,325 | 172 | 189 | (3,319) | 205
Collective allowances for incurred but not reported losses on financial assets | (6,024) | (1,558) | 1,463 | 88 | 775 | (15) | (5,270) | 1
Debt securities | (113) | (11) | 15 | 1 | 64 | - | (46) | -
Loans and advances | (5,911) | (1,546) | 1,449 | 87 | 711 | (15) | (5,224) | -
Total | (18,890) | (8,470) | 4,172 | 5,762 | 652 | 568 | (16,206) | 541
(*) Figures originally reported in the year 2016 in accordance to the applicable regulation, without restatements. 7.3.7 Refinancing and restructuring operations Group policies and principles with respect to refinancing and restructuring operations Refinancing and restructuring transactions (see definition in the Glossary) are carried out with customers who have requested such an operation in order to meet their current loan payments if they are expected, or may be expected, to experience financial difficulty in making the payments in the future. The basic aim of a refinancing and restructuring operation is to provide the c ustomer with a situation of financial viability over time by adapting repayment of the loan incurred with the Group to the customer’s new situation of fund generation. The use of refinancing and restructuring for other purposes, such as to delay loss recog nition, is contrary to BBVA Group policies. The BBVA Group’s refinancing and restructuring policies are based on the following general principles: Refinancing and restructuring is authorized according to the capacity of customers to pay the new installmen ts. This is done by first identifying the origin of the payment difficulties and then carrying out an analysis of the customers’ viability, including an updated analysis of their economic and financial situation and capacity to pay and generate funds. If t he customer is a company, the analysis also covers the situation of the industry in which it operates. With the aim of increasing the solvency of the operation, new guarantees and/or guarantors of demonstrable solvency are obtained where possible. An esse ntial part of this process is an analysis of the effectiveness of both the new and original guarantees. This analysis is carried out from the overall customer or group perspective. Refinancing and restructuring operations do not in general increase the a mount of the customer’s loan, except for the expenses inherent to the operation itself. The capacity to refinance and restructure loan is not delegated to the branches, but decided on by the risk units. The decisions made are reviewed from time to time w ith the aim of evaluating full compliance with refinancing and restructuring policies. These general principles are adapted in each case according to the conditions and circumstances of each geographical area in which the Group operates, and to the differ ent types of customers involved. In the case of retail customers (private individuals), the main aim of the BBVA Group’s policy on refinancing and restructuring loan is to avoid default arising from a customer’s temporary liquidity problems by implementing structural solutions that do not increase the balance of customer’s loan. The solution required is adapted to each case and the loan repayment is made easier, in accordance with the following principles: Analysis of the viability of operations based on t he customer’s willingness and ability to pay, which may be reduced, but should nevertheless be present. The customer must therefore repay at least the interest on the operation in all cases. No arrangements may be concluded that involve a grace period for both principal and interest. Refinancing and restructuring of operations is only allowed on those loans in which the BBVA Group originally entered into. Customers subject to refinancing and restructuring operations are excluded from marketing campaigns of any kind. In the case of non-retail customers (mainly companies, enterprises and corporates), refinancing/restructuring is authorized according to an economic and financial viability plan based on: Forecasted future income, margins and cash flows to allow entities to implement cost adjustment measures (industrial restructuring) and a business development plan that can help reduce the level of leverage to sustainable levels (capacity to access the financial markets). Where appropriate, the existence of a di vestment plan for assets and/or operating segments that can generate cash to assist the deleveraging process. The capacity of shareholders to contribute capital and/or guarantees that can support the viability of the plan. In accordance with the Grou p’s policy, the conclusion of a loan refinancing and restructuring operation does not meet the loan is reclassified from "impaired" or "significant increase in credit risk" to outstanding risk. The reclassification to "significant increase in credit risk" or normal risk categories must be based on the analysis mentioned earlier of the viability, upon completion of the probationary periods described below. The Group maintains the policy of including risks related to refinanced and restructured loans as eith er: "Impaired assets", as although the customer is up to date with payments, they are classified as unlikely to pay when there are significant doubts that the terms of their refinancing may not be met; or "Significant increase in credit risk" until the con ditions established for their consideration as normal risk are met). The conditions established for assets classified as “Significant increase in credit risk” to be reclassified out of this category are as follows: The customer must have paid past-due amou nts (principal and interest) since the date of the renegotiation or restructuring of the loan or other objective criteria, demonstrating the borrower´s ability to pay, have been verified; none of its exposures is more than 30 days past-due; and At least tw o years must have elapsed since completion of the renegotiation or restructuring of the loan and regular payments must have been made during at least half of this probation period; It is unlikely that the customer will have financial difficulties and, ther efore, it is expected that the customer will be able to meet its loan payment obligations (principal and interest) in a timely manner. The BBVA Group’s refinancing and restructuring policy provides for the possibility of two modifications in a 24 month per iod for loans that are not in compliance with the payment schedule. The internal models used to determine allowances for loan losses consider the restructuring and renegotiation of a loan, as well as re-defaults on such a loan, by assigning a lower interna l rating to restructured and renegotiated loans than the average internal rating assigned to non-restructured/renegotiated loans. This downgrade results in an increase in the probability of default (PD) assigned to restructured/renegotiated loans (with the resulting PD being higher than the average PD of the non- renegotiated loans in the same portfolios). For quantitative information on refinancing and restructuring operations see Appendix VIII. 7.4 Market risk 7.4.1 Market risk trading portfolios Market risk originates as a result of movements in the market variables that impact the valuation of traded financial products and assets. The main risks generated can be classified as follows: Interest-rate risk: This arises as a result of exposure to mov ements in the different interest-rate curves involved in trading. Although the typical products that generate sensitivity to the movements in interest rates are money-market products (deposits, interest-rate futures, call money swaps, etc.) and traditional interest-rate derivatives (swaps and interest-rate options such as caps, floors, swaptions, etc.), practically all the financial products are exposed to interest-rate movements due to the effect that such movements have on the valuation of the financial d iscount. Equity risk: This arises as a result of movements in share prices. This risk is generated in spot positions in shares or any derivative products whose underlying asset is a share or an equity index. Dividend risk is a sub-risk of equity risk, aris ing as an input for any equity option. Its variation may affect the valuation of positions and it is therefore a factor that generates risk on the books. Exchange-rate risk: This is caused by movements in the exchange rates of the different currencies in w hich a position is held. As in the case of equity risk, this risk is generated in spot currency positions, and in any derivative product whose underlying asset is an exchange rate. In addition, the quanto effect (operations where the underlying asset and t he instrument itself are denominated in different currencies) means that in certain transactions in which the underlying asset is not a currency, an exchange-rate risk is generated that has to be measured and monitored. Credit-spread risk: Credit spread is an indicator of an issuer's credit quality. Spread risk occurs due to variations in the levels of spread of both corporate and government issues, and affects positions in bonds and credit derivatives. Volatility risk: This occurs as a result of changes in the levels of implied price volatility of the different market instruments on which derivatives are traded. This risk, unlike the others, is exclusively a component of trading in derivatives and is defined as a first-order convexity risk that is generated in all possible underlying assets in which there are products with options that require a volatility input for their valuation. The metrics developed to control and monitor market risk in BBVA Group are aligned with market practices and are implemented co nsistently across all the local market risk units. Measurement procedures are established in terms of the possible impact of negative market conditions on the trading portfolio of the Group's Global Markets units, both under ordinary circumstances and in situations of heightened risk factors. The standard metric used to measure market risk is Value at Risk (“VaR”), which indicates the maximum loss that may occur in the portfolios at a given confidence level (99%) and time horizon (one day). This statistic value is widely used in the market and has the advantage of summing up in a single metric the risks inherent to trading activity, taking into account how they are related and providing a prediction of the loss that the trading book could sustain as a resul t of fluctuations in equity prices, interest rates, foreign exchange rates and credit spreads. The market risk analysis considers risks, such as credit spread, basis risk as well as volatility and correlation risk. Most of the headings on the Group's bal ance sheet subject to market risk are positions in the Group´s trading portfolio whose metric for measuring their market risk is VaR. This table shows the accounting lines of the consolidated balance sheet as of December 31, 2018, 2017 and 2016 in which th ere is a market risk in the Group´s trading and non-trading portfolios:
