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Note 7 - Risk Management | 12 Months Ended
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Dec. 31, 2019
Risk Management Abstract |
Risk Management Explanatory | 7. Risk management 7.1 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 fina ncial loss for the other party. The general principles governing credit risk management in the BBVA Group are: Risk s taken should comply with the general risk policy established by the Board of Directors of BBVA. Risk s taken should be in line with the level of equity and generation of recurring revenue of the BBVA Group prioritizing risk diversification and avoiding relevant concentrations. Risk s taken should be identified, measured and assessed and there should be management and mo nitoring procedures, in addition to sound mitigation and control mechanisms. Risk s should be managed in a prudent and integrated manner during their life cycle and their treatment should be based on the type of risk. In addition, portfolios should be activ ely managed on the basis of a common metric (economic capital). The main criterion when granting credit risks is the capability of the borrower or obligor to fulfill on a timely basis all financial obligations with its business income or source of income without depending upon guarantors, bondsmen or pledged asse t s. Credit risk management in the Group has an integrated structure for all its functions, 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 channels, procedures, structure and supervision. At the business area level: they are responsible for adapting the Group's criteria to the loc al realities of each geographical area and for direct management of risk according to the decision-making channel: Retail risks: in general, the decisions are formalized according to the scoring tools, within the general framework for action of each busine ss 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 r isks, which incorporates the delegation rule and the Group's corporate policies. The risk function has a decision-making process supported by a structure of committees with a solid governance scheme, which describes their purposes and functioning for a pro per performance of their tasks. 7.1.1 Measurement Expected Credit Loss (ECL) IFRS 9 requires 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 formulatio n 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 ri sk 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 looking 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 forecasting capacity. How economic scenarios are reflected in calculation of ECL The forward looking component is added to the calculation of the ECL through the introduction of macroeconomic scen arios as an input. Inputs highly depend on the particular combination of region and portfolio, so inputs are adapted to available data regarding each of them. Based on economic theory and analysis, the main indicators most directly relevant for explaining and forecasting the selected risk parameters (PD, LGD and EAD) are: The net income of families, corporates or public administrations. The outstanding payment amounts on the principal and interest on the financial instruments. 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 scenarios provided by the economic research department. Only a single specific indicator for each of the three categories can be used and only one of the following core macroeconomic indica tor s s hould be chosen as first option: T he real GDP g rowth for the purpose of conditional forecasting can be seen as the only “factor” required for capturing the influence of all potentially relevant macro-financial scenarios on internal PDs and LGD. T he most representative short term interest rate (typically the policy rate or the most liquid sovereign yield or interbank rate) or exchange rates expressed in real terms. A comprehensive and representative index of the price of real estate properties expressed in real terms in the case of mortgage loans and a representative and real term index of the price of the relevant commodity 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 comprehensive 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 measurement 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 th e macroeconomic variables under the baseline scenario, which are used in the rest of the related processes of the B ank, such as budgeting, ICAAP and risk appetite framework, stress testing, etc. Additionally, the BBVA Research teams produced alternative sc enarios to the baseline scenario so as to meet the requirements under the IFRS 9 standard. Alternative macroeconomic scenarios For each of the macro-financial variables, BBVA Research produces three scenarios. BBVA Research tracks, analy z es and forecasts the economic environment to provide a consistent forward looking assessment about the most likely scenario and risks that impact BBVA’s footprint. To build economic scenarios, BBVA Research combines official data, econometric techniques an d expert knowledge. Each of these scenarios corresponds to the expected value of a different area of the probabilistic distribution of the possible projections of the economic variables. The non-linearity overlay is defined as the ratio between the probabi lity-weighted ECL under the alternative scenarios and the baseline scenario, where the scenario’s probability depends on the distance of the alternative scenarios from the base one. BBVA Group establishes equally weighted scenarios, being the probability 3 4% for the baseline scenario, 33% for the worst alternative scenario and 33% for the best alternative scenario. BBVA Group considers three prospective macroeconomic scenarios which are updated periodically (currently every three months). BBVA Research projects a maximum of five years for the macro economic variables. The estimation for the next five years of the GDP used in the estimation of the measurement of expected credit loss as of D ecember 31, 2019 is as follows: GDP for the main geographies:
GDP for the main geographies
| Spain | Mexico | Turkey | The United States
Date | GDP negative scenario | GDP base scenario | GDP positive scenario | GDP negative scenario | GDP base scenario | GDP positive scenario | GDP negative scenario | GDP base scenario | GDP positive scenario | GDP negative scenario | GDP base scenario | GDP positive scenario
2019 | 0.96% | 1.54% | 2.15% | -0.58% | 0.23% | 1.06% | -0.60% | 3.32% | 7.06% | 1.16% | 2.12% | 3.13%
2020 | 1.35% | 1.87% | 2.42% | 0.93% | 1.66% | 2.39% | -0.68% | 2.48% | 5.27% | 1.00% | 1.81% | 2.62%
2021 | 2.01% | 2.10% | 2.19% | 2.05% | 2.14% | 2.23% | 4.60% | 4.74% | 4.91% | 1.84% | 1.92% | 2.03%
2022 | 1.85% | 1.89% | 1.88% | 2.07% | 2.14% | 2.19% | 4.28% | 4.38% | 4.47% | 1.83% | 1.86% | 1.91%
2023 | 1.81% | 1.85% | 1.85% | 2.11% | 2.15% | 2.17% | 4.31% | 4.38% | 4.50% | 1.88% | 1.91% | 1.94%
| Peru | Argentina | Colombia
Date | GDP negative scenario | GDP base scenario | GDP positive scenario | GDP negative scenario | GDP base scenario | GDP positive scenario | GDP negative scenario | GDP base scenario | GDP positive scenario
2019 | 0.34% | 2.92% | 5.43% | -7.41% | -2.47% | 2.40% | 1.93% | 3.29% | 4.58%
2020 | 0.32% | 2.46% | 4.56% | -6.62% | -2.57% | 0.85% | 1.71% | 2.73% | 3.74%
2021 | 3.07% | 3.28% | 3.49% | 2.08% | 2.30% | 2.51% | 3.61% | 3.61% | 3.61%
2022 | 3.39% | 3.39% | 3.39% | 1.64% | 1.78% | 1.88% | 3.59% | 3.59% | 3.59%
2023 | 3.86% | 3.86% | 3.86% | 1.95% | 2.10% | 2.23% | 3.59% | 3.59% | 3.59%
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, B udgeting…) and then 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 possib le 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. 7.1.2 Credit risk exposure In acc ordance with IFRS 7 “Financial i nstru ments: Disclosures”, the BBVA Group’s credit risk exposure by headings in the balance sheets as of December 31, 2019 and 2018 is provided below. It does not consider the loss allowances and the availability of collateral or other credit enhancements to enable compliance with payment obligations. The details are broken down by financial instruments and counterparties:
Maximum credit risk exposure (Millions of Euros)
| Notes | December 2019 | Stage 1 | Stage 2 | Stage 3
Financial assets held for trading |  | 69,503 |  |  |
Debt securities | 10 | 26,309 |  |  |
Equity instruments | 10 | 8,892 |  |  |
Loans and advances | 10 | 34,303 |  |  |
Non-trading financial assets mandatorily at fair value through profit or loss |  | 5,557 |  |  |
Loans and advances | 11 | 1,120 |  |  |
Debt securities | 11 | 110 |  |  |
Equity instruments | 11 | 4,327 |  |  |
Financial assets designated at fair value through profit or loss | 12 | 1,214 |  |  |
Derivatives (trading and hedging) |  | 39,462 |  |  |
Financial assets at fair value through other comprehensive income |  | 61,293 |  |  |
Debt securities | 13 | 58,841 | 58,590 | 250 | -
Equity instruments | 13 | 2,420 |  |  |
Loans and advances to credit institutions | 13 | 33 | 33 | - | -
Financial assets at amortized cost |  | 451,640 | 402,024 | 33,624 | 15,993
Loans and advances to central banks |  | 4,285 | 4,285 | - | -
Loans and advances to credit institutions |  | 13,664 | 13,500 | 158 | 6
Loans and advances to customers |  | 394,763 | 345,449 | 33,360 | 15,954
Debt securities |  | 38,930 | 38,790 | 106 | 33
Total financial assets risk |  | 628,670 |  |  |
Total loan commitments and financial guarantees | 33 | 181,116 | 169,663 | 10,452 | 1,001
Total maximum credit exposure |  | 809,786 |  |  |
Maximum credit risk exposure (Millions of Euros)
| Notes | December 2018 | Stage 1 | Stage 2 | Stage 3
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 |  |  |
Financial assets at fair value through other comprehensive income |  | 56,365 |  |  |
Debt securities | 13 | 53,737 | 53,734 | 3 | -
Equity instruments | 13 | 2,595 |  |  |
Loans and advances to credit institutions | 13 | 33 | 33 | - | -
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 |  | 592,571 |  |  |
Total loan commitments and financial guarantees | 33 | 170,511 | 161,404 | 8,120 | 987
Total maximum credit exposure |  | 763,082 |  |  |
The maximum credit exposure presented in the table above is determined by type of financial asset as explained below: In the case of financial instruments recognized in the consolidated balance sheets, exposure to credit risk is considered equal to its carrying amount (not including loss allowances) with the only exception of trading and hedging derivatives. The maximum credit risk exposure on financial commitments and guarantees granted is the maximum that the Group would be liable for if these guarantees were called in, or the higher amount pending to be disposed from the customer in the case of commitments. 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 breakdown by geographical location and Stage of the maximum credit risk exposure, the accumulated allowances recorded and the carrying amount of the loans and advances to customers as of December 31, 2019 and 2018 is shown below:
December 2019
| Gross exposure | Accumulated allowances | Carrying amount
| Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3
Spain (*) | 197,058 | 173,843 | 14,599 | 8,616 | (5,311) | (712) | (661) | (3,939) | 191,747 | 173,131 | 13,939 | 4,677
The United States | 57,387 | 49,744 | 7,011 | 632 | (688) | (165) | (342) | (182) | 56,699 | 49,580 | 6,670 | 450
Mexico | 60,099 | 54,748 | 3,873 | 1,478 | (2,013) | (697) | (404) | (912) | 58,087 | 54,052 | 3,469 | 566
Turkey (**) | 43,113 | 34,536 | 5,127 | 3,451 | (2,613) | (189) | (450) | (1,974) | 40,500 | 34,347 | 4,677 | 1,477
South America (***) | 36,265 | 31,754 | 2,742 | 1,769 | (1,769) | (366) | (323) | (1,079) | 34,497 | 31,388 | 2,419 | 690
Others | 839 | 824 | 7 | 9 | (8) | (1) | (1) | (6) | 832 | 823 | 6 | 2
Total (****) | 394,763 | 345,449 | 33,360 | 15,954 | (12,402) | (2,129) | (2,181) | (8,093) | 382,360 | 343,320 | 31,179 | 7,861
(*) Spain includes all countries where BBVA, S.A. operates. (**) Turkey includes all countries in which Garanti BBVA operates. (***) In South America, BBVA Group operates in Argentina, Colombia, Peru, Uruguay and Venezuela. (****) The amount of the accumulated impairment includes the provisions recorded for credit risk over the remaining expected lifetime of purchased financial instruments. Those provisions were determined at the moment of the Purchase Price Allocation and were originated mainly in the acquisition of Catalunya Banc S.A. (as of December 31, 2019, the remain ed balance was €433 million). These valuation adjustments are recognized in the income statement during the residual life of the operations or are applied to the value correctio ns when the losses materialize.