Headings of the balance sheet under market risk (Millions of euros)
| December 2018 | December 2017 | December 2016
| Main market risk metrics - VaR | Main market risk metrics - Others (*) | Main market risk metrics - VaR | Main market risk metrics - Others (*) | Main market risk metrics - VaR | Main market risk metrics - Others (*)
Assets subject to market risk |  |  |  |  |  |
Financial assets held for trading | 57,486 | 28,459 | 59,008 | 441 | 64,623 | 1,480
Financial assets at fair value through other comprehensive income | 5,652 | 19,125 | 5,661 | 24,083 | 7,119 | 28,771
Of which: Equity instruments | - | 2,046 | - | 2,404 | - | 3,559
Derivatives - Hedging accounting | 688 | 1,061 | 829 | 1,397 | 1,041 | 1,415
Liabilities subject to market risk |  |  |  |  |  |
Financial liabilities held for trading | 38,844 | 40,026 | 42,468 | 2,526 | 47,491 | 2,223
Derivatives - Hedging accounting | 550 | 910 | 1,157 | 638 | 1,305 | 689
(*) Includes mainly assets and liabilities managed by ALCO. Although the prior table shows details of the financial positions subject to market risk, it should be noted that the data are for information purposes only and do not reflect how the risk is managed in trading activity, where it is not classified into assets and liabilities. With respect to the risk measurement models used in BBVA Group, the Bank of Spain has authorized the use of the internal model to determine bank capital requirements deriving from risk positions on the BBVA S.A. and BBVA Bancomer trading book, which jointly account for around 76%, 70% and 66% of the Group’s trading-book market risk as of December 31, 2018, 2017 and 2016. For the rest of the geographical areas (mainly South America, Garanti and BBVA Compass), bank capital for the risk positions in the trading book is calculated using the standard model. The current management st ructure includes the monitoring of market-risk limits, consisting of a scheme of limits based on VaR, economic capital (based on VaR measurements) and VaR sub-limits, as well as stop-loss limits for each of the Group’s business units. The model used estim ates VaR in accordance with the "historical simulation" methodology, which involves estimating losses and gains that would have taken place in the current portfolio if the changes in market conditions that took place over a specific period of time in the p ast were repeated. Based on this information, it infers the maximum expected loss of the current portfolio within a given confidence level. This model has the advantage of reflecting precisely the historical distribution of the market variables and not ass uming any specific distribution of probability. The historical period used in this model is two years. The historical simulation method is used in BBVA S.A., BBVA Bancomer, BBVA Colombia, Compass Bank and Garanti. VaR figures are estimated following two m ethodologies: VaR without smoothing, which awards equal weight to the daily information for the previous two years. This is currently the official methodology for measuring market risks for the purpose of monitoring compliance with risk limits. VaR with sm oothing, which gives a greater weight to more recent market information. This metric supplements the previous one. In the case of Global Markets Argentina and Global Markets Peru a parametric methodology is used to measure risk in terms of VaR. At the sam e time, and following the guidelines established by the Spanish and European authorities, BBVA incorporates metrics in addition to VaR with the aim of meeting the Bank of Spain's regulatory requirements with respect to the calculation of bank capital for t he trading book. Specifically, the new measures incorporated in the Group since December 2011 (stipulated by Basel 2.5) are: VaR: In regulatory terms, the VaR charge incorporates the stressed VaR charge, and the sum of the two (VaR and stressed VaR) is cal culated. This quantifies the losses associated with the movements of the two risk factors inherent to market operations (interest rates, FX, RV, credit, etc.). Both VaR and stressed VaR are rescaled by a regulatory multiplier set at three and by the square root of ten to calculate the capital charge. Specific Risk: Incremental Risk Capital (“IRC”) Quantification of the risks of default and downgrading of the credit ratings of the bond and credit derivative positions in the portfolio. The specific capital ri sk by IRC is a charge exclusively used in the geographical areas with the internal model approved (BBVA S.A. and Bancomer). The capital charge is determined according to the associated losses (at 99.9% in a 1-year horizon under the hypothesis of constant r isk) due to the rating migration and/or default state the issuer of an asset. In addition, the price risk is included in sovereign positions for the items specified. Specific Risk: Securitization and correlation portfolios. Capital charge for securitizatio ns and the correlation portfolio to include the potential losses associated at the level of rating a specific credit structure (rating). Both are calculated by the standard method. The scope of the correlation portfolios refers to the FTD-type market opera tion and/or tranches of market CDOs and only for positions with an active market and hedging capacity. Validity tests are performed regularly on the risk measurement models used by the Group. They estimate the maximum loss that could have been incurred in the positions with a certain level of probability (backtesting), as well as measurements of the impact of extreme market events on risk positions (stress testing). As an additional control measure, backtesting is conducted at trading desk level in order to enable more specific monitoring of the validity of the measurement models. Market risk in 2018 The Group’s market risk remains at low levels compared to other risks managed by BBVA, particularly in terms of credit risk. This is due to the nature of the b usiness. During the financial year 2018 the average VaR was €21 million, below the figure of 2017, with a high on March 16, 2018 of €26 million. The evolution in the BBVA Group’s market risk during 2018, measured as VaR without smoothing (see Glossary) wit h a 99% confidence level and a 1-day horizon (shown in millions of Euros) is as follows: By type of market risk assumed by the Group's trading portfolio, the main risk factor for the Group continues to be that linked to interest rates, with a weight of 5 5% of the total at the end of year ended December 31, 2018 (this figure includes the spread risk). The relative weight has increased compared with the close of 2017 (48%). Exchange-rate risk maintains its proportion with respect to 2017 (14%), while equity, volatility and correlation risk have decreased, with a weight of 31% at the close of 2018 (vs. 38% at the close of 2017). As of December 31, 2018, 2017 and 2016 the balance of VaR was €17 million, €22 million and €26 million, respectively. These figures can be broken down as follows:
VaR by Risk Factor (Millions of euros)
| Interest/Spread Risk | Currency Risk | Stock-market Risk | Vega/Correlation Risk | Diversification Effect(*) | Total
December 2018 |  |  |  |  |  |
VaR average in the year | 20 | 6 | 4 | 9 | (20) | 21
VaR max in the year | 23 | 7 | 6 | 11 | (21) | 26
VaR min in the year | 17 | 6 | 4 | 7 | (18) | 16
End of period VaR | 19 | 5 | 3 | 7 | (17) | 17
December 2017 |  |  |  |  |  |
VaR average in the year | 25 | 10 | 3 | 13 | (23) | 27
VaR max in the year | 27 | 11 | 2 | 12 | (19) | 34
VaR min in the year | 23 | 7 | 4 | 14 | (26) | 22
End of period VaR | 23 | 7 | 4 | 14 | (26) | 22
December 2016 |  |  |  |  |  |
VaR average in the year | 28 | 10 | 4 | 11 | (23) | 29
VaR max in the year | 30 | 16 | 4 | 11 | (23) | 38
VaR min in the year | 21 | 10 | 1 | 11 | (20) | 23
End of period VaR | 29 | 7 | 2 | 12 | (24) | 26
(*) The diversification effect is the difference between the sum of the average individual risk factors and the total VaR figure that includes the implied correlation between all the variables and scenarios used in the measurement. Validation of the model The internal market risk model is validated on a regular basis by backtesting in both BBVA S.A. and Bancomer. The aim of backtesting is to validate the quality and precision of the internal market risk model used by BBVA Group to estimate the maximum daily loss of a portfolio, at a 99% level of confidence and a 250-day time horizon, by comparing the Group's results and the risk measurements generated by the internal market risk model. These tests s howed that the internal market risk model of both BBVA, S.A. and Bancomer is adequate and precise. Two types of backtesting have been carried out during 2018, 2017 and 2016: "Hypothetical" backtesting: the daily VaR is compared with the results obtained, not taking into account the intraday results or the changes in the portfolio positions. This validates the appropriateness of the market risk metrics for the end-of-day position. "Real" backtesting: the daily VaR is compared with the total results, includi ng intraday transactions, but discounting the possible minimum charges or fees involved. This type of backtesting includes the intraday risk in portfolios. In addition, each of these two types of backtesting was carried out at the level of risk factor or b usiness type, thus making a deeper comparison of the results with respect to risk measurements. For the period between the year ended December 31, 2017 and the year ended December 31, 2018, the backtesting of the internal VaR calculation model was carried out, comparing the daily results obtained to the estimated risk level by the internal VaR calculation model. At the end of the year the comparison showed the internal VaR calculation model was working correctly, within the "green" zone (0-4 exceptions), th us validating the internal VaR calculation model, as has occurred each year since the internal market risk model was approved for the Group. Stress test analysis A number of stress tests are carried out on BBVA Group's trading portfolios. First, global a nd local historical scenarios are used that replicate the behavior of an extreme past event, such as for example the collapse of Lehman Brothers or the "Tequilazo" crisis. These stress tests are complemented with simulated scenarios, where the aim is to ge nerate scenarios that have a significant impact on the different portfolios, but without being anchored to any specific historical scenario. Finally, for some portfolios or positions, fixed stress tests are also carried out that have a significant impact o n the market variables affecting these positions. Historical scenarios The historical benchmark stress scenario for the BBVA Group is Lehman Brothers, whose sudden collapse