December 2018
| Gross exposure | Accumulated allowances | Carrying amount
| Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3
Spain (*) | 195,447 | 172,599 | 12,827 | 10,021 | (5,874) | (713) | (877) | (4,284) | 189,574 | 171,886 | 11,951 | 5,737
The United States | 57,321 | 50,665 | 5,923 | 733 | (658) | (206) | (299) | (153) | 56,663 | 50,459 | 5,624 | 580
Mexico | 52,858 | 48,354 | 3,366 | 1,138 | (1,750) | (640) | (373) | (737) | 51,107 | 47,714 | 2,992 | 401
Turkey (**) | 43,718 | 34,883 | 6,113 | 2,722 | (2,241) | (171) | (591) | (1,479) | 41,479 | 34,712 | 5,523 | 1,244
South America (***) | 36,098 | 31,947 | 2,436 | 1,715 | (1,656) | (338) | (234) | (1,084) | 34,442 | 31,609 | 2,202 | 631
Others | 783 | 756 | 8 | 19 | (19) | - | (1) | (18) | 763 | 755 | 7 | 1
Total (****) | 386,225 | 339,204 | 30,673 | 16,348 | (12,199) | (2,070) | (2,374) | (7,755) | 374,027 | 337,134 | 28,299 | 8,593
(*) Spain includes all countries where BBVA, S.A. operates. (**) Turkey includes all countries in which Garanti BBVA operates. (***) In South America, BBVA Group operates in Argentina, Chile, Colombia, Peru, Uruguay and Venezuela. (****) The amount of the accumulated impairment includes the provisions recorded for credit risk over the remaining expected lifetime of purchased financial instruments. Those provisions were determined at the moment of the Purchase Price Allocation and were originated mainly in the acquisition of Catalunya Banc S.A. (as of December 31, 2018 the remained balance was €540 million). These valuation adjustments are recognized in the income statement during the residual life of the operations or are applied to the value corrections when the losses materialize. The breakdown by counterparty of the maximum credit risk exposure, the accumulated allowances recorded, as well as the carrying amount by stages of loans and advances to customers as of December 31, 2019 and 2018 is shown below:
December 2019 (Millions of Euros)
| Gross exposure | Accumulated allowances | Net amount
| Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3
Public administrations | 28,281 | 27,511 | 682 | 88 | (59) | (15) | (22) | (21) | 28,222 | 27,496 | 660 | 66
Other financial corporations | 11,239 | 11,085 | 136 | 17 | (31) | (19) | (2) | (10) | 11,207 | 11,066 | 134 | 8
Non-financial corporations | 173,254 | 148,768 | 16,018 | 8,468 | (6,465) | (811) | (904) | (4,750) | 166,789 | 147,957 | 15,114 | 3,718
Individuals | 181,989 | 158,085 | 16,523 | 7,381 | (5,847) | (1,283) | (1,252) | (3,312) | 176,142 | 156,801 | 15,272 | 4,069
Loans and advances to customers | 394,763 | 345,449 | 33,360 | 15,954 | (12,402) | (2,129) | (2,181) | (8,093) | 382,360 | 343,320 | 31,179 | 7,861
December 2018 (Millions of Euros)
| Gross exposure | Accumulated allowances | Net amount
| Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3
Public administrations | 28,632 | 27,740 | 764 | 128 | (84) | (21) | (25) | (38) | 28,549 | 27,719 | 739 | 91
Other financial corporations | 9,490 | 9,189 | 291 | 11 | (22) | (13) | (4) | (4) | 9,468 | 9,176 | 286 | 6
Non-financial corporations | 169,764 | 145,875 | 15,516 | 8,372 | (6,260) | (730) | (1,190) | (4,341) | 163,503 | 145,145 | 14,327 | 4,031
Individuals | 178,339 | 156,400 | 14,102 | 7,838 | (5,833) | (1,305) | (1,155) | (3,372) | 172,506 | 155,094 | 12,946 | 4,466
Loans and advances to customers | 386,225 | 339,204 | 30,673 | 16,348 | (12,199) | (2,070) | (2,374) | (7,755) | 374,027 | 337,134 | 28,299 | 8,593
The breakdown by counterparty and product of loans and advances, net of loss allowances, as well as the gross carrying amount by type of product, classified in different headings of the assets, as of December 31, 2019, 2018 and 2017 is shown below:
December 2019 (Millions of Euros)
| Central banks | General governments | Credit institutions | Other financial corporations | Non-financial corporations | Households | Total | Gross carrying amount
By product |  |  |  |  |  |  |  |
On demand and short notice | - | 9 | - | 118 | 2,328 | 595 | 3,050 | 3,251
Credit card debt | - | 10 | 1 | 3 | 1,940 | 14,401 | 16,355 | 17,608
Commercial debtors |  | 971 | - | 230 | 15,976 | 99 | 17,276 | 17,617
Finance leases | - | 227 | - | 6 | 8,091 | 387 | 8,711 | 9,095
Reverse repurchase loans | - | - | 1,817 | - | 26 | - | 1,843 | 1,848
Other term loans | 4,240 | 26,734 | 4,121 | 7,795 | 137,934 | 160,223 | 341,047 | 351,230
Advances that are not loans | 35 | 865 | 7,743 | 3,056 | 951 | 506 | 13,156 | 13,214
LOANS AND ADVANCES | 4,275 | 28,816 | 13,682 | 11,208 | 167,246 | 176,211 | 401,438 | 413,863
By secured loans |  |  |  |  |  |  |  |
Of which: mortgage loans collateralized by immovable property |  | 1,067 | 15 | 261 | 23,575 | 111,085 | 136,003 | 139,317
Of which: other collateralized loans | - | 10,447 | 93 | 2,106 | 29,009 | 6,893 | 48,548 | 49,266
By purpose of the loan |  |  |  |  |  |  |  |
Of which: credit for consumption |  |  |  |  |  | 46,356 | 46,356 | 49,474
Of which: lending for house purchase |  |  |  |  |  | 110,178 | 110,178 | 111,636
By subordination |  |  |  |  |  |  |  |
Of which: project finance loans |  |  |  |  | 12,259 |  | 12,259 | 12,415
December 2018 (Millions of Euros)
| Central banks | General governments | Credit institutions | Other financial corporations | Non-financial corporations | Households | Total | Gross carrying amount
By product |  |  |  |  |  |  |  |
On demand and short notice | - | 10 | - | 151 | 2,833 | 648 | 3,641 | 3,834
Credit card debt | - | 8 | 1 | 2 | 2,328 | 13,108 | 15,446 | 16,495
Commercial debtors |  | 948 | - | 195 | 16,190 | 103 | 17,436 | 17,716
Finance leases | - | 226 | - | 3 | 8,014 | 406 | 8,650 | 9,077
Reverse repurchase loans | - | 293 | 477 | - | - | - | 770 | 772
Other term loans | 3,911 | 26,839 | 2,947 | 7,030 | 133,573 | 157,760 | 332,060 | 342,264
Advances that are not loans | 29 | 1,592 | 5,771 | 2,088 | 984 | 498 | 10,962 | 11,025
LOANS AND ADVANCES | 3,941 | 29,917 | 9,196 | 9,468 | 163,922 | 172,522 | 388,966 | 401,183
By secured loans |  |  |  |  |  |  |  |
Of which: mortgage loans collateralized by immovable property |  | 1,056 | 15 | 219 | 26,784 | 111,809 | 139,883 | 144,005
Of which: other collateralized loans | - | 7,179 | 285 | 1,389 | 31,393 | 6,835 | 47,081 | 47,855
By purpose of the loan |  |  |  |  |  |  |  |
Of which: credit for consumption |  |  |  |  |  | 40,124 | 40,124 | 42,736
Of which: lending for house purchase |  |  |  |  |  | 111,007 | 111,007 | 112,952
By subordination |  |  |  |  |  |  |  |
Of which: project finance loans |  |  |  |  | 13,973 |  | 13,973 | 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
7.1.3 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 existence 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 th e 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 Grou p: Analysis of the financial risk of the transaction, based on the debtor’s capacity for repayment 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 ac cepted forms: monetary, secured, personal or hedge guarantees; and finally A ssessment of the repayment risk (asset liquidity) of the guarantees received. This is carried out through a prudent risk policy that consists of the analysis of the financial risk, based on the capacity f or reimbursement or generation of resources of the borrower, the analysis of the guarantee, assessing, among others, the efficiency, the robustness and the risk, the adequacy of the guarantee with the operation and other aspects such as the location, currency, concentration or the existence of limitations. Additionally, the necessary tasks for the constitution of guarantees must be carried out - in any of the generally accepted forms (collaterals, personal guarantees and financial hedge instruments) - appropriate to the risk assumed. The procedures for the management and valuation of collateral ar e set out in the corporate p olicies (retail and wholesale), which establish the basic principles for cre dit risk management, including the management of collaterals assigned in transactions with customers. The criteria for the systematic, standardized and effective treatment of collateral in credit transaction procedures in BBVA Group’s wholesale and retail banking are included in the Specific Collateral Rules. 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 of collateral for each financial instrument class: Debt instruments held for trading: The guarantees or credit enhancements obtained directly from the issuer or counterparty are implicit in the clauses of the instrument (mainly guarantees of the issuer). Derivatives and hedging derivatives: In derivatives, credit risk is minimized through contractual netting agreements, where positive- and negative-value derivatives with the same counterparty are offset for their net balance. There may likewise be other kinds of guarantee s and collaterals, depending on counterparty solvency and the nature of the transaction (mainly collaterals). The summary of the compensation effect (via netting and collateral) for derivatives and securities operations is presented in Note 7.2.2. Other fi nancial assets designated at fair value 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 (mainly personal guarantees). A s of December 31, 2019 and 2018, BBVA Group had no credit risk exposure of impaired financial assets at fair value through other comprehensive income (see Note 7.1.2). Financial assets at amortized cost: Loans a nd advances to credit institutions: These usually have the counterparty’s personal guarantee or pledged securities in the case of repos. Loans and advances to customers: Most of these loans and advances are backed by personal guarantees extended by the cus tomer. 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 or insurances). Debt securities: The guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent to the structure of the instrument. Financial guarantees, other contingent risks and drawable by third parties: these have the counterparty’s personal guarantee or other types of collaterals. The disclosure of impaired loans and advances at amortized cost covered by collateral (see Note 7.1.2), by type of collateral, as of December 31, 2019 and 2018, is the following:
December 2019 (Millions of Euros)
| Maximum exposure to credit risk | Of which secured by collateral
| Residential properties | Commercial properties | Cash | Others | Financial
Impaired loans and advances at amortized cost | 15,959 | 3,396 | 939 | 35 | 221 | 542
Total | 15,959 | 3,396 | 939 | 35 | 221 | 542
December 2018 (Millions of Euros)
| Maximum exposure to credit risk | Of which secured by collateral
| Residential properties | Commercial properties | Cash | Others | Financial
Impaired loans and advances at amortized cost | 16,359 | 3,484 | 1,255 | 13 | 317 | 502
Total | 16,359 | 3,484 | 1,255 | 13 | 317 | 502
The value of guarantees received as of December 31, 2019 and 2018, is the following:
Guarantees received (Millions of Euros)
| 2019 | 2018
Value of collateral | 152,454 | 158,268
Of which: guarantees normal risks under special monitoring | 14,623 | 14,087
Of which: guarantees non-performing risks | 4,590 | 5,068
Value of other guarantees | 35,464 | 16,897
Of which: guarantees normal risks under special monitoring | 3,306 | 1,519
Of which: guarantees non-performing risks | 542 | 502
Total value of guarantees received | 187,918 | 175,165
The maximum credit risk exposure of impaired financial guarantees and other commitments at December 31, 2019 and 2018 amounts to €1,001 and €987 mil lion, respectively (see Note 7.1.2). 7.1.4 Credit quality of financial assets that are neither past due nor impaired The BBVA Group has tools that enable it to rank the credit quality of its transactions and customers based on an assessment and its correspondence with the probability 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 togeth er 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 origi nate a loan, what amount should 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 requeste d by a customer, on the basis 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 i s needed is a series of objective 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 r equested 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 t ransactions for a given product 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 th at refer to the behavior of 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 the customer’s credit quality and it is used to pre-approve 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, quant itative factors, and on the 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 rating s 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 bu siness 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, Stand ard & 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 prob ability of default of a transaction 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 informat ion of the behavior of portfolios 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 abri dged scale used to classify the BBVA Group’s outstanding risk as of December 31, 2019:
External rating | Internal rating | Probability of default(basic points)
Standard&Poor's List | Reduced List (22 groups) | Average | Minimum from >= | Maximum
AAA | AAA | 1 | 0 | 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 Standard & 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 secti ons/Master Rating Scale levels) 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 terms of the BBVA Group as of December 31, 2019 and 2018:
Probability of default (basis points)
| December 2019 | December 2018
| Subject to 12 month ECL (Stage 1) | Subject to lifetime ECL (Stage 2) | Subject to 12 month ECL (Stage 1) | Subject to lifetime ECL (Stage 2)
| % | % | % | %
0 to 2 | 5.5 | - | 9.6 | -
2 to 5 | 6.3 | - | 10.8 | 0.1
5 to 11 | 14.6 | 0.2 | 6.3 | -
11 to 39 | 24.5 | 0.8 | 20.9 | 0.4
39 to 194 | 24.5 | 1.6 | 30.1 | 1.8
194 to 1,061 | 14.0 | 3.6 | 12.2 | 3.6
1,061 to 2,121 | 1.4 | 1.2 | 1.6 | 1.2
> 2,121 | 0.4 | 1.5 | 0.2 | 1.2
Total | 91.0 | 9.0 | 91.7 | 8.3
7.1.5 I mpaired secured loan risks T he breakdown of loans and advances, within financial assets at amortized cost, non-performing and accumulated impairment, as well as the gross carrying amount, by counterparties as of December 31, 2019, 2018 and 2017 is as follows:
December 2019 (Millions of Euros)
| Gross carrying amount | Non-performing loans and advances | Accumulated impairment | Non-performing loans and advances as a % of the total
Central banks | 4,285 | - | (9) | 0.0%
General governments | 28,281 | 88 | (60) | 0.3%
Credit institutions | 13,664 | 6 | (15) | 0.0%
Other financial corporations | 11,239 | 17 | (31) | 0.2%
Non-financial corporations | 173,254 | 8,467 | (6,465) | 4.9%
Agriculture, forestry and fishing | 3,758 | 154 | (124) | 4.1%
Mining and quarrying | 4,669 | 100 | (86) | 2.1%
Manufacturing | 39,517 | 1,711 | (1,242) | 4.3%
Electricity, gas, steam and air conditioning supply | 12,305 | 684 | (575) | 5.6%
Water supply | 900 | 14 | (16) | 1.6%
Construction | 10,945 | 1,377 | (876) | 12.6%
Wholesale and retail trade | 27,467 | 1,799 | (1,448) | 6.6%
Transport and storage | 9,638 | 507 | (392) | 5.3%
Accommodation and food service activities | 8,703 | 279 | (203) | 3.2%
Information and communications | 6,316 | 95 | (65) | 1.5%
Financial and insurance activities | 6,864 | 191 | (140) | 2.8%
Real estate activities | 19,435 | 782 | (527) | 4.0%
Professional, scientific and technical activities | 4,375 | 167 | (140) | 3.8%
Administrative and support service activities | 3,415 | 118 | (134) | 3.4%
Public administration and defense; compulsory social security | 282 | 5 | (6) | 1.7%
Education | 903 | 41 | (38) | 4.5%
Human health services and social work activities | 4,696 | 66 | (55) | 1.4%
Arts, entertainment and recreation | 1,396 | 47 | (39) | 3.4%
Other services | 7,671 | 331 | (360) | 4.3%
Households | 181,989 | 7,381 | (5,847) | 4.1%
LOANS AND ADVANCES | 412,711 | 15,959 | (12,427) | 3.9%
December 2018 (Millions of Euros)
| Gross carrying amount | Non-performing loans and advances | Accumulated impairment | Non-performing loans and advances as a % of the total
Central Banks | 3,947 | - | (6) | -
General governments | 28,198 | 128 | (84) | 0.4%
Credit institutions | 9,175 | 10 | (12) | 0.1%
Other financial corporations | 9,490 | 11 | (22) | 0.1%
Non-financial corporations | 170,182 | 8,372 | (6,260) | 4.9%
Agriculture, forestry and fishing | 3,685 | 122 | (107) | 3.3%
Mining and quarrying | 4,952 | 96 | (70) | 1.9%
Manufacturing | 36,772 | 1,695 | (1,134) | 4.6%
Electricity, gas, steam and air conditioning supply | 13,853 | 585 | (446) | 4.2%
Water supply | 1,061 | 19 | (15) | 1.8%
Construction | 11,899 | 1,488 | (1,007) | 12.5%
Wholesale and retail trade | 25,833 | 1,624 | (1,259) | 6.3%
Transport and storage | 9,798 | 459 | (374) | 4.7%
Accommodation and food service activities | 7,882 | 315 | (204) | 4.0%
Information and communication | 5,238 | 113 | (72) | 2.1%
Financial and insurance activities | 6,929 | 147 | (128) | 2.1%
Real estate activities | 17,272 | 834 | (624) | 4.8%
Professional, scientific and technical activities | 5,096 | 204 | (171) | 4.0%
Administrative and support service activities | 3,162 | 128 | (125) | 4.0%
Public administration and defense, compulsory social security | 319 | 5 | (7) | 1.6%
Education | 912 | 31 | (31) | 3.4%
Human health services and social work activities | 4,406 | 63 | (63) | 1.4%
Arts, entertainment and recreation | 1,323 | 59 | (41) | 4.5%
Other services | 9,791 | 386 | (382) | 3.9%
Households | 178,355 | 7,838 | (5,833) | 4.4%
LOANS AND ADVANCES | 399,347 | 16,359 | (12,217) | 4.1%
December 2017 (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 | 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%
The changes during the years 2019, 2018 and 2017 of impaired financial assets and contingent risks are as follow:
Changes in impaired financial assets and contingent risks (Millions of Euros)
| 2019 | 2018 | 2017
Balance at the beginning | 17,134 | 20,590 | 23,877
Additions | 9,857 | 9,792 | 10,856
Decreases (*) | (5,874) | (6,909) | (7,771)
Net additions | 3,983 | 2,883 | 3,085
Amounts written-off | (3,803) | (5,076) | (5,758)
Exchange differences and other | (544) | (1,264) | (615)
Balance at the end | 16,770 | 17,134 | 20,590
(*) Reflects the total amount of impaired loans derecognized from the consolidated balance sheet throughout the year as a result of mortgag e foreclosures and real estate assets received in lieu of payment as well as monetary recoveries (see Note 21). The changes during the years 2019, 2018 and 2017 in financial assets derecognized from the accompanying consolidated balance sheet as their reco very is considered unlikely ("write-offs"), is shown below:
Changes in impaired financial assets written-off from the balance sheet (Millions of Euros)
| Notes | 2019 | 2018 | 2017
Balance at the beginning |  | 32,343 | 30,139 | 29,347
Increase |  | 4,712 | 6,164 | 5,986
Decrease: |  | (11,039) | (4,210) | (4,442)
Re-financing or restructuring |  | (2) | (10) | (9)
Cash recovery | 47 | (919) | (589) | (558)
Foreclosed assets |  | (617) | (625) | (149)
Sales (*) |  | (8,325) | (1,805) | (2,284)
Debt forgiveness |  | (493) | (889) | (1,121)
Time-barred debt and other causes |  | (682) | (292) | (321)
Net exchange differences |  | 230 | 250 | (752)
Balance at the end |  | 26,245 | 32,343 | 30,139
(*) Includes principal and interest. As indicated in Note 2.2.1, although they have been derecognized from the consolidated balance sheet, the BBVA Group continues to attempt to collect on these written-off financial assets, until the rights to receive them are fully extinguished, either because it is a time-barred financial as set, the financial asset is condoned, or other reasons. 7.1.6 Loss allowances Movements in gross accounting balances and accumulated allowances for loan losses during 2019 are recorded on the accompanying consolidated balance sheet as of December 31, 201 9, in order to cover the estimated loss allowances in loans and advances and debt securities measured at amortized cost. As for the years ended December 31, 2018 and 2017, the changes in the accumulated allowances are presented):
Changes in gross accounting balances of loans and advances at amortized cost. December 2019 (Millions of Euros)
| Stage 1 | Stage 2 | Stage 3 | Total
Opening balance | 352,282 | 30,707 | 16,359 | 399,347
Transfers of financial assets: | (9,021) | 6,279 | 2,741 | -
Transfers from stage 1 to Stage 2 | (13,546) | 13,546 | - | -
Transfers from stage 2 to Stage 1 | 5,656 | (5,656) | - | -
Transfers to Stage 3 | (1,571) | (2,698) | 4,269 | -
Transfers from Stage 3 | 440 | 1,087 | (1,527) | -
Net annual origination of financial assets | 20,296 | (2,739) | 246 | 17,804
Becoming write-offs | (152) | (349) | (3,407) | (3,908)
Foreign exchange | 1,611 | 35 | 16 | 1,662
Modifications that do not result in derecognition | (1) | (27) | 15 | (13)
Other | (1,782) | (388) | (11) | (2,180)
Closing balance | 363,234 | 33,518 | 15,959 | 412,711
Changes in allowances of loans and advances at amortized cost. December 2019 (Millions of Euros)
| Stage 1 | Stage 2 | Stage 3 | Total
Opening balance | (2,082) | (2,375) | (7,761) | (12,217)
Transfers of financial assets: | 176 | (227) | (1,574) | (1,626)
Transfers from stage 1 to Stage 2 | 126 | (649) | - | (523)
Transfers from stage 2 to Stage 1 | (38) | 273 | - | 235
Transfers to Stage 3 | 89 | 234 | (1,810) | (1,487)
Transfers from Stage 3 | (1) | (86) | 236 | 149
Net annual origination of allowances | (542) | (116) | (1,711) | (2,370)
Becoming write-offs | 130 | 337 | 2,789 | 3,256
Foreign exchange | (30) | (18) | 69 | 20
Modifications that do not result in derecognition | (15) | (149) | (89) | (254)
Other | 215 | 366 | 183 | 764
Closing balance | (2,149) | (2,183) | (8,094) | (12,427)
Financial assets at amortized cost. December 2018 (Millions of Euros)
| Not credit-impaired | Credit-impaired | Total
| Stage 1 | Stage 2 | Credit-impaired (Stage 3)
| Loss allowances | Loss allowances (collectively assessed) | Loss allowances (individually assessed) | Loss allowances | Loss allowances
Opening balance | (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)
Of which: Loans and advances | - | - | - | - | (12,217)
Of which: Debt certificates | - | - | - | - | (46)
Financial assets at amortized cost. December 2017 (Millions of Euros) (*)
| Opening balance | Increases due to amounts set aside for estimated loan losses during the year | Decreases due to amounts reversed for estimated loan losses during the year | Decreases due to amounts taken against allowances | Transfers between allowances | Other adjustments | Closing balance | Recoveries recorded directly to the statement of profit or loss
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
7.1.7 Refinancing and restructuring transactions Group policies and principles with respect to refinancing and restructuring transactions Refinancing and restructuring transactions (see definition in the Glossary) are carried out with customers who have requested such a transaction in order to meet their current loan payme nts 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 transaction is to provide the customer 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 recognition, is c ontrary to BBVA Group policies. The BBVA Grou p’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 installments. This is done by first identifying the origin of the pa yment 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 the customer is a company, the analysis also covers the sit uation of the industry in which it operates. With the aim of increasing the solvency of the transaction, new guarantees and/or guarantors of demonstrable solvency are obtained where possible. An essential part of this process is an analysis of the effecti veness of both the new and original guarantees. This analysis is carried out from the overall customer or group perspective. Refinancing and restructuring transactions do not in general increase the amount of the customer’s loan, except for the expense i nherent to the transaction itself. The capacity to refinance and restructure a loan is not delegated to the branches, but decided on by the risk units. The decisions made are reviewed from time to time with the aim of evaluating full compliance with refi nancing 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 different types of customers involved. In the case of reta il customers (private individuals), the main aim of the BBVA Group’s policy on refinancing and restructuring a loan is to avoid default arising from a customer’s temporary liquidity problems by implementing structural solutions that do not increase the bal ance of the 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 transactions based on the 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 transaction in all cases. No arrangements may be concluded that involve a grace period for both principal and interest. Refinancing an d restructuring of transactions is only allowed on those loans in which the BBVA Group originally entered into. Customers subject to refinancing and restructuring transactions are excluded from marketing campaigns of any kind. In the case of non-retail cus tomers (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 m easures (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 divestment plan for assets and/or operatin g 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 Group’s policy, the conclusion of a loan refinanci ng and restructuring transaction does not mean the loan is reclassified from "impaired" or "significant increase in credit risk" to normal risk. The reclassification to "significant increase in credit risk" or normal risk categories must be based on the an alysis 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 either: "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 conditions established for their consideration as nor mal risk are met. The assets classified as "Impaired assets" should comply with the following conditions in order to be reclassified to "Significant increase in credit risk": The customer has to have paid a significant part of the pending exposure. At leas t one year must have elapsed since its classification as "Impaired asset". The customer does not have past due payments. The conditions established for assets classified as “Significant increase in credit risk” to be reclassified out of this category are a s follows: The customer must have paid past-due amounts (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 expo sures is more than 30 days past-due. At least two 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; and It is unlikely that the customer will have financial difficulties and, therefore, 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 th e possibility of two modifications in a 24 month period 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-d efaults on such a loan, by assigning a lower internal 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) a ssigned to restructured/renegotiated loans (with the resulting PD being higher than the average PD of the non- renegotiated loans in the same portfolios). 