in September 2008 led to a significant impact on the behavior of financial markets at a global level. The following are the most relevant effects of this historical scenario: Credit shock: reflected mainly in the increase of credit spreads and downgrades in credit ratings. Increased volatility in most of the financial markets (giving ri se to a great deal of variation in the prices of different assets (currency, equity, debt). Liquidity shock in the financial systems, reflected by a major movement in interbank curves, particularly in the shortest sections of the euro and dollar curves. Si mulated scenarios Unlike the historical scenarios, which are fixed and therefore not suited to the composition of the risk portfolio at all times, the scenario used for the exercises of economic stress is based on Resampling methodology. This methodology i s based on the use of dynamic scenarios are recalculated periodically depending on the main risks held in the trading portfolios. On a data window wide enough to collect different periods of stress (data are taken from 1-1-2008 until today), a simulation i s performed by resampling of historic observations, generating a loss distribution and profits to analyze most extreme of births in the selected historical window. The advantage of this resampling methodology is that the period of stress is not predetermin ed, but depends on the portfolio maintained at each time, and making a large number of simulations (10,000 simulations) allows a richer information for the analysis of expected shortfall than what is available in the scenarios included in the calculation o f VaR. The main features of this approach are: a) the generated simulations respect the correlation structure of the data, b) flexibility in the inclusion of new risk factors and c) to allow the introduction of a lot of variability in the simulations (desi rable to consider extreme events). The impact of the stress test under multivariable simulation of the risk factors of the portfolio (Expected shortfall 95% to 20 days) as of December 31, 2018 is as follows:
Millions of Euros
| Europe | Mexico | Peru | Venezuela | Argentina | Colombia | Turkey | Compass
Expected Shortfall | (99) | (33) | (11) | - | (5) | (6) | (6) | (1)
7.4.2 Structural risk The Assets and Liabilities Committee (ALCO) is the main responsible body for the management of structural risks relating to liquidity/funding, interest rates, currency rates, equity and solvency. Every month, with the assistance of the CEO and representat ives from the areas of Finance, Risks and Business Areas, this committee monitors the above risks and is presented with proposals for managing them for its approval. These management proposals are made proactively by the Finance area, taking into account t he risk appetite framework and with the aim of guaranteeing recurrent earnings and financial stability and preserving the entity's solvency. All the balance-sheet management units have a local ALCO, assisted constantly by the members of the Corporate Cente r. There is also a corporate ALCO where the management strategies in the Group's subsidiaries are monitored and presented. Structural interest-rate risk The structural interest-rate risk (“IRRBB”) is related to the potential impact that variations in marke t interest rates have on an entity's net interest income and equity. In order to properly measure IRRBB, BBVA takes into account the main sources that generate this risk: repricing risk, yield curve risk, option risk and basis risk, which are analyzed from two complementary points of view: net interest income (short term) and economic value (long term). ALCO monitors the interest-rate risk metrics and the Assets and Liabilities Management unit carries out the management proposals for the structural balance sheet. The management objective is to ensure the stability of net interest income and book value in the face of changes in market interest rates, while respecting the internal solvency and limits in the different balance-sheets and for BBVA Group as a who le; and complying with current and future regulatory requirements. BBVA's structural interest-rate risk management control and monitoring is based on a set of metrics and tools that enable the entity's risk profile to be monitored correctly. A wide range o f scenarios are measured on a regular basis, including sensitivities to parallel movements in the event of different shocks, changes in slope and curve, as well as delayed movements. Other probabilistic metrics based on statistical scenario-simulating meth ods are also assessed, such as earnings at risk (“EaR”) and economic capital (“EC”), which are defined as the maximum adverse deviations in net interest income and economic value, respectively, for a given confidence level and time horizon. Impact threshol ds are established on these management metrics both in terms of deviations in net interest income and in terms of the impact on economic value. The process is carried out separately for each currency to which the Group is exposed, and the diversification e ffect between currencies and business units is considered after this. In order to evaluate its effectiveness, the model is subjected to regular internal validation. In addition, the banking book’s interest-rate risk exposures are subjected to different st ress tests in order to reveal balance sheet vulnerabilities under extreme scenarios. This testing includes an analysis of adverse macroeconomic scenarios designed specifically by BBVA Research, together with a wide range of potential scenarios that aim to identify interest-rate environments that are particularly damaging for the entity. This is done by generating extreme scenarios of a breakthrough in interest rate levels and historical correlations, giving rise to sudden changes in the slopes and even to i nverted curves. The model is necessarily underpinned by an elaborate set of hypotheses that aim to reproduce the behavior of the balance sheet as closely as possible to reality. Especially relevant among these assumptions are those related to the behavior of Non Maturity Deposits, for which stability and remuneration assumptions are established, consistent with an adequate segmentation by type of product and customer, and prepayment estimates (implicit optionality). The assumptions are reviewed and adapted, at least on an annual basis, to signs of changes in behavior, kept properly documented and reviewed on a regular basis in the internal validation processes. The impacts on the metrics are assessed both from a point of view of economic value with a static model (gone concern) and from the perspective of net interest income, for which a dynamic model (going concern) consistent with the corporate assumptions of earnings forecasts is used. The table below shows the profile of average sensitivities to net inter est income and value of the main banks in BBVA Group in 2018:
Sensitivity to Interest-Rate Analysis - December 2018
| Impact on Net Interest Income (*) | Impact on Economic Value (**)
| 100 Basis-Point Increase | 100 Basis-Point Decrease | 100 Basis-Point Increase | 100 Basis-Point Decrease
Europe (***) | + (5% - 10%) | - (5% - 10%) | + (0% - 5%) | - (0% - 5%)
Mexico | + (0% - 5%) | - (0% - 5%) | + (0% - 5%) | - (0% - 5%)
USA | + (5% - 10%) | - (5% - 10%) | - (5% - 10%) | + (0% - 5%)
Turkey | + (0% - 5%) | - (0% - 5%) | - (0% - 5%) | + (0% - 5%)
South America | + (0% - 5%) | - (0% - 5%) | - (0% - 5%) | + (0% - 5%)
BBVA Group | + (0% - 5%) | - (0% - 5%) | - (0% - 5%) | - (0% - 5%)
(*) Percentage of "1 year" net interest income forecast for each unit. (**) Percentage of Core Capital for each unit. (***) In Europe downward movement includi ng rates below the current ones. In 2018 in Europe monetary policy has remained expansionary, maintai ning rates at 0% and the deposit rate at -0.4%. In USA the rising rate cycle initiated by the Federal Reserve in 2015 has continued. In Mexico and Turkey, the upward cycle has continued because of volatility of their currencies and inflation prospects. In South America, monetary policy has continued to be expansive in most of the economies where the Group operates, with the exception of Argentina, where rates increased and actions were taken not to increase the monetary basis and slow the inflation. The BBV A Group maintains, overall a positive and moderate sensitivity in its net interest income to an increase in interest rates. The higher relative net interest income sensitivities are observed in, particularly Euro and USD. In Europe however, the decrease in interest rates is limited by the downward path scope in interest rates. The Group maintains a moderate risk profile, according to its target risk, through effective management of its balance sheet structural risk. Structural exchange-rate risk In BBVA Gr oup, structural exchange-rate risk arises from the consolidation of holdings in subsidiaries with functional currencies other than the euro. Its management is centralized in order to optimize the joint handling of permanent foreign currency exposures, taki ng into account the diversification. The corporate Global ALM unit, through ALCO, designs and executes hedging strategies with the main purpose of controlling the potential negative effect of exchange-rate fluctuations on capital ratios and on the equival ent value in euros of the foreign-currency earnings of the Group's subsidiaries, considering transactions according to market expectations and their cost. The risk monitoring metrics included in the framework of limits are integrated into management and supplemented with additional assessment indicators. At corporate level they are based on probabilistic metrics that measure the maximum deviation in the Group’s Capital, CET1 (“Common Equity Tier 1”) ratio, and net attributable profit. The probabilistic m etrics make it possible to estimate the joint impact of exposure to different currencies taking into account the different variability in exchange rates and their correlations. The suitability of these risk assessment metrics is reviewed on a regular basi s through backtesting exercises. The final element of structural exchange-rate risk control is the analysis of scenarios and stress with the aim of identifying in advance possible threats to future compliance with the risk appetite levels set, so that any necessary preventive management actions can be taken. The scenarios are based both on historical situations simulated by the risk model and on the risk scenarios provided by BBVA Research. 