7.1.8 Risk concentration Policies for preventi ng 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 concentration indices which are tied to the various observable variables related to concentration risk. Togeth er with the limits for individual concentration, the Group uses the Herfindahl index to measure the concentration of the Group's portfolio and the banking group's subsidiaries. At the BBVA Group level, the index reached implies a "very low" degree of conce ntration. The limit on the Group’s exposure or financial commitment to a specific customer therefore depends on the customer’s credit rating, the nature of the risks involved, and the Group’s presence in a given market, based on the following guidelines: T he aim is, as much as possible, to reconcile the customer's credit needs (commercial/financial, short-term/long-term, etc.) with the interests of the 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 th e accompanying consolidated balance sh eets is set forth in Appendix IX. Sovereign risk concentration Sovereign risk management The risk associated with the transactions involving sovereign risk is identified, measured, controlled and tracked by a centrali zed unit integrated in the BBVA Group’s Risk Area. Its basic functions involve the preparation of reports in the countries where sovereign risk exists (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 financial 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 risk and mitigation policies to any macroeconomic and political changes that may occur. Moreover, it regularly u pdates its internal ratings and forecasts for these countries. The methodology is based on the assessment of quantitative and qualitative parameters 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 sovereig n risk in Europe see Appendix IX. Valuation and impairment methods The valuation methods used to assess the instruments that are subject t o sovereign risks are the same ones used for other instruments included in the relevant portfol ios and are detailed in Note 8. Specifically, the fair value of sovereign debt securities of European countries has been considered equivalent to their listed pr ice 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 investment 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 commercialized. The sales of 80% of the Group’s share in Divarian and of other performing and NPL wholesale portfo lios 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 ma nagement of the Real-Estate Sector risk, given its economic importance and specific technical component. This specialization is not only in the Risk-Acceptance teams, but throughout the handling, commercial, problem risks and legal, etc. It also includes t he research department of the BBVA Group (BBVA Research), which helps determine the medium/long-term vision needed to manage this portfolio. The policies established to address the risks related to the developer and real-estate sector, aim to accomplish, a mong others, the following objectives: to avoid concentration in terms of customers, products and regions; to estimate the risk profile for the portfolio; and to anticipate possible worsening of the portfolio within a sector is highly cyclic al. Specific po licies for analysis and granting of new developer risk transactions In the analysis of new transactions, the assessment of the commercial operation in terms of the economic and financial viability of the project has been linear. 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 transactions. With regard the participation of the Risk Acceptance teams, they have a direct link and participate in the committees o f areas such as Valuation, Legal, Research and Recoveries. This assures coordination and exchange of information in all the processes. The following strategies have been implemented with customers in the developer sector: avoidance of large corporate trans actions, 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 transactions. Feasibility studies, at project level, are perfo rmed 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 mo nthly. 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 revi ew of the portfolio for financing land, while, in the case of ongoing developments, 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. Proper management of the relationship with each customer requires knowledge of various aspects such as an analysis of the company’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 offered as collateral. BBVA has a classifica tion of debtors according to the provisions in each country, in general, categorizing the degree of problem of each risk. The volume of restructurings during 2019 and 2018 has not been significant, being close to zero. 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 development of residential real estate are established. The recommendations represent guidelines about how to ma nage the credit admission activity of BBVA Group entities based on best practices of markets in which this activity 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 deriving 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. 7.2 Market risk 7.2.1 Market risk in trading portfolios Market risk originates in the possibility that there may be losses in the value of positions held due to movements in the market variables that impact the valuation of traded financial products and assets. The main risks can be classified as follows: Interest-rate risk: This arises as a result of exposure to movements in the different interest-rate curves involved in trading. Although the typical products th at 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 discount. 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, arising 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 which a position is held. As in the case of equity risk, this risk is generated in spot currency po sitions, and in any derivative product whose underlying asset is an exchange rate. In addition, the quanto effect (operations where the underlying asset and the instrument itself are denominated in different currencies) means that in certain transactions i n 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 a re 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 volatil ity input for their valuation. The metrics developed to assess market risk in the BBVA Group are aligned with market practices and are implemented consistently across a ll the local market risk units. Measurement procedures are established in terms of the p ossible 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 (“Va R”), 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 result of fluctuations in equity prices, interest rates, foreign exchange rates and credit spreads. The market ri sk analysis considers various risks, such as credit spread risk, basis risk, as well as volatility and correlation risk. With respect to the risk measurement models used by the BBVA Group, the Bank of Spain has authorized the use of the internal market risk model to determine bank capital requirements deriving from risk positions on the BBVA, S.A. and BBVA Mexico trading book, which jointly accounted for around 72%, 76% and 70% of the Group’s trading-book market risk as of December 31, 2019, 2018 and 201 7. For the rest of the geographical areas where the Group operates (applicable mainly to the Group´s South America subsidiaries, Garanti BBVA and BBVA USA), bank capital for the risk positions in the trading book is calculated using the Standardized Approa ch defined by the Basel Committee on Banking Supervision (which is referred to herein as the "standard model”). The main headings in the consolidated balance sheet of the Group which are exposed to market risk, are positions whose main metric to measure th e market risk is the VaR. The table below shows, by accounting line of the consolidated balance sheet as of December 31, 2019, 2018 and 2017, the traded financial products and assets of trading for those geographical areas that use Internal Model (BBVA, S.A. and BBVA Mexico):
Headings of the balance sheet under market risk (Millions of Euros)
| December 2019 | December 2018 | December 2017
| 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 | 96,461 | 1,671 | 114,156 | 124 | 59,008 | 441
Financial assets at fair value through other comprehensive income | 7,089 | 24,691 | 5,652 | 19,125 | 5,661 | 24,083
Of which: Equity instruments | - | 1,783 | - | 2,046 | - | 2,404
Derivatives - Hedge accounting | 628 | 840 | 688 | 1,061 | 829 | 1,397
Financial liabilities held for trading | 74,967 | 12,677 | 67,859 | 11,011 | 42,468 | 2,526
Derivatives - Hedge accounting | 671 | 1,183 | 550 | 910 | 1,157 | 638
(*) Includes mainly assets and liabilities managed by ALCO. Although the table above provides information on certain financial positions in our trading portfolio subject to market risk and therefore VaR measurement, such information is provided for information purposes only and does not reflect how market risk in trading activity is managed. The current management struc ture 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 estimates 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 past we re repeated. Based on this information, it predicts 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 assumin g any specific distribution of probability. The historical period used in this model is two years. VaR figures are estimated with the following methodologies: 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 smoothing, which gives a greater weight to more recent market information. This metric supplements the previous one. At the same 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 the trading book. Specifically, the 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 stress ed VaR) is calculated. This quantifies the losses associated with the movements of the risk factors inherent to market operations (including interest-rate risk, exchange-rate risk, equity risk and credit risk, among others). Both VaR and stressed VaR are r escaled 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 cre dit derivative positions in the portfolio. The IRC charge is exclusively applied in entities in respect of which the internal market risk model is used (i.e., B BVA, S.A. and BBVA Mexico). The IRC charge is determined based on the associated losses (calcula ted at 99.9% confidence level over a one year horizon under the hypothesis of constant risk) due to a rating change and/or default of the issuer with respect to an asset. In addition, the price risk is included in sovereign positions for the specified item s. Specific Risk - Securitization and correlation portfolios. Capital charges for securitizations and correlation portfolios are assessed based on the potential losses associated with the rating level of a specific credit structure. They are calculated by the standard model. The scope of the correlation portfolios refers to the First To Default (FTD)-type market operation 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 assessed positions with a certain level of probability (backtesting), as well as measurements of the impact of extreme market events on ri sk positions (stress testing). As an additional supporting measure, backtesting is conducted at a trading desk level in order to enable more specific monitoring of the validity of the measurement models. Market risk in 2019 The Group’s market risk related to its trading portfolio remained at low levels compared to other risks managed by BBVA, particularly credit risk. This is due to the nature of the business. In 2019 the average VaR was €19 million, below the figure of 2018, with a high on September 13, 2019 of €25 million. The evolution in the BBVA Group’s market risk during 2019, measured as VaR without smoothing (see Glossary) with a 99% confidence level and a 1-day horizon (shown in millions of Euros) is as follows: By type of market risk assumed by t he Group's trading portfolio, the main risk factor for the Group continued to be that linked to interest rates, with a weight of 58% of the total at December 31, 201 9 (this figure includes the spread risk). The relative weight of this risk has in creased co mpared with the close of 201 8 (55%). Exchange-rate risk account ed for 1 3% of the total risk, de creasing its weight with respect to December 201 8 (14%), while equity, volatility and correlation risk has decreased, with a weight of 29% at the close of 201 9 (vs. 31% at the close of 2018). As of December 31, 2019, 2018 and 2017 the VaR was €20 million, €17 million and €22 million, respectively. The total VaR figures for 2019, 2018 and 2017 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 2019 |  |  |  |  |  |
VaR average in the year | 21 | 6 | 4 | 9 | (20) | 19
VaR max in the year | 28 | 6 | 3 | 9 | (21) | 25
VaR min in the year | 13 | 5 | 5 | 9 | (18) | 14
End of period VaR | 24 | 5 | 5 | 8 | (22) | 20
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
(*) The div ersification 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 internal market risk model The internal market risk model is validated on a regular basis by backtesting in both, BBVA, S.A. and G lobal M arkets Mexico (BBVA Mexico). The aim of backtesting is to validate the quality and precision of the interna l 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 showed that the inter nal market risk model of both, B BVA, S.A. and BBVA Mexico is adequate and precise. Two types of backtesting have been carried out in 2019, 2018 and 2017: "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, including intraday tran sactions, 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 a risk factor or business type level, thus ma king a deeper comparison of the results with respect to risk measurements. For the period between the year ended December 31, 2018 and the year ended December 31, 2019, the backtesting of the internal VaR calculation mode l was carried out, comparing the da ily results obtained to the risk level estimated 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), thus validating the int ernal VaR calculation model, as has occurred each year since the internal market risk model was approved for the Group. Stress testing A number of stress tests are carried out on the BBVA Group's trading portfolios. First, global and 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 generate s cenarios 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 on the ma rket 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 glo bal level. The following are the most relevant effects of this historical scenario: Credit shock: reflected mainly in the increase of credit spreads an d downgrades in credit ratings. Increased volatility in most of the financial markets (giving rise 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. Simulated 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 is based on the use of dynamic scenarios that are recalculated periodically depending on the main risks affecting the trading portfolios. On a data window wide enough to collect different periods of stress (data are taken from January 1, 2008 until the date of the assessment), a simulation is performed by resampling of historic observations, generating a distribution of losses and gains that serve to analyze the most extreme of births in the selected historical window. The advantage of this methodology is that the p eriod of stress is not predetermined, but depends on the portfolio maintained at each time, and making a large number of simulations (10,000 simulations) allows a greater richness of information for the analysis of expected shortfall than what is available in the scenarios included in the calculation of VaR. The main features of this approach are: a) the generated simulations respect the correlation structure of the data, b) there is flexibility in the inclusion of new risk factors and c) it allows the intr oduction of a lot of variability in the simulations (desirable for considering extreme events). The impact of the stress test under multivariable simulation of the risk factors of the portfolio based on the e xpected shortfall (expected shortfall calculated at a 95% confidence level, 20 days) as of December 31, 2019 is as follows:
Impact of the stress test (Millions of Euros)
| Europe | Mexico | Peru | Venezuela | Argentina | Colombia | Turkey | The United States
Expected shortfall | (112) | (68) | (23) | - | (4) | (5) | (9) | (3)
7.2.2 Financial Instruments offset Financial assets and liabilities may be netted in certain cases. In particular, they are presented for a net amount on the consolidated balance sheet only when the Group's entities satisfy 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 simultaneously 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 the net amount. The most common types of events that trigger the netting of reciprocal obligations are bankruptcy of the entity, surpassing certain le vel of indebtedness threshold, failure to pay, restructuring and dissolution of the entity. In the current market context, derivatives are contracted under different framework contracts the most widespread having been developed by the International Swaps a nd Derivatives Association (“ISDA”) and, for the Spanish market, the Framework Agreement on Financial Transactions (“CMOF”). Almost all portfolio derivative transactions have been concluded under these framework contracts, including in them the netting cla uses mentioned in the preceding paragraph as "Master Netting Agreement", greatly reducing the credit exposure on these instruments. Additionally, in contracts signed with counterparties, the collateral agreement annexes called Credit Support Annex (“CSA”) are included, thereby minimizing exposure to a potential default of the counterparty. Moreover, many of the transactions involving assets purchased or sold under a repurchase agreement are transacted through clearing houses that articulate mechanisms to re duce counterparty risk, as well as through the signing of various master agreements for bilateral transactions, the most widely used being the Global Master Repurchase Agreement (GMRA), published by the International Capital Market Association (“ICMA”), to which the clauses related to the collateral exchange are usually added within the text of the master agreement itself. A summary of the effect of offsetting (via netting and collateral) for derivatives and securities operations is presented below as of December 31, 2019, 2018 and 2017:
December 2019 (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 | 37,302 | 2,388 | 34,914 | 25,973 | 8,210 | 731
Reverse repurchase, securities borrowing and similar agreements |  | 35,805 | 21 | 35,784 | 35,618 | 204 | (39)
Total Assets |  | 73,107 | 2,409 | 70,698 | 61,591 | 8,415 | 692
Trading and hedging derivatives | 10, 15 | 39,646 | 2,394 | 37,252 | 25,973 | 10,613 | 667
Repurchase, securities lending and similar agreements |  | 45,977 | 21 | 45,956 | 45,239 | 420 | 297
Total Liabilities |  | 85,623 | 2,414 | 83,209 | 71,212 | 11,033 | 964
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
The amount of recognized financial instruments within derivatives includes the effect in case of compensation with counterparties with whic h the Group holds netting agreements, while, for repos, it reflects the market value of the collateral associated with the transaction. 7.3 Structural risk – Non-trading activities The structural risks are defined, in general terms, as the possibility of sustaining losses due to adverse movements in market risk factors as a result of mismatches in the financial structure of an entity´s balance sheet. In the Group, the following types of structural risks are defined, according to the nature and the following market factors: interest rate, exchange rate and equity. The scope of structur al risks in the Group is limited to the banking book, excluding market risks in the trading book that are clearly delimited and separate d and make up the Market Risks. The Assets and Liabilities Committee (ALCO) is the main responsible body for the managem ent of structural risks regarding liquidity/ funding interest rate, currency, equity and solvency. Every month, with the participation of the CEO and representatives from the areas of Finance, Risks and Business Areas, this committee monitors the structura l 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 the risk appetite framework and with the aim of achieving recurrent earnings and financial stability and preserving the entity's solvency. All balance ma nagement units have a local ALCO, which is permanently attended by members of the corporate cente r, and there is a corporate ALCO where management strategies are monitored and presented in the Group's subsidiaries. Global Risk Management (GRM) area acts as an independent unit, enabling adequate separation between the management and risk control functions, and is responsible for assi sting the goal that the structural risks in the Group are managed according to the strategy approved by the Board of Directors. Consequently, GRM deals with the identification, measurement, monitoring and control of those risks and their reporting to the c orresponding corporate bodies. Through the Global Risk Management Committee (GRMC), it performs the function of control and risk assessment and is responsible for developing the strategies, policies, procedures and infrastructure necessary to identify, eva luate, measure and manage the significant risks that the BBVA Group faces. To this end, GRM, through the corporate unit of Structural Risks, proposes a scheme of limits and alerts that defines the risk appetite set for each of the relevant structural risk types, both at Group level and by management units, which will be reviewed annually, reporting the situ ation periodically to the Group’s corporate bodies as well as to the GRMC. In addition, both, the management as well as the control and measurement system of the structural risks need to be adjusted necessarily to the Group’s internal control model, in compliance with the related evaluation and certification processes. In this regard, the required tasks and controls have been identifi ed and documented, which allows the Bank to have a regulatory framework that includes precise processes and measures for structural risks with a global perspective from a geographical point of view. BBVA’s internal control model, which is based on high sta ndards, is included within the three lines of defense. The Finance area is the first line of defense, by being in charge of the structural risk management, whereas GRM is in charge of the identification of the risks and establishes policies and control mod els, which are periodically evaluated with regard to their performance. Within the second line of defense there is Internal Risk Control, which independently reviews the structural risk controls, and one entity of Internal Financial Control, which reviews the design and the effectiveness of the operating management controls. Internal Audit, which works with total independence, represents the third line of defense and reviews specific controls and processes. 7.3.1 Structural interest rate risk The structural interest-rate risk (“IRRBB”) is related to the potential impact that variations in market 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 genera te this risk: repricing risk, yield curve risk, option risk and basis risk, which are analyzed with an integral vision, combining two complementary points of view: net interest income (short term) and economic value (long term). The exposure of a financial entity to adverse interest rates movements is a risk inherent to the development of the banking business, which is also, in turn, an opportunity to create economic value. Therefore, interest rate risk must be effectively managed so that it is limited in a ccordance with the entity’s equity and in line with the expected economic result. This function falls to the Global ALM (Asset & Liability Management) unit, within the Finance area, who, through ALCO, aims to support the recurrence of results and preserve the solvency of the entity, always adhering to the risk profile defined by the management bodies of the BBVA Group. The interest rate risk management of the balance sheet aims to promote the stability of the net interest income and book value with respect to changes in market interest rates in the different balance-sheets, while respecting solvency and internal limits, as well as complying with current and future regulatory requirements. Likewise, a specific monitoring of the banking book instruments registered at market value (fair value) is developed, which due to their accounting treatment have an impact on results and / or equity. In this regard, the BBVA Group maintai ns an exposure to fluctuations o n interest rates according to its objective strategy and risk profile, being carried out in a decentralized and independent manner in each of th e banking entities that compose its structural balance-sheet. The management is carried out in accordance with the guidelines established by the European Banking Aut hority (EBA), with a monitoring of interest rate risk metrics, with the aim of analyzing the potential impact that could be derived from the range of scenarios in the different balance-sheets of the Group. Nature of Interest Rate Risk Repricing risk arises due to the difference between the repricing or maturity terms of the assets and liabilities, and represents the most frequent interest rate risk faced by financial entities. However, other sources of risk as changes in the slope and shape of the yield cur ve, the reference to different indexes and the optionality risk embedded in certain banking transactions, are also taken into account by the risk control system. BBVA's structural interest-rate risk management process is formed by a set of metrics and tool s that allows for the precise monitorization of the risk profile of the Group, backed-up by an assumptions set that aims to characterize the behavior of the balance sheet items with the maximum accuracy. The IRRBB measurement is carried out on a monthly ba sis, and includes probabilistic measures based on methods of scenario simulation, which enables to capture additional sources of risk to the parallel shifts, as the changes in slope and shape of the yield curve. Additionally, sensitivity analysis to multip le parallel shocks of different magnitude are also assessed on a regular basis. The process is run separately for each currency to which the Group is exposed, considering, at a later stage, the diversification effect among currencies and business units. The risk measurement model is complemented by the assessment of ad-hoc scenarios and stress tests. As stress testing has become more relevant during the recent years, the evaluation of extreme scenarios of rupture of historical interest rates levels, corre lations and volatility has continued to be enhanced, while assessing, also, BBVA Research market scenarios. During 2019 the Group has worked on the enhancement of the control and management model according to the guidelines established by the EBA on the ma nagement of interest rate risk in the banking book. It is worth highlighting, among other aspects, the reinforcement of stress analysis incorporating the assessment of the impacts on the main balance sheets of the Group that could derive from the range of interest rate scenarios defined in accordance with the aforementioned EBA guidelines. Key assumptions of the model In order to measure structural interest rate risk, the setting of assumptions on the evolution and behavior of certain balance sheet items is particularly relevant, especially those related to products without an explicit or contractual maturity. The assumptions that characterize these balance sheet items must be understandable for the areas and bodies involved in risk management and control an d remain duly justified and documented. The modeling of these assumptions must be conceptually reasonable and consistent with the evidence based on historical experience, reviewed at least once a year. In view of the heterogeneity of the financial markets and the availability of historical data, each one of the entities of the Group is responsible for determining the behavior assumptions to be applied to the balance sheet items, always under the guidelines and the applicability of the corporate models exist ing in the Group. Among the balance sheet assumptions stand out those established for the treatment of items without contractual maturity, mainly for demand customer deposits, and those related to the expectations on the exercise of interest rate options, especially those relating to loans and deposits subject to prepayment risk. For the modeling of demand deposits, a segmentation of the accounts in several categories is previously carried out depending on the characteristics of the customer (retail / wholesale) and the product (type of account / transactionality / remuneration), in order to outline the specific behavior of each segment. In order to establish the remuneration of each segment, the relationship between the evolution of market interest rat es and the interest rates of managed accounts is analyzed, with the aim of determining the translation dynamic (percentages and lags) of interest rates variations to the remuneration of the accounts. The behavior assigned to each category of accounts is de termined by an analysis of the historical evolution of the balances and the probability of cancellation of the accounts. For this, the volatile part of the balance assigned to a short-term maturity is isolated, thus avoiding fluctuations in the level of ri sk caused by specific variations in the balances and promoting stability in the management of the balance. Once the stable part is identified, a medium / long term maturity model is applied through a decay distribution based on the average term of the acco unts and the conditional cancellation probabilities throughout the life of the product. Additionally, the relationship of the evolution of the balance of deposits with the levels of market interest rates is taken into account, where appropriate, including the potential migration between the different types of deposits (on demand / time deposits) in the different interest rate scenarios. Equally relevant is the treatment of early cancelation options embedded in credit loans, mortgage portfolios and customer deposits. The evolution of market interest rates may condition, along with other variables, the incentive that customers have to prepay loans or deposits, modifying the future behavior of the balance amounts with respect to the forecasted contractual matur ity schedule. The detailed analysis of the historical information related to prepayment data, both partial and total prepayment, combined with other variables such as interest rates, allows estimating future amortizations and, where appropriate, their beha vior linked to the evolution of such variables. The approval and updating of the risk behavior models of structural interest rate risk are subject to corporate governance under the scope of GRM-Analytics. In this way, the models must be properly inventorie d and cataloged and comply with the requirements established in the internal procedures for their development, updating and management of the changes. The models are also subject to the corresponding internal validations based on their relevance and the es tablished monitoring requirements. The table below shows the profile of average interest rate risk in terms of sensitivities of the main banks in the BBVA Group in 2019:
Sensitivity to interest-rate analysis - December 2019
| 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%) | - (0% - 5%) | + (0% - 5%) | - (0% - 5%)
Mexico | + (0% - 5%) | - (0% - 5%) | + (0% - 5%) | - (0% - 5%)
The United States | + (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, includes falling interest rates at more negative level than current rates. In 2019 in Europe monetary policy has remained expansionary, implementing in the last part of the year a new package of measures to boost the economy and the financial system in response to a weaker global economic environment. This environment, coupled with uncertainty about trade policy and low inflation led the Federal Reserve of the United States to begin a process of interest rate cuts. Both monetary authorities, taking into account the recent signals regarding a stabilization of the economic growth, have not changed the interest rates during the last months. In Mexico and Turkey, a bearish cycle was initiated in the second half of the year due to economic weakness and inflation prospects. In South America, monetary policy has been expansive, with declines in the economies of Chile and Peru, caused by the slowdown of the activity and the contained inflation, while in Colombia interest rates have remained flat. On the other hand, in Argentina there is a restrictive monetary policy, with a strong increase in interest rates due to the strong volatility of the markets after the election result. BBVA maintains, at the aggregate level, a favorable position in net interest income in the event of an increase in interest rates, as well as a moderate risk profile, in line with its target, through effective management of str uctural balance sheet risk. The higher net interest income sensitivities are observed in, particularly the Euro and USD. In Europe, the risk of a decrease in interest rates is limited given the current levels, preventing extremely adverse scenarios. In the United States, the net interest margin sensitivity has decreased during 2019 due to the downward trend of interest rates, showing therefore a moderate risk profile. Mexico shows a high level of stability between the balance sheets referenced to fixed and variable interest rates, keeping limited net interest income sensitivity throughout 2019. In Turkey, the e volution of the balance sheets in Turkish lira and USD has been positive, with very moderate interest rate risk, which has allowed to reduce sensitivity during the year. In South America, the balance sheet profiles in the countries which this business area comprises have remai ned stable, showing a low interest rate risk with an almost stable sensitivity during the year. 7.3.2 Structural exchange-rate risk Structural exchange rate risk, inherent to the business of international banking groups that develop their activities in different geographies and currencies, is defined as the possibility of impacts on solvency, equi ty value and results driven by fluctuations in the exchange rates due to exposures in foreign currencies. In the BBVA Group, structural exchange-rate risk arises from the consolidation of holdings in subsidiaries with functional currencies other than the e uro. Its management is centralized in order to optimize the joint management of permanent foreign currency exposures, takin g diversification into account. The corporate Global ALM unit, through ALCO, designs and executes hedging strategies with the main pu rpose of preserving the stability of consolidated capital ratios and income flows generated in a currency other than the euro in the BBVA Group, keeping a value generation perspective to preserve the Group’s equity in the long term. To this end, a dynamic management strategy is carried out, considering hedge transactions according to marke t expectations and their costs. The risk monitoring metrics included in the framework of limits, in line with the Risk Appetite Framework, are integrated into management a nd supplemented with additional assessment indicators. At the 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 probabili stic metrics make it possible to estimate the joint impact of exposure to different currencies taking into account the different variability in exchang e rates and their correlations. The suitability of these risk assessment metrics is reviewed on a regular basis through back-testing exercises. The final element of structural exchange-rate risk control is the stress and scenario analysis aimed to assess the vulnerabilities of foreign currency structural exposure not contemplated by the risk metrics and to se rve as an additional tool when making management decisions. The scenarios are based both on historical situations simulated by the risk model and on the risk scenarios provided by BBVA Research. As of December 31, 2019, it is worth mentioning the appreciat ion of the main currencies of the geographies where the Group operates against the euro, especially the Mexican peso (6%) and the US Dollar (2%). The Turkish lira (-9%) and the Argentinian peso (-36%) ha ve depreciated, the latter being affected by idiosyncratic factors. The Group's structural exchange-rate risk exposure level has slightly increased since the end of 2018 driven by the effect of currencies appreciation. The hedging policy intends to keep low levels of sensitivity to movements in the exchange rates of emerging markets currencies against the euro and focuses mainly on the Mexican peso and the Turkish lira. The risk mitigation level in the capital ratio due to the book value of the BBVA Group's holdings in foreign emerg ing markets currencies stood at around 65% and, as of the end of 2019, CET1 ratio sensitivity to the depreciation of 10% in the euro exchange rate for each currency wa s: USD +11 bp; Mexican peso -4 bps; Turkish Lira -2 bps; other currencies -1 bp (excludin g hyperinflation economies). On the other hand, hedging of emerging markets currency denominated earnings in 2019 was 52%, concentrated in Mexican peso, Turkish lira and the main Latin American currencies. 7.3.3 Structural equity risk Structural equity risk refers to the possibility of suffering losses in the value of positions in shares and other equity instruments held in the banking book with long or medium term investment horizons due to fluctuations in the value of equity indexes or shares. BBVA Gro up's exposure to structural equity risk arises largely from minority shareholdings held on industrial and financial companies. This exposure is modulated in some portfolios with positions held on derivative instruments on the same underlying assets, in ord er to adjust the portfolio sensitivity to potential changes in equity prices. The management of structural equity portfolios is a responsibility of Global ALM and other Group's units specialized in this area. Their activity is subject to the risk managemen t corporate policy on structural equity risk management, complying with the defined management principles and Risk Appetite Framework. The structural equity risk metrics, designed by GRM according to the corporate model, contribute to the effective monitor ing of the risk by estimating the sensitivity and the capital necessary to cover the possible unexpected losses due to changes in the value of the shareholdings in the Group's investment portfolio, with a level of confidence that corresponds to the objecti ve rating of the entity, taking into account the liquidity of the positions and the statistical behavior of the assets to be considered. In order to analyze the risk profile in depth, stress tests and scenario analysis of sensitivity to different simulated scenarios are carried out. They are based on both past crisis situations and forecasts made by BBVA Research. These analyses are carried out regularly to assess the vulnerabilities of structural equity exposure not contemplated by the risk metrics and to serve as an additional tool when making management decisions. Backtesting is carried out on a regular basis on t he risk measurement model used. With regard to the equity markets, the world indexes have closed the year 2019 with generalized gains and volati lity moderation in a macro environment of global growth slowdown. Structural equity risk, measured in terms of economic capital, has remained fairly stable in the period. 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 decreased to -€26 million as of December 31, 2019, compared to -€29 million as of December 31, 2018. This estimation takes into account the exposure in shares valued at market prices, or if n ot applicable, at fair value (excluding the positions in the Treasury Area portfolios) and the net delta-equivalent positions in derivatives on the same underlyings. 7.4 Liquidity and funding risk Liquidity and funding risk is defined as the incapacity of a bank to meet its payment commitments for missing resources or that, to face those commitments, should have to make use of funding under burdensome terms. 7.4.1 Liquidity and Funding Strategy and Planning The BBVA Group is a multinational financial institution whose business is focused mainly on retail and commercial banking activities. In addition to the retail business model, which forms the core of its business, the Group engages in corporate and investment banking, through the global CIB (Corporate & Investment Banking) division. Liquidity and f unding ri sk management aims to maintain a solid balance sheet structure which allows a sustainable business model. The Group’s l iquidity and funding strategy is based on the following pillars: The principle of the funding self-sufficiency of its subsidiaries, meaning that each of the Liquidity Ma nagement Units (LMUs) must cover its funding needs independently on the markets where it operates. This avoids possible contagion due to a crisis affecting one or more of the Group’s LMUs. Stable customer deposits as the main source of funding in all the L MUs, in accordance with the Group’s business model. Diversification of the sources of wholesale funding, in terms of maturity, market, instruments, counterparties and currencies, with recurring access to the markets. Compliance with regulatory requirements, enabling the availability of ample liquidity buffers, as well as sufficient instruments as required by regulations with the capacity to absorb losses. Compliance with the internal Liquidity Risk and Funding metrics, while adhering to the Risk Appetite le vel established for each LMU at any time. Liquidity and funding risk management aims to support that in the short term a bank does not have any difficulties in meeting its payment commitments in due time and form, and that it does not have to make use of f unding under burdensome terms, or conditions that deteriorate its image or reputation. In the medium term the aim is to support that the Group’s financing structure is ideal and that it is moving in the right direction with respect to the economic situatio n, the markets and regulatory changes. This management of structural and liquidity funding is based on the principle of financial self-sufficiency of the entities that make it up. This approach helps prevent and limit liquidity risk by reducing the Group’s vulnerability during periods of high risk. This decentralized management prevents possible contagion from a crisis affecting only one or a few Group entities, which must act independently to meet their liquidity requirements in the markets where they ope rate. As one aspect of this strategy, BBVA Group is organized into eleven LMUs composed of the parent and the banking subsidiaries in each geographical area, plus the independent branches. In addition, the policy for managing liquidity and funding risk is also based on the model’s robustness and on the planning and integration of risk management into the budgeting process of each LMU, according to the appetite for funding risk it decides to assume in its business. Liquidity and f unding planning is drawn up as part of the strategic processes for the Group’s budgetary and business planning. It allows a recurring growth of the banking business with suitable maturities and costs within the established risk tolerance levels by using a wide range of instruments w hich allow the diversification of the funding sources and the maintenance of a high volume of available liquid assets. 