2018 has been characterized by higher volatility levels of FX rates in emerging markets. As for the main currencies of the geographies where the Group operates, it is worth mentioning the appreciation of Mexican peso and US Dollar against the euro (around 5% in both cases), while Turkish lira and Argentinian peso have str ongly depreciated (25% and 48%, respectively) affected by idiosyncratic factors. The Group's structural exchange-rate risk exposure level has remained fairly stable since the end of 2017. The hedging policy intends to keep low levels of sensitivity to mov ements in the exchange rates of emerging currencies against the euro and focuses on Mexican peso and Turkish lira. The risk mitigation level in capital ratio due to the book value of BBVA Group's holdings in foreign emerging currencies stood at around 70% and, as of the end of 2018, CET1 ratio sensitivity to the appreciation of 1% in the euro exchange rate for each currency is: US Dollar +1.1 bps; Mexican peso -0.2 bps; Turkish Lira -0.2 bps; other currencies -0.2 bps. On the other hand, hedging of emerging-currency denominated earnings of 2018 has reached an 82%, concentrated in Mexican peso, Turkish lira and the main Latin American currencies. Structural equity risk BBVA Group's exposure to structural equity risk stems basically from minority shareholdings in industrial and financial companies held with long or medium-term investment horizons. This exposure is modulated in some portfolios with positions held in derivative instruments on the same underlying assets, in order to adjust the portfolio sensitivit y to potential changes in equity prices. The management of structural equity portfolios is a responsibility of the Group's units specialized in this area. Their activity is subject to the risk management corporate policy on structural equity risk managemen t, complying with the defined management principles and Risk Appetite Framework. The Group's risk management systems also make it possible to anticipate potential negative impacts and take appropriate measures to prevent damage being caused to the entity. The risk control and limitation mechanisms are focused on the exposure, annual performance and economic capital estimated for each portfolio. Economic capital is estimated in accordance with a corporate model based on Monte Carlo simulations, taking into a ccount the statistical performance of asset prices and the diversification existing among the different exposures. Stress tests and analyses of sensitivity to different simulated scenarios are carried out periodically to analyze the risk profile in more d epth. They are based on both past crisis situations and forecasts made by BBVA Research. This checks that the risks are limited and that the tolerance levels set by the Group are not at risk. Backtesting is carried out on a regular basis on the risk measur ement model used. With regard to the equity markets, the world indexes have closed the year 2018 with generalized falls and volatility surges in a macro environment of global growth slowdown, increase of the political uncertainty and normalization of the monetary policies. Structural equity risk, measured in terms of economic capital, has decreased in the period mainly due to lower exposure. The aggregate sensitivity of the BBVA Group’s consolidated equity to a 1% fall in the price of shares of the companies making up the equity portfolio remained at around €-28 million as of December 31, 2018 and €-32 million as of December 31, 2017. This estimation takes into account the exposure in shares valued at market prices, or if not applicable, at fair valu e (excluding the positions in the Treasury Area and the net delta-equivalent positions in derivatives on the same underlyings. 7.4.3 Financial Instruments offset Financial assets and liabilities may be netted, i.e. they are presented for a net amount on the consolidated balance sheet only when the Group's entities satisfy with the provisions of IAS 32-Paragraph 42, so they have both the legal right to net recognized amounts, and the intention of settling the net amount or of realizing the asset and simul taneously paying the liability. In addition, the Group has presented as gross amounts assets and liabilities on the consolidated balance sheet for which there are master netting arrangements in place, but for which there is no intention of settling net. Th e most common types of events that trigger the netting of reciprocal obligations are bankruptcy of the entity, surpassing certain level of indebtedness threshold, failure to pay, restructuring and dissolution of the entity. In the current market context, d erivatives are contracted under different framework contracts being the most widespread developed by the International Swaps and Derivatives Association (“ISDA”) and, for the Spanish market, the Framework Agreement on Financial Transactions (“CMOF”). Almos t all portfolio derivative transactions have been concluded under these framework contracts, including in them the netting clauses mentioned in the preceding paragraph as "Master Netting Agreement", greatly reducing the credit exposure on these instruments. Additionally, in contracts signed with professional counterparties, the collateral agreement annexes called Credit Support Annex (“CSA”) are included, thereby minimizing exposure to a potential default of the counterparty. Moreover, in transactions invol ving assets purchased or sold under a repurchase agreement there is a high volume transacted through clearing houses that articulate mechanisms to reduce counterparty risk, as well as through the signature of various master agreements for bilateral transac tions, the most widely used being the Global Master Repurchase Agreement (GMRA), published by International Capital Market Association (“ICMA”), to which the clauses related to the collateral exchange are usually added within the text of the master agreeme nt itself. A summary of the effect of the compensation (via netting and collateral) for derivatives and securities operations is presented below as of December 31, 2018, 2017 and 2016:
December 2018 (Millions of euros)
|  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets (D) |
| Notes | Gross Amounts Recognized (A) | Gross Amounts Offset in the Consolidated Balance Sheets (B) | Net Amount Presented in the Consolidated Balance Sheets (C=A-B) | Financial Instruments | Cash Collateral Received/ Pledged | Net Amount (E=C-D)
Trading and hedging derivatives | 10, 15 | 49,908 | 16,480 | 33,428 | 25,024 | 7,790 | 613
Reverse repurchase, securities borrowing and similar agreements |  | 28,074 | 42 | 28,032 | 28,022 | 169 | (159)
Total Assets |  | 77,982 | 16,522 | 61,460 | 53,046 | 7,959 | 454
Trading and hedging derivatives | 10, 15 | 51,596 | 17,101 | 34,494 | 25,024 | 6,788 | 2,682
Repurchase, securities lending and similar agreements |  | 43,035 | 42 | 42,993 | 42,877 | 34 | 82
Total liabilities |  | 94,631 | 17,143 | 77,487 | 67,901 | 6,822 | 2,765
December 2017 (Millions of euros)
|  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets (D) |
| Notes | Gross Amounts Recognized (A) | Gross Amounts Offset in the Consolidated Balance Sheets (B) | Net Amount Presented in the Consolidated Balance Sheets (C=A-B) | Financial Instruments | Cash Collateral Received/ Pledged | Net Amount (E=C-D)
Trading and hedging derivatives | 10, 15 | 49,333 | 11,584 | 37,749 | 27,106 | 7,442 | 3,202
Reverse repurchase, securities borrowing and similar agreements |  | 26,426 | 56 | 26,369 | 26,612 | 141 | (384)
Total Assets |  | 75,759 | 11,641 | 64,118 | 53,717 | 7,583 | 2,818
Trading and hedging derivatives | 10, 15 | 50,693 | 11,644 | 39,049 | 27,106 | 8,328 | 3,615
Repurchase, securities lending and similar agreements |  | 40,134 | 56 | 40,078 | 40,158 | 21 | (101)
Total liabilities |  | 90,827 | 11,701 | 79,126 | 67,264 | 8,349 | 3,514
December 2016 (Millions of euros)
|  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets (D) |
| Notes | Gross Amounts Recognized (A) | Gross Amounts Offset in the Consolidated Balance Sheets (B) | Net Amount Presented in the Consolidated Balance Sheets (C=A-B) | Financial Instruments | Cash Collateral Received/ Pledged | Net Amount (E=C-D)
Trading and hedging derivatives | 10, 15 | 59,374 | 13,587 | 45,788 | 32,146 | 6,571 | 7,070
Reverse repurchase, securities borrowing and similar agreements |  | 25,833 | 2,912 | 22,921 | 23,080 | 174 | (333)
Total Assets |  | 85,208 | 16,499 | 68,709 | 55,226 | 6,745 | 6,738
Trading and hedging derivatives | 10, 15 | 59,545 | 14,080 | 45,465 | 32,146 | 7,272 | 6,047
Repurchase, securities lending and similar agreements |  | 49,474 | 2,912 | 46,562 | 47,915 | 176 | (1,529)
Total liabilities |  | 109,019 | 16,991 | 92,027 | 80,061 | 7,448 | 4,518
7.5 Liquidity risk 7.5.1 Liquidity risk management Management of liquidity and structural finance within the BBVA Group is based on the principle of the financial autonomy of the entities that make it up. This approach helps prevent and limit liquidity risk by reducing the Group’s vulnerability in periods of high risk. This decentralized management avoids possible contagion due to a crisis that could affect only one or several BBVA Group entities, which must cover their liquidity needs independently in the markets where they operate. Liquidity Management Un its (LMUs) have been set up for this reason in the geographical areas where the main foreign subsidiaries operate, an d also for the parent BBVA S.A. Assets and Liabilities Management unit manages BBVA Group's liquidity and funding. It plans and executes th e funding of the long-term structural gap of each LMUs and proposes to ALCO the actions to adopt in this regard in accordance with the policies and limits establi shed by the Standing Committee. As first core element, the Bank's target in terms of liquidity and funding risk is characterized through the Liquidity Coverage Ratio (LCR) and the Loan-to-Stable-Customer-Deposits (LtSCD) ratio. LCR is a regulatory measurement aimed at ensuring entities’ resistance in a scenario of liquidity stress within a time hor izon of 30 days. BBVA, within its risk appetite framework and its limits and alerts schemes, has established a level of requirement for compliance with the LCR ratio both for the Group as a whole and for each of the Liquidity Management Units (LMUs) indivi dually. The internal levels required are geared to comply sufficiently and efficiently in advance with the implementation of the regulatory requirement of 2018, at a level above 100%. LCR ratio in Europe was applicable as from October 1, 2015. With an init ial 60% minimum requirement, progressively increased (phased-in) up to 100% in 2018. Throughout the year 2018, LCR level at BBVA Group has been above 100%. As of December 31, 2018, the LC R ratio at Group level is 127%. Although this regulatory requirem ent is mandatory at a Group level and Eurozone banks, all subsidiaries are above this minimum. In any case, it should be noted that liquidity excesses in subsidiaries are not deemed transferable when calculating the consolidated ratio. Taking into account the impact of these High Quality Liquid Assets excluded, LCR ratio would be 154%, which is +27% above the Group’s LCR.