7.4.2 Governance and monitoring The responsibility for l iquidity and f unding management in normal business activity lies with the Finan ce area as a first line of defense in managing the risks inherent to this activity, in accordance with the principles established by the European Banking Authority EBA and in line with the standards, policies, procedures and controls in the framework estab lished by the governing bodies. The Finance department, through the Balance-Sheet Management area, plans and executes the funding of the structural long-term gap of each LMU and proposes to the Assets and Liabilities Committee (ALCO) the actions to be take n on this matter, in accordance with the policies established by the Risk and Compliance Committee in line with the metrics of the Risk Appetite Framework approved by the Board of Directors. The Finance area, in its regulatory liquidity reporting function, coordinates the processes necessary to meet any reporting requirements that may be generated at corporate and regulatory level, with the areas responsible for this reporting in each LMU, thereby monitoring the integrity of the information supplied. GRM is responsible for promoting that liquidity and funding risk in the Group is managed according to the strategy approved by the Board of Directors. It is also responsible for identifying, measuring, monitoring and controlling those risks and reporting to the proper corporate governing bodies. To carry out this work adequately, the risk function in the Group has been set up as a single, global function that is independent of the management areas. In addition, the Group has an Internal Risk Control unit that conducts an independent review of Liquidity and Funding Risk control and management, independently of the functions performed in this area by Internal Audit. Additionally, the Group has in its second line of de fense an Internal Risk Control unit, which performs independent reviews of the Liquidity and Funding risk controls, and an Internal Financial Control unit, which reviews the design and effectiveness of the operating management controls and the liquidity re porting. As a third line of defense in the Group’s internal control model, Internal Audit is in charge of reviewing specific controls and processes in accor dance with an annual work plan. The Group’s fundamental objectives regarding the liquidity and fundi ng risk are determined through the Liquidity Coverage Ratio (LCR) and through the Loan-to-Stable C ustomer Deposits (LtSCD) ratio. The LCR ratio is a regulatory metric that aims to enable the resilience of entities in a scenario of liquidity tension within a time horizon of 30 days. Within its risk appetite framework and system of limits and alerts, BBVA has established a required LCR compliance level for the entire Group and for each individual LMU. The required internal levels aim to comply efficiently and sufficiently in advance with the implementation of the regulatory requirement at a level above 100%. The LtSCD ratio measures the relationship between net lending and stable customer funds. The aim is to preserve a stable funding structure in the medium t erm for each LMU making up the BBVA Group, taking into account that maintaining an adequate volume of stable customer funds is key to achieving a sound liquidity profile. In geographical areas with balance sheets with two currencies, the indicator is also controlled by currency to manage the mismatches that might occur. S table customer funds can be considered as those obtained and managed by the LMUs among their target customers. Those funds are characterized by their low sensitivity to market changes and by their less volatile behavior at aggregated level per operation due to the loyalty of the customer to the entity. The stable resources are calculated by applying to each identified customer segment a haircut determined by the analysis of the stability if the balances by which different aspects are evaluated (concentration, stability, level of loyalty). The main source of stable resources arises from wholesale funding and retail customer funds. In order to establish the target (maximum) levels of LtSCD in e ach LMU and provide an optimal funding structure reference in terms of risk appetite, the corporate Structural Risks unit of GRM identifies and assesses the economic and financial variables that condition the funding structures in th e different geographica l areas. Additionally, liquidity and funding risk management aims to achieve a proper diversification of the funding structure, avoiding excessive reliance on short-term funding by establishing a maximum level for the short-term funds raised, including bot h wholesale funding and customer funds. The residual maturity profile of long-term wholesale funding has no significant concentrations, which matches the schedule of planned issues to the best possible financial conditions of markets, as shown in the table below. Finally, concentration risk is monitored at LMU level, with the aim of allowing a correct diversification of both the counterparty and type of instrument. One of the fundamental metrics within the general management framework of the liquidity and f unding risk is the maintaining of a liquidity buffer consisting of high quality assets free of charges which can be sold or offered as guarantees to obtain funding, either under normal market conditions or in stress situations. The Finance area is responsible for the collateral management and determining the liquidity buffer within the BBVA Group. According to the principle of auto-sufficiency of the subsidiaries, every LMU is responsible for the holding of a buffer of liquid assets which comply with the regulatory requirements applicable under each jurisdiction. In addition, the liquidity buffer of each LMU should be aligned with the liquidity and funding risk tolerance as well as the management limits set and approved for each case. In this cont ext, the short-term resistance of the liquidity risk profile is promoted, enabling that each LMU has sufficient collateral to deal with the risk of the close of wholesale markets. Basic capacity is the short-term liquidity risk management and control metri c that is defined as the relationship between the available explicit assets and the maturities of wholesale liabilities and volatile funds, at different terms up to one year, with special relevance being given to 30-day 90-day maturities, in order to maint ain the survivability period above the 3 months with the available buffer, not taking into consideration the inflows of the balance sheet. Stress tests are carried out as a fundamental element of the liquidity and funding risk monitoring scheme. They enabl e anticipating deviations from the liquidity targets and the limits set in the appetite, and establish ing tolerance ranges in the different management areas. They also play a major role in the design of the Liquidity Contingency Plan and the definition of specific measures to be adopted to rectify the risk profile if necessary. For each scenario, it is checked whether BBVA has a sufficient stock of liquid assets to assist its capacity to meet the liquidity commitments/outflows in the different periods analy zed. The analysis considers four scenarios: one central and three crisis-related (systemic crisis; unexpected internal crisis with a considerable rating downgrade and/or affecting the ability to issue in wholesale markets and the perception of business ris k by the banking intermediaries and the e ntity’s customers; and a mixed scenario, as a combination of the two aforementioned scenarios). Each scenario considers the following factors: existing market liquidity, customer behavior and sources of funding, the impact of rating downgrades, market values of liquid assets and collateral, and the interaction between liquidity requirements and the development of the LMU’s asset quality. The stress tests conducted on a regular basis reveal that BBVA maintains a suffi cient buffer of liquid assets to deal with the estimated liquidity outflows in a scenario resulting from the combination of a systemic crisis and an unexpected internal crisis, during a period of longer than 3 months in general for the different LMUs, incl uding in the scenario of a significant downgrade of the Bank’s rating by up to three notches. Together with the results of the stress tests and the risk metrics, the early warning indicators play an important role within the corporate model and the Liquidi ty Contingency Plan. They are mainly indicators of the funding structure, in relation to asset encumbrance, counterparty concentration, flights of customer deposits, unexpected use of credit facilities, and of the market, which help anticipate possible ris ks and capture market expectations. Finance is the area responsible for the elaboration, monitoring, execution and update of the liquidity and funding plan and of the market access strategy to assist and improve the stability and diversification of the who lesale funding sources. In order to implement and establish management in an anticipated manner, limits are set on an annual basis for the main management metrics that form part of the budgeting process for the liquidity and funding plan. This framework of limits contributes to the planning of the joint future performance of: The loan book, considering the types of assets and their degree of liquidity, as well as their validity as collateral in collateralized funding. Stable customer funds, based on the app lication of a methodology for establishing which segments and customer balances are considered to be stable or volatile funds based on the principle of sustainability and recurrence of these funds. Projection of the credit gap, in order to require a degree of self-funding that is defined in terms of the difference between the loan-book and stable customer funds. Incorporating the planning of securities portfolios into the banking book, which include both fixed-interest and equity securities, and are classif ied as financial assets at fair value through other comprehensive income and at amortized cost, and additionally on trading portfolios. The structural gap projection, as a result of assessing the funding needs generated both from the credit gap and by the securities portfolio in the banking book, together with the rest of on-balance-sheet wholesale funding needs, excluding trading portfolios. This gap therefore needs to be funded with customer funds that are not considered stable or on wholesale markets. As a result of these funding needs, BBVA Group plans the target wholesale funding structure according to the tolerance set in each LMU target. Thus, once the structural gap has been identified and after resorting to wholesale markets, the amount and composit ion of wholesale structural funding is established in subsequent years, in order to maintain a diversified funding mix and support that there is not a high reliance on short-term funding (short-term wholesale funding plus volatile customer funds). In practice, the execution of the principles of planning and self-funding at the different LMUs results in the Group’s main source of funding being customer deposits, which consist mainly of demand deposits, savings deposits and time deposits. As sources of funding, customer deposits are complemented by access to the interbank market and the domestic and international capital markets in order to address additional liquidity requirements, implementing domestic and international programs for the issuance of commercial paper and medium and long-term debt. The process of analysis and assessment of the liquidity and funding situation and of the inherent risks is a process carried out on an ongoing basis in the BBVA Group, with the participation of all the Group areas involved in liquidity and funding risk management. This process is carried out at both local and corporate level. It is incorporated into the decision- making process for liquidity and funding management, with integration between the risk appetite st rategy and establishment and the planning process, the funding plan and the limits scheme. 7.4.3 Liquidity and funding performance During 2019, the BBVA Group has maintained a robust and dynamic funding structure with a predominantly retail nature, where customer resources represent the main source of funding. T he performance of the indicators show that the funding structure remained steady during 2019, 2018 and 2017, in the sense that all LMUs held self-funding levels with stable customer resources above the requirements.
LtSCD by LMU
| December 2019 | December 2018 | December 2017
Group (average) | 108% | 106% | 110%
Eurozone | 108% | 101% | 108%
BBVA Mexico | 116% | 114% | 109%
BBVA USA | 111% | 119% | 109%
Garanti BBVA | 99% | 110% | 122%
Other LMUs | 103% | 99% | 108%
(*)BBVA USA LCR calculated according to local regulation (Fed Modified LCR). Each entity maintains an individual liquidity buffer, both BBVA, S.A. and each of its subsidiaries, including BBVA USA, BBVA Mexico, Garanti BBVA and the Latin American subsidiaries. The table below shows the liquidity available by instrument as of December 31, 2019, 2018 and 2017 for the most significant entities based on prudential supervisor’s information (Commission Implementing Regulations (EU) 2017/2114 of November 9, 2017):
LCR main LMU
Group | 129% | 127% | 128%
Eurozone | 147% | 145% | 151%
BBVA Mexico | 147% | 154% | 148%
BBVA USA (*) | 145% | 143% | 144%
Garanti BBVA | 206% | 209% | 134%
(*)BBVA USA LCR calculated according to local regulation (Fed Modified LCR). Each entity maintains an individual liquidity buffer, both BBVA, S.A. and each of its subsidiaries, including BBVA USA, BBVA Mexico, Garanti BBVA and the Latin American subsidiaries. The table below shows the liquidity available by instrument as of December 31, 2019, 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 2019 (Millions of Euros)
| BBVA Eurozone | BBVA Mexico | BBVA USA | Garanti BBVA | Other
Cash and withdrawable central bank reserves | 14,516 | 6,246 | 4,949 | 6,450 | 6,368
Level 1 tradable assets | 41,961 | 7,295 | 11,337 | 7,953 | 3,593
Level 2A tradable assets | 403 | 316 | 344 | - | -
Level 2B tradable assets | 5,196 | 219 | - | - | 12
Other tradable assets | 22,213 | 1,269 | 952 | 669 | 586
Non tradable assets eligible for central banks | - | - | 2,935 | - | -
Cumulated counterbalancing capacity | 84,288 | 15,344 | 20,516 | 15,072 | 10,559
December 2018 (Millions of Euros)
| BBVA Eurozone | BBVA Mexico | BBVA USA | Garanti BBVA | 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 (*) | 8,772 | 1,372 | 1,043 | 499 | 617
Non tradable assets eligible for central banks | - | - | 2,314 | - | -
Cumulated counterbalancing capacity | 69,705 | 14,475 | 16,024 | 14,634 | 10,946
(*) The balance of “BBVA Eurozone” has been reexpressed including the available funding in the European Central Bank (ECB)
December 2017 (Millions of Euros)
| BBVA Eurozone (1) | BBVA Mexico | BBVA USA | Garanti BBVA | 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 (*) | 10,192 | 1,703 | 1,252 | 962 | 1,573
Non tradable assets eligible for central banks | - | - | 2,800 | - | -
Cumulated counterbalancing capacity | 70,163 | 14,644 | 15,983 | 13,359 | 13,828