LCR main LMU
| December 2018 | December 2017
Group | 127% | 128%
Eurozone | 145% | 151%
Bancomer | 154% | 148%
Compass(*) | 143% | 144%
Garanti | 209% | 134%
(*) Compass LCR calculated according to local regulation (Fed Modified LCR). The LtSCD measures the relation be tween the net loans credit investment and stable customer deposits. The aim is to preserve a stable funding structure in the medium term for each of the LMUs making up BBVA Group, taking into account that maintaining an adequate volume of stable customer f unds is key to achie ving a sound liquidity profile. Stable customer deposits are defined as the customer funds captured and managed by business units among their target customers. These funds usually show little sensitivity to market changes and are largel y non-volatile in terms of aggregate amounts per transaction, thanks to customer linkage to the unit. Stable funds in each LMU are calculated by analyzing the behavior of the balance sheets of the different customer segments identified as likely to provide stability to the funding structure, and by prioritizing an established relationship and applying bigger haircuts to the funding lines of less stable customers. The main base of stable funds is composed of deposits by retail individual customers and small businesses. For the purpose of establishing the (maximum) target levels for LtSCD in each LMU and providing an optimal funding structure reference in terms of risk appetite, GRM-Structural Risks identifies and assesses the economic and financial variables that condition the funding structures in the various geographical areas. The behavior of the indicators reflects that the funding structure remained robust in 2018, 2017 and 2016, in the sense that all the LMUs maintain levels of self-funding with stable c ustomer funds higher than the required levels.
LtSCD by LMU
| December 2018 | December 2017 | December 2016
Group (average) | 106% | 110% | 113%
Eurozone | 101% | 108% | 113%
Bancomer | 114% | 109% | 113%
Compass | 119% | 109% | 108%
Garanti | 110% | 122% | 124%
Other LMUs | 99% | 108% | 107%
The second core element in liquidity and funding risk management is to achieve proper diversification of the funding structure, avoiding excessive reliance on short-term funding and es tablishing a maximum level of short-term funding comprising both wholesale funding as well as funds from less stable non-retail customers. Regarding long-term funding, the maturity profile does not show significant concentrations, which enables adaptation of the anticipated issuance schedule to the best financial conditions of the markets. Finally, concentration risk is monitored at the LMU level, with a view to ensuring the right diversification both per counte rparty and per instrument type. The third elem ent promotes the short-term resilience of the liquidity risk profile, making sure that each LMU has sufficient collateral to address the risk of wholesale markets closing. Basic Capacity is the short-term liquidity risk management and control metric that i s defined as the relationship between the available explicit assets and the maturities of wholesale liabilities and volatile funds, at different terms to one year, with special relevance being given to 30 and 90-day maturities. Each entity maintains an ind ividual liquidity buffer, both 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 3 1, 2018 and 2017 for the most significant entities based on prudential supervisor’s information (Commission Implementing Regulations (EU) 2017/2114 of November 9, 2017):
December 2018 (Millions of euros)
| BBVA Eurozone | BBVA Bancomer | BBVA Compass | Garanti Bank | Other
Cash and withdrawable central bank reserves | 26,506 | 7,666 | 1,667 | 7,633 | 6,677
Level 1 tradable assets | 29,938 | 4,995 | 10,490 | 6,502 | 3,652
Level 2A tradable assets | 449 | 409 | 510 | - | -
Level 2B tradable assets | 4,040 | 33 | - | - | -
Other tradable assets | 5,661 | 1,372 | 1,043 | 499 | 617
Non tradable assets eligible for central banks | - | - | 2,314 | - | -
Cumulated Counterbalancing Capacity | 66,594 | 14,475 | 16,024 | 14,634 | 10,946
December 2017 (Millions of euros)
| BBVA Eurozone (1) | BBVA Bancomer | BBVA Compass | Garanti Bank | Other
Cash and withdrawable central bank reserves | 15,634 | 8,649 | 2,150 | 6,692 | 6,083
Level 1 tradable assets | 38,954 | 3,805 | 9,028 | 5,705 | 6,141
Level 2A tradable assets | 386 | 418 | 753 | - | 10
Level 2B tradable assets | 4,995 | 69 | - | - | 21
Other tradable assets | 6,734 | 1,703 | 1,252 | 962 | 1,573
Non tradable assets eligible for central banks | - | - | 2,800 | - | -
Cumulated Counterbalancing Capacity | 66,703 | 14,644 | 15,983 | 13,359 | 13,828
(1) Includes Spain, Portugal and Rest of Eurasia. Stress analyses are also a basic element of the liquidity and funding risk monitoring system, as they help anticipate deviations from the liquidity targets and limits set out in the risk appetite as well as establish tolerance ranges at di fferent management levels. They also play a key role in the design of the Liquidity Contingency Plan and in defining the specific measures for action for realigning the risk profile. For each of the scenarios, a check is carried out whether BBVA has suffic ient liquid assets to meet the liquidity commitments/outflows in the various periods analyzed. The analysis considers four scenarios, one core 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 BBVA's customers; and a mixed scenario, as a combination of the two aforementioned scenarios. Each scenario considers the followi ng factors: liquidity existing on 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 performance of the BBVA's asset q uality. The results of these stress analyses carried out regularly reveal that BBVA has a sufficient buffer of liquid assets to deal with the estimated liquidity outflows in a scenario such as a combination of a systemic crisis and an unexpected internal c risis, during a period in general longer than 3 months for LMUs, including a major downgrade in the BBVA's r ating (by up to three notches). Beside the results of stress exercises and risk metrics, Early Warning Indicators play an important role in the corp orate model and also in the Liquidity Contingency Plan. These are mainly financing structure indicators, related to asset encumbrance, counterparty concentration, outflows of customer deposits, unexpected use of credit lines, and market indicators, which h elp to anticipate potential risks and capture market expectations. Below is a matrix of residual maturities by contractual periods based on supervisory prudential reporting as of December 31, 2018, 2017 and 2016:
December 2018. Contractual Maturities (Millions of euros)
| Demand | Up to 1 Month | 1 to 3 Months | 3 to 6 Months | 6 to 9 Months | 9 to 12 Months | 1 to 2 Years | 2 to 3 Years | 3 to 5 Years | Over 5 Years | Total
ASSETS |  |  |  |  |  |  |  |  |  |  |
Cash, cash balances at central banks and other demand deposits | 9,550 | 40,599 | - | - | - | - | - | - | - | - | 50,149
Deposits in credit entities | 801 | 3,211 | 216 | 141 | 83 | 152 | 133 | 178 | 27 | 1,269 | 6,211
Deposits in other financial institutions | 1 | 1,408 | 750 | 664 | 647 | 375 | 1,724 | 896 | 1,286 | 2,764 | 10,515
Reverse repo, securities borrowing and margin lending | - | 21,266 | 1,655 | 1,158 | 805 | 498 | 205 | 1,352 | 390 | 210 | 27,539
Loans and Advances | 132 | 19,825 | 25,939 | 23,265 | 15,347 | 16,433 | 42,100 | 32,336 | 53,386 | 120,571 | 349,334
Securities' portfolio settlement | - | 1,875 | 4,379 | 5,990 | 2,148 | 6,823 | 8,592 | 12,423 | 11,533 | 42,738 | 96,501
December 2018. Contractual Maturities (Millions of euros)
| Demand | Up to 1 Month | 1 to 3 Months | 3 to 6 Months | 6 to 9 Months | 9 to 12 Months | 1 to 2 Years | 2 to 3 Years | 3 to 5 Years | Over 5 Years | Total
LIABILITIES |  |  |  |  |  |  |  |  |  |  |
Wholesale funding | 1 | 2,678 | 1,652 | 2,160 | 2,425 | 2,736 | 7,225 | 8,578 | 16,040 | 26,363 | 69,858
Deposits in financial institutions | 7,107 | 5,599 | 751 | 1,992 | 377 | 1,240 | 1,149 | 229 | 196 | 904 | 19,544
Deposits in other financial institutions and international agencies | 10,680 | 4,327 | 1,580 | 458 | 302 | 309 | 781 | 304 | 825 | 1,692 | 21,258
Customer deposits | 252,630 | 44,866 | 18,514 | 10,625 | 6,217 | 7,345 | 5,667 | 2,137 | 1,207 | 1,310 | 350,518
Security pledge funding | 40 | 46,489 | 2,219 | 2,274 | 114 | 97 | 22,911 | 526 | 218 | 1,627 | 76,515
Derivatives, net | - | (75) | (523) | (68) | (5) | (117) | 498 | (91) | (67) | (392) | (840)
December 2017. Contractual Maturities (Millions of euros)
| Demand | Up to 1 Month | 1 to 3 Months | 3 to 6 Months | 6 to 9 Months | 9 to 12 Months | 1 to 2 Years | 2 to 3 Years | 3 to 5 Years | Over 5 Years | Total
ASSETS |  |  |  |  |  |  |  |  |  |  |
Cash, cash balances at central banks and other demand deposits | 8,179 | 31,029 | - | - | - | - | - | - | - | - | 39,208
Deposits in credit entities | 252 | 4,391 | 181 | 169 | 120 | 122 | 116 | 112 | 157 | 1,868 | 7,488
Deposits in other financial institutions | 1 | 939 | 758 | 796 | 628 | 447 | 1,029 | 681 | 806 | 1,975 | 8,060
Reverse repo, securities borrowing and margin lending | 18,979 | 2,689 | 1,921 | 541 | 426 | 815 | 30 | 727 | 226 | - | 26,354
Loans and Advances | 267 | 21,203 | 26,323 | 23,606 | 15,380 | 17,516 | 43,973 | 35,383 | 50,809 | 123,568 | 358,028
Securities' portfolio settlement | 1 | 1,579 | 4,159 | 4,423 | 2,380 | 13,391 | 5,789 | 11,289 | 12,070 | 44,666 | 99,747
December 2017. Contractual Maturities (Millions of euros)
| Demand | Up to 1 Month | 1 to 3 Months | 3 to 6 Months | 6 to 9 Months | 9 to 12 Months | 1 to 2 Years | 2 to 3 Years | 3 to 5 Years | Over 5 Years | Total