(1) Includes Banco Bilbao Vizcaya Argentaria, S.A. and Banco Bilbao Vizcaya Argentaria (Portugal), S.A. (*) The balance of “BBVA Eurozone” has been reexpressed including the available funding in the European Central Bank (ECB) The Net Stable Funding Ratio (NSFR), defined as the ratio between the amount of stable funding available and the amount of stable funding required, is one of the Basel Committee's essential reforms, and requires banks to maintain a stable funding profile in relation to the composition of their assets an d off-balance-sheet activities. This ratio should be at least 100% at all times. The NSFR of BBVA Group and its main LMUs at December 31, 2019, calculated based on the Basel requirements, is the following:
NSFR main LMU
| December 2019
Group | 120%
BBVA Eurozone | 113%
BBVA Mexico | 130%
BBVA USA | 116%
Garanti BBVA | 151%
Below is a matrix of res idual maturities by contractual periods based on supervisory prudential reporting as of December 31, 2019, 2018 and 2017:
December 2019. 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 | 20,954 | 20,654 | - | - | - | - | - | - | - | - | 41,608
Deposits in credit entities | - | 3,591 | 283 | 488 | 585 | 503 | 189 | 24 | 120 | 432 | 6,216
Deposits in other financial institutions | - | 1,336 | 1,120 | 796 | 589 | 991 | 1,420 | 1,072 | 672 | 2,089 | 10,084
Reverse repo, securities borrowing and margin lending | - | 21,612 | 3,858 | 2,287 | 561 | 808 | 4,121 | 1,838 | 411 | 803 | 36,299
Loans and advances | 157 | 22,015 | 25,056 | 24,994 | 15,777 | 16,404 | 42,165 | 35,917 | 54,772 | 122,098 | 359,354
Securities' portfolio settlement | - | 1,622 | 3,873 | 6,620 | 2,017 | 7,292 | 21,334 | 6,115 | 13,240 | 46,022 | 108,136
December 2019. 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 | 1,393 | 1,714 | 4,208 | 1,645 | 4,386 | 8,328 | 10,608 | 10,803 | 27,840 | 70,927
Deposits in financial institutions | 7,377 | 7,608 | 493 | 1,122 | 172 | 1,514 | 386 | 614 | 206 | 510 | 20,004
Deposits in other financial institutions and international agencies | 10,177 | 3,859 | 867 | 381 | 367 | 257 | 982 | 503 | 499 | 952 | 18,843
Customer deposits | 271,638 | 43,577 | 18,550 | 10,013 | 7,266 | 6,605 | 3,717 | 2,062 | 854 | 1,039 | 365,321
Security pledge funding | - | 45,135 | 3,202 | 15,801 | 1,456 | 653 | 3,393 | 7,206 | 759 | 1,308 | 78,914
Derivatives, net | - | (66) | (25) | 29 | (11) | 1,097 | (830) | (278) | (333) | (420) | (838)
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)
The matrix shows the retail nature of the funding structure, with a loan portfolio being mostly funded by customer deposits. 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 little concentration. According to a behavior analysis which is done every year in every entity, t his type of account is considered to be stable and for liquidity risk purposes receive a better treatment. In the Euro Liquidity Management Unit (LMU), the liquidity and funding position continued to be solid and stable with a slightly increase of the cred it gap in 2019. During 2019, BBVA, S.A. made 7 issues in the public market for an aggregate of €5,750 million and USD 1,000 million; two issues of Senior Non Preferred (“SNP”) securities at 5 years for €1,000 million each and another one at 7 years for €1,000 million; a T2 issue at 10 years with an early amortization option after the fifth year for €750 million; two AT1 issues for €1,000 million and USD 1,000 million respectively with an early amortization option after five and a half years for the first an d 5 years for the second; and a Senior Preferred securities issue at 7 years for €1,000 million. In Mexico, there was a sound liquidity position despite the credit gap increase in 2019. This increase is mainly due to a lower increase in deposits as a resul t of higher market competition. During the financial year 2019, BBVA Mexico made a Tier II issuance on international markets for USD 750 million as well as carried out a repurchase for the same amount as part of two subordinated issuances with a maturity i n 2020 and 2021 which were no longer computing in capital ratios. They also made an issuance on the local market for 10,000 million of Mexican pesos in 2 tranches: 5,000 million at 3 years and 5,000 million at 8 years. In the United States, a positive liqu idity situation has been maintained with a decrease in the credit gap during the year mainly as a result of an increase in the deposits which has allowed to reduce the dependency on brokered deposits. During the third quarter of 2019, BBVA USA issued succe ssfully a Senior debt note of USD 600 million at 5 years. In Turkey we closed the year with a satisfactory liquidity situation, with Garanti BBVA showing an evolution of the credit gap in foreign currency and therefore reducing the wholesale financing, allowing throughout a passable buffer of liquid assets. The main operations during the year were two syndicat ed loans for USD 1,600 million, a subordinated issuance for an amount of 252 million of Turkish lira (€39 million) and a securitization (Diversified Payment Rights) for USD 150 million. In addition, Garanti BBVA financed itself with a bilateral loan for an amount of USD 322 million and issued a green bond for USD 50 million in December 2019. Furthermore, additional bilateral funds for USD 110 million have been signed in December 2019. Argentina was affected by the change in the political situation generatin g a reduction of deposits and credits in foreign currency in the banking system. In this context, BBVA Argentina has maintained at any time a satisfactory liquidity position supported by higher requirements of regulatory reserve regulations. BBVA Argentina issued 1,619 million of Argentine pesos (€24 million) in the local market in the first quarter of 2019 and later, in the fourth quarter, issued an additional 1,967 million of Argentine pesos (€29 million). The liquidity position of the rest of subsidiarie s has continued to be sound, maintaining a satisfactory liquidity position in all the jurisdictions in which the Group operates. 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 enabling a sufficient buffer of fully available liquid assets, diversifying the various sources of funding available, and optimizing the generation of collateral available for dealing with st ress situations in the markets. 7.4.4 Asset encumbrance As of December 31, 2019, 2018 and 2017, the encumbered (those provided as collateral for certain liabilities) and unencumbered assets are broken down as follows:
December 2019 (Millions of Euros)
| Encumbered assets | Non-encumbered assets
| Book value | Market value | Book value | Market value
Assets | 101,792 |  | 596,898 |
Equity instruments | 3,526 | 3,526 | 12,113 | 12,113
Debt securities | 29,630 | 29,567 | 95,611 | 95,611
Loans and advances and other assets | 68,636 |  | 489,174 |
December 2018 (Millions of Euros)
| Encumbered assets | Non-encumbered assets
| Book value | Market value | Book value | Market value
Assets | 107,950 |  | 567,573 |
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 | Market value | Book value | Market value
Assets | 110,600 |  | 579,459 |
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 |
The committed value of "Loans and Advances and other assets" corresponds mainly to loans linked to the issue of covered bonds, territorial bonds or long-term securitized bonds (see Note 22.4) as well as those us ed 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 different types of counterparties, mainly clearing houses or credit institutions, and to a lesser extent central banks. Collateral provided to enable derivative transactions is also included as committed assets. As of December 31, 2019, 2018 and 2017, collateral pledges received mainly due to repurchase agreements and securities lending, and those which could be committed in order to obtain funding are provided below:
December 2019. 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 | 38,496 | 9,208 | 48
Equity instruments | 65 | 70 | -
Debt securities | 38,431 | 9,130 | 38
Loans and advances and other assets | - | 8 | 10
Own debt securities issued other than own covered bonds or ABSs | - | 82 | -
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 | -
The guarantees received 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, 2019, 2018 and 2017, financial liabilities issued related to encumbered assets in financial transactions as well as their book value w ere as follows:
December 2019. 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 | 124,252 | 135,500
Derivatives | 19,066 | 20,004
Loans and advances | 87,906 | 94,240
Outstanding subordinated debt | 17,280 | 21,256
Other sources | 449 | 4,788
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
7.5 Legal risk factors The financial sector is exposed to increasing litigation, so the financial institutions face a large number of proceedings of every kind, civil, criminal, administrative, litigation, as well as investigations from the supervisor or other governmental authorities, along several jurisdictions, which consequences are difficult to determine (including those procedures in which an undetermined number of applicants is involved, in which dam ages claimed are not easy to estimate, in which an exorbitant amount is claimed, in which new jurisdictional issues are introduced under creative non – contrasted legal arguments and those which are at a very initial stage). In Spain, in many of the existi ng procedures, applicants claim, both at Spanish courts and through preliminary rulings towards the European Union Court of Justice that various clauses usually included under a mortgage loan with credit institutions are stated abusive (including mortgage fees clauses, early redemption right clause, referenced inter est rate type and opening fee). In particular, with regards to consumer mortgage loan agreements linked to the mortgage loan reference index (Índice de Referencia de los Préstamos Hipotecarios — mortgage loan reference index) (IRPH), which is the average interest rate calculated by the Bank of Spain and published in the Official Spanish Gazette (Boletín Oficial del Estado) for mortgage loans of more than three years for freehold housing purchases granted by Spanish credit institutions and which is considered the “official interest rate” by mortgage transparency regulations, on 14th December, 2017 the Spanish Supreme Court, in its Ruling No 669/2017 (the Ruling), held that it was not possible to det ermine that a loan's interest rate was not transparent simply due to it making reference to one official rate or another, nor can its terms then be confirmed as unfair under the provisions of Directive 93/13/EEC of 5th April, 1993. As of the date of this A nnual Report, a preliminary ruling is pending in which the Ruling is being challenged before the Court of Justice of the European Union. BBVA considers that the Ru ling is clear and well founded. On 10th September, 2019, the Advocate General of the Court of Justice of the European Union issued a report on this matter. In that report, the Advocate General of the Court of Justice of the European Union concluded that the bank to which the preliminary ruling relates (Bankia, S.A.) complied with the requirement o f transparency imposed by the applicable European regulation. The Advocate General also indicated that it is for the national courts to carry out the checks they consider necessary in order to analyze compliance with the applicable transparency obligations in each individual case. The Advocate General's report does not bind the decision which the Court of Justice of the European Union may take finall y on this matter in the future. It is therefore necessary to await the Court of Justice of the European Union’s ruling on the matter referred in the preliminary ruling in order to determine whether i t may have any effect on BBVA. The impact of any potential unfavorable ruling by the Court of Justice of the European Union is difficult to predict at this time, but could be material. The impact of such a resolution may vary depending on matters such as (i) the decision of the Court of Justice of the European Union on what interest rate should be applied to the applicable loans; and (ii) whether the effects of the jud gment are applied retroactively. According to the latest available information, the amount of mortgage loans to individuals linked to IRPH and up to date with the payment is approximately €2,800 million. In addition, there are also claims before the Spanis h courts challenging the application of certain interest rates and other mandatory rules to certain revolving credit card agreements. The resolutions in this type of proceedings against the Group or other banking entities may directly or indirectly affect the Group. The Group is involved in several competition investigations and other legal actions related to competition initiated by third parties in various countries which may give raise to penalties and claims by third parties. Spanish judicial authorities are investigating the activities of Centro Exclusivo de Negocios y Transacciones, S.L. (“Cenyt”). Such investigation includes the provision of services by Cenyt to the Bank. On July 29, 2019, the Bank was named as an investigated party (investigado) in a criminal judicial investigation (Preliminary Proceeding No. 96/2017 – Piece No. 9, Central Investigating Court No. 6 of the National High Court) for alleged facts which could represent the crimes of bribery, revelation of secrets and corruption. As at the date of this Annual Report, no formal accusation against the Bank has been made. Certain current and former officers and employees of the Group, as well as former directors of the Bank, have also been named as investigated parties in connection with this investigation. The Bank has been and continues to be proactively collaborating with the Spanish judicial authorities, including sharing with the courts information from its on-going forensic investigation regarding its relationship with Cenyt. The Bank has also testified before the judge and prosecutors at the request of the Central Investigating Court No. 6 of the National High Court. On February 3, 2020, the Bank was notified by the Central Investigating Court No. 6 of the National High Court of the order lifting the secrecy of the proceedings. This criminal judicial proceeding is at a preliminary stage. Therefore, it is not possible at this time to predict the scope or duration of such proceeding or any related proceeding or its or their possible outcomes or implications for the Group, including any fines, damages or harm to the Group’s reputation caused thereby.

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