LIABILITIES |  |  |  |  |  |  |  |  |  |  |
Wholesale funding | - | 3,648 | 4,209 | 4,238 | 1,227 | 2,456 | 5,772 | 6,432 | 18,391 | 30,162 | 76,535
Deposits in financial institutions | 6,831 | 5,863 | 1,082 | 2,335 | 392 | 1,714 | 930 | 765 | 171 | 1,429 | 21,512
Deposits in other financial institutions and international agencies | 10,700 | 4,827 | 3,290 | 1,959 | 554 | 1,328 | 963 | 286 | 355 | 1,045 | 25,307
Customer deposits | 233,068 | 45,171 | 18,616 | 11,428 | 8,711 | 10,368 | 7,607 | 2,612 | 1,833 | 2,034 | 341,448
Security pledge funding | - | 35,502 | 2,284 | 1,405 | 396 | 973 | 64 | 23,009 | 338 | 1,697 | 65,668
Derivatives, net | - | (18) | (110) | (116) | (135) | (117) | (336) | (91) | (106) | (419) | (1,448)
December 2016. Contractual Maturities (Millions of euros)
| Demand | Up to 1 Month | 1 to 3 Months | 3 to 6 Months | 6 to 9 Months | 9 to 12 Months | 1 to 2 Years | 2 to 3 Years | 3 to 5 Years | Over 5 Years | Total
ASSETS |  |  |  |  |  |  |  |  |  |  |
Cash, cash balances at central banks and other demand deposits | 23,191 | 13,825 | - | - | - | - | - | - | - | - | 37,016
Deposits in credit entities | 991 | 4,068 | 254 | 155 | 48 | 72 | 117 | 87 | 122 | 4,087 | 10,002
Deposits in other financial institutions | 1 | 1,192 | 967 | 675 | 714 | 532 | 1,330 | 918 | 942 | 336 | 7,608
Reverse repo, securities borrowing and margin lending | - | 20,232 | 544 | 523 | - | 428 | 500 | 286 | 124 | 189 | 22,826
Loans and Advances | 591 | 20,272 | 25,990 | 22,318 | 16,212 | 15,613 | 44,956 | 35,093 | 55,561 | 133,589 | 370,195
Securities' portfolio settlement | - | 708 | 3,566 | 3,688 | 2,301 | 4,312 | 19,320 | 10,010 | 16,662 | 51,472 | 112,039
December 2016. Contractual Maturities (Millions of euros)
| Demand | Up to 1 Month | 1 to 3 Months | 3 to 6 Months | 6 to 9 Months | 9 to 12 Months | 1 to 2 Years | 2 to 3 Years | 3 to 5 Years | Over 5 Years | Total
LIABILITIES |  |  |  |  |  |  |  |  |  |  |
Wholesale funding | 419 | 7,380 | 2,943 | 5,547 | 3,463 | 5,967 | 7,825 | 5,963 | 14,016 | 31,875 | 85,397
Deposits in financial institutions | 6,762 | 5,365 | 1,181 | 2,104 | 800 | 2,176 | 746 | 1,156 | 859 | 3,714 | 24,862
Deposits in other financial institutions and international agencies | 15,375 | 6,542 | 8,624 | 3,382 | 2,566 | 1,897 | 1,340 | 686 | 875 | 2,825 | 44,114
Customer deposits | 206,140 | 49,053 | 25,522 | 15,736 | 11,863 | 11,343 | 8,619 | 5,060 | 781 | 936 | 335,052
Security pledge funding | - | 38,153 | 3,561 | 1,403 | 1,004 | 912 | 1,281 | 640 | 23,959 | 1,712 | 72,626
Derivatives, net | - | (2,123) | (95) | (190) | (111) | (326) | (132) | (82) | (105) | (47) | (3,210)
The matrix shows the retail nature of the funding structure, with a loan portfolio being mostly funded by c ustomer deposits (66%). On the outflows side of the matrix, the “demand” maturity bucket mainly contains the retail customer sight accounts whose behavior historically showed a high level of stability and littl e concentration. According to a behavior anal ysis which is done every year in every entity, this type of account is considered to be stable and for liquidity risk purposes, it is estimated that 78% have a maturity of more than 5 years. In the Euro Liquidity Management Unit (LMU), solid liquidity and funding situation, where activity has continued to generate liquidity through the decrease of Credit Gap. In addition, during 2018 the Euro LMU made 3 issues in the public market for €3,500 million; Senior Non Preferred (“SNP”) at 5 years for €1,500 millio n, Green bond SNP at 7 years for €1,000 million and AT1 for €1,000 million, which have allowed it to obtain long-term funding at favorable price conditions. These public operations have been complemented by a private issue T2 for USD 300 million. In Mexico, sound liquidity position despite the market volatility, the Credit Gap has increased in 2018 due to a minor increase in deposits mainly because of the outflows of non-profitable USD deposits. During the financial year 2018, BBVA Bancomer made a local Tie r II issuance on international markets for USD 1,000 million as well as an issuance on the local market for 7,000 million of Mexican pesos in 2 tranches: at 3 and 5 years, being the 3 years tranche the first Green Bond issued by a private bank. In the Unit ed States, the containment of the cost of liabilities has led to a slightly increase in the credit gap. During the financial year 2018, BBVA Compass successfully issued 3 year senior debt for USD 1,150 million. In Turkey an adequate liquidity situation is maintained, after having been affected by the currency volatility at the beginning of the second semester. Despite this, Garanti showed a good performance with the roll-over of the 2018 maturities of corporate funding. The main operations during the year w ere two syndicated loans for USD 2,300 million, the first Green Bond at 6 years for USD 75 million and future flows securitization (Diversified Payment Rights) for USD 375 million at 7 years. Argentina was affected by the market volatility but no relevant impact on the liquidity situation of the entity has been noted. BBVA Francés maintains a solid liquidity situation distinguished by a major volume of cash reserves. The liquidity position of the rest of subsidiaries has continued to be sound, maintaining a solid liquidity position in all the jurisdictions in which the Group operates. Access to capital markets of these subsidiaries has also been maintained with recurring issuances in the local market. In this context, BBVA has maintained its objective of strengthening the funding structure of the different Group entities based on growing their self-funding from stable customer funds, while guaranteeing a sufficient buffer of fully available liquid assets, diversifying the various sources of funding availa ble, and optimizing the generation of collateral available for dealing with stress situations in the markets. 7.5.2 Asset encumbrance As of December 31, 2018, 2017 and 2016, the encumbered (those provided as collateral for certain liabilities) and unencumbered assets are broken down as follows:
December 2018 (Millions of euros)
| Encumbered assets | Non-Encumbered assets
| Book value of Encumbered assets | Market value of Encumbered assets | Book value of non-encumbered assets | Market value of non-encumbered assets
Assets |  |  |  |
Equity instruments | 1,864 | 1,864 | 6,485 | 6,485
Debt Securities | 31,157 | 32,216 | 82,209 | 82,209
Loans and Advances and other assets | 74,928 |  | 478,880 |
December 2017 (Millions of euros)
| Encumbered assets | Non-Encumbered assets
| Book value of Encumbered assets | Market value of Encumbered assets | Book value of non-encumbered assets | Market value of non-encumbered assets
Assets |  |  |  |
Equity instruments | 2,297 | 2,297 | 9,616 | 9,616
Debt Securities | 28,700 | 29,798 | 84,391 | 84,391
Loans and Advances and other assets | 79,604 |  | 485,451 |
December 2016 (Millions of euros)
| Encumbered assets | Non-Encumbered assets
| Book value of Encumbered assets | Market value of Encumbered assets | Book value of non-encumbered assets | Market value of non-encumbered assets
Assets |  |  |  |
Equity instruments | 2,214 | 2,214 | 9,022 | 9,022
Debt Securities | 40,114 | 39,972 | 90,679 | 90,679
Loans and Advances and other assets | 94,718 |  | 495,109 |
The committed value of "Loans and Advances and other assets" corresponds mainly to loans linked to the issue of covered bonds, ter ritorial bonds or long-term securitized bonds (see Note 22.3) as well as those used as a guarantee to access certain funding transactions with central banks. Debt securities and equity instruments correspond to underlying that are delivered in repos with d ifferent types of counterparties, mainly clearing houses or credit institutions, and to a lesser extent central banks. Collateral provided to guarantee derivative transactions is also included as committed assets. As of December 31, 2018, 2017 and 2016, co llateral pledge mainly due to repurchase agreements and securities lending, and those which could be committed in order to obtain funding are provided below:
December 2018. Collateral received (Millions of euros)
| Fair value of encumbered collateral received or own debt securities issued | Fair value of collateral received or own debt securities issued available for encumbrance | Nominal amount of collateral received or own debt securities issued not available for encumbrance
Collateral received | 27,474 | 5,633 | 319
Equity instruments | 89 | 82 | -
Debt securities | 27,385 | 5,542 | 300
Loans and Advances and other assets | - | 8 | 19
Own debt securities issued other than own covered bonds or ABSs | 78 | 87 | -
December 2017. Collateral received (Millions of euros)
| Fair value of encumbered collateral received or own debt securities issued | Fair value of collateral received or own debt securities issued available for encumbrance | Nominal amount of collateral received or own debt securities issued not available for encumbrance
Collateral received | 23,881 | 9,630 | 201
Equity instruments | 103 | 5 | -
Debt securities | 23,715 | 9,619 | 121
Loans and Advances and other assets | 63 | 6 | 80
Own debt securities issued other than own covered bonds or ABSs | 3 | 161 | -
December 2016. Collateral received (Millions of euros)
| Fair value of encumbered collateral received or own debt securities issued | Fair value of collateral received or own debt securities issued available for encumbrance | Nominal amount of collateral received or own debt securities issued not available for encumbrance
Collateral received | 19,921 | 10,039 | 173
Equity instruments | 58 | 59 | -
Debt securities | 19,863 | 8,230 | 28
Loans and Advances and other assets | - | 1,750 | 144
Own debt securities issued other than own covered bonds or ABSs | 5 | - | -
The guarantees recei ved in the form of reverse repurchase agreements or security lending transactions are committed by their use in repurchase agreements, as is the case with debt securities. As of December 31, 2018, 2017 and 2016, financial liabilities issued related to encu mbered assets in financial transactions as well as their book value were as follows:
December 2018. Sources of encumbrance (Millions of euros)
| Matching liabilities, contingent liabilities or securities lent | Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered
Book value of financial liabilities | 113,498 | 131,172
Derivatives | 8,972 | 11,036
Loans and Advances | 85,989 | 97,361
Outstanding subordinated debt | 18,538 | 22,775
Other sources | 3,972 | 4,330
December 2017. Sources of encumbrance (Millions of euros)
| Matching liabilities, contingent liabilities or securities lent | Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered
Book value of financial liabilities | 118,704 | 133,312
Derivatives | 11,843 | 11,103
Loans and Advances | 87,484 | 98,478
Outstanding subordinated debt | 19,377 | 23,732
Other sources | 305 | 1,028
December 2016. Sources of encumbrance (Millions of euros)
| Matching liabilities, contingent liabilities or securities lent | Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered
Book value of financial liabilities | 134,387 | 153,632
Derivatives | 9,304 | 9,794
Loans and Advances | 96,137 | 108,268
Outstanding subordinated debt | 28,946 | 35,569
Other sources | - | 2,594
7.6 Operational Risk BBVA defines operational risk (“OR”) as any risk that could result in losses caused by human errors, inadequate or faulty internal processes, misconduct with clients or in the markets, failures, disruptions or deficiencies of systems or communications, inadequate data management, legal risks and, lastly, from external eve nts, including cyberattacks, frauds committed by third parties, disasters and an unsatisfactory service provided by suppliers. Operational risk management is oriented towards the identification of the root causes to avoid their occurrence and mitigate possible consequences. This is carried out through the establishment of mitigation plans and control frameworks aimed at minimizing resulting losses and their impact on the recurrent generation of income and the profit of the Group. Operational risk manage ment is integrated into the global risk management structure of the BBVA Group. This section addresses general aspects of operational risk management as the main component of non-financial risks. However, sections devoted to conduct and compliance risk and to cybersecurity risk management ar e also included in this report. Operational Risk Management Principles The BBVA Group is committed to preferably applying advanced operational risk management models, regardless of the capital calculation regulatory mode l applicable at the time. Operational risk management at the BBVA Group shall: Be in line with the Risk Appetite Framework approved by BBVA's Board of Directors. Meet BBVA’s management needs arising from compliance with rules, regulation, industry standard s and from decisions or positions taken by the governing bodies of the Group. Predict potential operational risks to which the Group shall be exposed as a result of the emergence or changes on new products, activities, processes or systems and services pro curement or outsourcing decisions; and establish mechanisms to achieve a reasonable assessment and mitigation before implementation, in addition to a regular review on all existing processes. Establish methodologies, procedures and indicators to regularly reassess the relevant operational risks to which the Group is exposed to implement the most appropriate mitigation measures in each case, once the identified risk and the mitigation cost have been considered (cost-benefit analysis) and preserving the solve ncy of the Group at all times. Seek the causes behind the operational events suffered by the Group and establish the appropriate redressing measures (always considering the cost-benefit analysis). To that end, procedures for analyzing operational events mu st be in place, in addition to mechanisms to capture the potential operational losses resulting from those events. Analyze the public events with significant operational risk in other entities and to promote, if applicable, the implementation of the approp riate measures to avoid its occurrence in the Group. Identify, analyze and try to quantify events with a low probability of occurrence and a high impact that, due to their exceptional nature, may not be included in the loss database or, if included, with n ot highly representative impacts, in order to assess possible mitigation measures. Have an effective governance on which the functions and responsibilities of the Areas and Bodies intervening in OR management are clearly defined. Irrespective of the implem entation of all the possible measures and controls designed to avoid or mitigate the frequency and severity of OR events, BBVA ensures at all times the capital required to face potential expected or unexpected losses. Operational risk control and manageme nt model The operational risk management cycle at BBVA is similar to the one implemented for the rest of risks. Its elements are: Planning Operational risk forms part of the risk appetite framework of the Group and includes three types of metrics: Economic capital calculated with the operational losses database of the Group and the industry, considering the corresponding diversification effects and the additional estimation of potential and emerging risks through stress scenarios designed for the ma in types of risks. The economic capital is regularly calculated for the main banks of the group and simulation capabilities are available to anticipate the impact of changes on the risk profile or new potential events. IRO metrics (operational risk losses vs. gross income) broken down by geography, business area and type of risk. In addition, work is in progress on the implementation in the entire group of a common and more granular scheme of metrics that covers the main types of operational risks. Operatio nal risk admission The main purposes of the operational risk admission phase are the following: Anticipate potential operational risks to which the Group would be exposed with the emergence of new initiatives (new business, product, outsourcing, process transformation, new systems, etc.) or changes in those initiatives in place. Ensure that the implementation is carried out once the appropriate mitigation measures have been adopted, among others ri s k insurance, where appropriate. The Corporate Policy on Operational Risk Management and Control sets out the specific operational risk admission framework through different committees, at a corporate and Business Area level, that follow a delegation struc ture based on the risk level of proposed initiatives. Operational risk monitoring The purpose of this phase is to check that the target operational risk profile of the group is within the authorized limits. Operational risk monitoring considers 2 scopes: M onitoring the operational risk admission process, oriented towards checking that accepted risks levels are within the limits and that defined controls are effective. Monitoring the operational risk “stock” linked to the processes, in order to carry out a r egular reassessment to confirm that residual risks and target risk are reasonably aligned and, if not, to implement action plans to red ress gaps to the desired level. This process is supported by a corporate Governance, Risk & Compliance tool that monitors OR at a local level and its aggregation at a corporate level. In addition, and in line with the best practices and recommendations provided by the BIS, BBVA has procedures to collect the operational losses occurred in the different entities of the Group a nd in other financial groups, with the appropriate level of detail to carry out an effective analysis that provides useful information for management purposes. To that end, a corporate tool implemented in all the countries of the Group is used. Operationa l risk mitigation Several cross-sectional operational risk plans have been promoted over the last two years for the entire BBVA Group to encourage a forward-looking management of these risks. To that end, focuses have been identified from events, self-asse ssments and recommendations from auditors and supervisors in different geographies, both in the Group and the industry, thereby analyzing the best practices and fostering comprehensive action plans to strengthen and standardize the control environment. One of the core plans is outsourcing management, which is an increasingly important subject in the Group, the industry and the regulatory environment. Some of the different initiatives launched under this scheme are summarized below: Strengthening the admissi on process of these initiatives and their con trol and monitoring frameworks. New internal regulation comprising the best practices of the industry. Integration in the 3 lines of defense control model: roles and responsibilities in each phase of it s life cy cle. Risk management o f the service and the supplier. Review of its governance process, which is included in operational risk governance, and escalation criteria. Adaptation of the managemen t tool to the new requirements. Internal communication process and training between outsourcing units and senior management, including these issues on the agenda of the main control committees of the Group. This plan will still be promoted in the year 2019 with a focus on a review of the most significant outsourcing stoc k. Governance of Non-financial risks The non-financial risks governance model at the BBVA Group is based on two components: The three lines of defense control model, in accordance with the best practices of the industry and through which compliance with the most advanced standards in terms of operational risk internal control is ensured. Scheme of Corporate Assurance Committees and Operational Risk and Internal Control Committees at the level of the different business areas. Corporate Assurance establishe s a structure of corporate and local committees that provides Senior Management with a comprehensive and consistent view of the most relevant non-financial risks. The purpose is to ensure a forward-looking and prompt decision-making process for the mitigat ion or taking of the major risks both at a local level and at the l evel of the consolidated Group. In addition, the Non-Financial Risks unit periodically reports the Risk Committee of the Board on the situation of non-financial risks management in the Group. 7.7 Risk concentration Policies for preventing excessive risk concentration In order to prevent the build-up of excessive risk concentrations at the individual, sector and portfolio levels, BBVA Group maintains updated maximum permitted risk co ncentration indices which are tied to the various observable variables related to concentration risk. Together with the limits for individual concentration, the Group uses the Herfindahl index to measure the concentration of the Group's portfolio and the b anking group's subsidiaries. At the BBVA Group level, the index reached implies a "very low" degree of concentration. The limit on the Group’s exposure or financial commitment to a specific customer therefore depends on the customer’s credit rating, the na ture of the risks involved, and the Group’s presence in a given market, based on the following guidelines: The aim is, as much as possible, to reconcile the customer's credit needs (commercial/financial, short-term/long-term, etc.) with the interests of th e Group. Any legal limits that may exist concerning risk concentration are taken into account (relationship between risks with a customer and the capital of the shareholder´s entity that assumes them), the markets, the macroeconomic situation, etc. Risk concentrations by geography The breakdown of the main figures in the most significant foreign currencies in the accompanying consolidated balance sheets is set forth in Appendix IX. Sovereign risk concentration Sovereign risk management The risk associate d with the transactions involving sovereign risk is identified, measured, controlled and tracked by a centralized unit integrated in the BBVA Group’s Risk Area. Its basic functions involve the preparation of reports in the countries where sovereign risk ex ists (called “financial programs”), tracking such risks, assigning ratings to these countries and, in general, supporting the Group in terms of reporting requirements for any transactions involving sovereign risk. The risk policies established in the finan cial programs are approved by the relevant risk committees. The country risk unit tracks the evolution of the risks associated with the various countries to which the Group are exposed (including sovereign risk) on an ongoing basis in order to adapt its ri sk and mitigation policies to any macroeconomic and political changes that may occur. Moreover, it regularly updates its internal ratings and forecasts for these countries. The methodology is based on the assessment of quantitative and qualitative paramete rs which are in line with those used by certain multilateral organizations such as the International Monetary Fund (IMF) and the World Bank, rating agencies and export credit organizations. For additional information on sovereign risk in Europe see Appendi x IX. Valuation and impairment methods The valuation methods used to assess the instruments that are subject to sovereign risks are the same ones used for other instruments included in the relevant portfol ios and are detailed in Note 8. Specifically, the f air value of sovereign debt securities of European countries has been considered equivalent to their listed price in active markets (Level 1 as defined in Note 8). Risk related to the developer and Real-Estate sector in Spain The relative weight of the inv estment in Real Estate developments has dramatically decreased during the last years, especially since 2014. A corporate sales policy has been rolled out to eliminate those real estate assets from the balance sheet which have been most difficult to be comm ercialized. The sales of 80% of the Group’s share in Divarian and of other performing and NPL wholesale portfolios to Funds and specialized investors have been some of the most relevant transactions (see Note 3). Policies and strategies established by the Group to deal with risks related to the developer and real-estate sector BBVA has teams specializing in the management of the Real-Estate Sector risk, given its economic importance and specific technical component. This specialization is not only in the Ri sk-Acceptance teams, but throughout the handling, commercial, problem risks and legal, etc. It also includes the research department of the BBVA Group (BBVA Research), which helps determine the medium/long-term vision needed to manage this portfolio. The p olicies established to address the risks related to the developer and real-estate sector, aim to accomplish, among others, the following objectives: to avoid concentration in terms of customers, products and regions; to estimate the risk profile for the po rtfolio; and to anticipate possible worsening of the portfolio within a sector is highly cyclic. Specific policies for analysis and admission of new developer risk transactions In the analysis of new operations, the assessment of the commercial operation in terms of the economic and financial viability of the project has been one of the constant. The monitoring of the work, the sales and the legal situation of the project are essential aspects for the admission and follow-up of new real estate operations. With regard the participation of the Risk Acceptance teams, they have a direct link and participate in the committees of areas such as Valuation, Legal, Research and Recoveries. This guarantees coordination and exchange of info rmation in all the processes. The following strategies have been implemented with customers in the developer sector: avoidance of large corporate transactions, which had already reduced their share in the years of greatest market growth. Additionally, very restrictive limits have been established for the second-home market and for the of land operations. Feasibility studies, at project level, are performed by doing a contrast analysis in the pre-commercialization phase, with an appropriate funding cycle and in locations with low commercialization risk. Risk monitoring policies The base information for analyzing the real estate portfolios is updated monthly. The tools used include the so-called “watch-list”, which is updated monthly with the progress of each client under watch, and the different strategic plans for management of special groups. There are plans that involve an intensification of the review of the portfolio for financing land, while, in the case of ongoing promotions, they are classified based on the rate of progress of the projects. This implies a comparison of the progress of the work and the sales, including a scoreboard which enables the persons in charge to detect timely any deviation from the project’s initial plan. These actions have enab led BBVA to identify possible impairment situations, by always keeping an eye on BBVA’s position with each customer (whether or not as first creditor). In this regard, key aspects include management of the risk policy to be followed with each customer, con tract review, improved collateral and rate review (repricing. Since 2013, there are no threats o f new defaults in the portfolio Proper management of the relationship with each customer requires knowledge of various aspects such as an analysis of the compan y’s future viability, the updating of the information on the debtor and the guarantors (their current situation and business course, economic-financial information, debt analysis and generation of funds), and the updating of the appraisal of the assets off ered as collateral. The volume of restructurings during the last period has b een very low, being close to 0. Policies applied in the management of real estate assets in Spain Regarding the financing of real estate, a new regulation has been updated in 2018 in which recommendations for the promotion of residential real estate are established. The recommendations represent guidelines about how to manage the credit admission activity of BBVA Group entities based on best practices of markets in which this activ ity is performed. It is expected that a high percentage of the current transactions will be in compliance with the latter. The guidelines apply to new transactions with clients which are not classified as impaired or Watchlist (WL1 or WL2). The policies de riving from the guidelines foresee a prudential intervention in a market which has changed its cycle in almost all of the geographies and which is showing a more sustainable behavior in terms of demography, employment and economic and investment capacities. For quantitative information about the risk related to the developer and Real-Estate sector in Spain see Appendix IX.

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