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Note 8 - Fair Value | 12 Months Ended
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Dec. 31, 2020
Fair Value Abstract |
Fair Value Measurement | 8. Fair v alue of financial instruments Framework and processes control As part of the process established in the Group for determining the fair value in order to support that financial assets and liabilities are properly following the IFRS 13 principles: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market or most advantageous market, at the mea surement date. BBVA has established, at a geographic level, a structure of Risk Operational Admission and Product Governance Committees responsible for validating and approving new products or types of financial assets and liabilities before being contract ed. Local management responsible for valuation, which are independent from the business are members of these committees. These areas are required to support, prior to the approval stage, the existence of not only technical and human resources, but also ade quate informational sources to measure the fair value of these financial assets and liabilities, in accordance with the rules established by the valuation global area and using models that have been validated and approved by the responsible areas. Fair value hierarchy All financial instruments, both assets and liabilities are initially recognized at fair value, which at that point is equivalent to the transaction price, unless there is evidence to the contrary in the market. Subsequently, depending on th e type of financial instrument, it may continue to be recognized at amortized cost or fair value through adjustments in the consolidated income statement or equity. When possible, the fair value is determined as the market price of a financial instrument. However, for many of the financial assets and liabilities of the Group, especially in the case of derivatives, there is no market price available, so its fair value is estimated on the basis of the price established in recent transactions involving similar instruments or, in the absence thereof, by using mathematical measurement models that are sufficiently tried and trusted by the international financial community. The estimates of the fair value derived from the use of such models take into consideration the specific features of the asset or liability to be measured and, in particular, the various t ypes of risk associated with such asset or liability. However, the limitations inherent in the measurement models and possible inaccuracies in the assumptions a nd parameters required by these models may mean that the estimated fair value of an asset or liability does not exactly match the price for which the asset or liability could be exchanged or settled on the date of its measurement. Additionally, for financi al assets and liabilities that show significant uncertainty in inputs or model parameters used for valuation, criteria is established to measure said uncertainty and activity limits are set based on these. Finally, these measurements are compared, as much as possible, against other sources such as the measurements obtained by the business teams or those obtained by other market participants. The process for determining the fair value requires the classification of the financial assets and liabilities accord ing to the measurement processes used as set forth below: Level 1: Valuation using directly the quotation of the instrument, observable and readily and regularly available from independent price sources and referenced to active markets that the entity can access at the measurement date. The instruments classified within this level are fixed-income securities, equity instruments and certain derivatives. Level 2: Valuation of financial instruments with commonly accepted techniques that use inputs obtained fr om observable data in markets. Level 3: Valuation of financial instruments with valuation techniques that use significant unobservable inputs in the market. As of December 31, 2020, the affected instruments at fair value accounted for approximately 0.55% of financial assets and 0.40% of the Group’s financial liabilities. Model selection and validation is undertaken by control areas outside the business areas. 8.1. Fair value of financial instruments The fair value of the Group’s financial instruments in the accompanying consolidated balance sheets a nd its corresponding carrying amounts, as of December 31, 2020, 2019 and 201 8 are presented below:
Fair Value and carrying amount (Millions of euros)
|  | 2020 | 2019 | 2018
| Notes | Carrying amount | Fair value | Carrying amount | Fair value | Carrying amount | Fair value
ASSETS |  |  |  |  |  |  |
Cash, cash balances at central banks and other demand deposits | 9 | 65.520 | 65.520 | 44.303 | 44.303 | 58.196 | 58.196
Financial assets held for trading | 10 | 108.257 | 108.257 | 101.735 | 101.735 | 89.103 | 89.103
Non-trading financial assets mandatorily at fair value through profit or loss | 11 | 5.198 | 5.198 | 5.557 | 5.557 | 5.135 | 5.135
Financial assets designated at fair value through profit or loss | 12 | 1.117 | 1.117 | 1.214 | 1.214 | 1.313 | 1.313
Financial assets at fair value through other comprehensive income | 13 | 69.440 | 69.440 | 61.183 | 61.183 | 56.337 | 56.337
Financial assets at amortized cost | 14 | 367.668 | 374.267 | 439.162 | 442.788 | 419.660 | 419.857
Hedging derivatives | 15 | 1.991 | 1.991 | 1.729 | 1.729 | 2.892 | 2.892
LIABILITIES |  |  |  |  |  |  |
Financial liabilities held for trading | 10 | 86.488 | 86.488 | 88.680 | 88.680 | 79.761 | 79.761
Financial liabilities designated at fair value through profit or loss | 12 | 10.050 | 10.050 | 10.010 | 10.010 | 6.993 | 6.993
Financial liabilities at amortized cost | 22 | 490.606 | 491.006 | 516.641 | 515.910 | 509.185 | 510.300
Hedging derivatives | 15 | 2.318 | 2.318 | 2.233 | 2.233 | 2.680 | 2.680
Not all financial assets and liabilities are recorded at fair value, so below we provi de the information on financial instruments recorded at fair value and subsequently the information of those recorded at amortized cost (including their fair value although this value is not used when accounting for these instruments). 8.1.1. Fair value of financial instruments recognized at fair value, according to valuation criteria Below are the different elements used in the valuation technique of financial instruments. Active Market B BVA considers active market as a market that allows the observation o f bid and offer prices representative of the levels to which the market participants are willing to negotiate an asset, with sufficient frequency and volume. By default, BBVA would consider all internally approved “Organized Markets” as active markets, wit hout considering this an unchangeable list. Furthermore, BBVA would consider as traded in an “Organized Market” quotations for assets or liabilities from O ver T he C ounter (OTC) markets when they are obtained from independent sources, observable on a daily basis and fulfil certain conditions. The following table shows the financial instruments carried at fair value in the accompanying consolidated balance sheets, broken down by level used to determine their fair value as of December 31, 2020, 2019 and 2018:
Fair value of financial instruments by levels (Millions of Euros)
| 2020 | 2019 | 2018
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3
ASSETS |  |  |  |  |  |  |  |  |
Financial assets held for trading | 32.555 | 73.856 | 1.847 | 31.135 | 69.092 | 1.508 | 26.730 | 61.969 | 404
Loans and advances | 2.379 | 28.659 | 1.609 | 697 | 32.321 | 1.285 | 47 | 28.642 | 60
Debt securities | 12.790 | 11.123 | 57 | 18.076 | 8.178 | 55 | 17.884 | 7.494 | 199
Equity instruments | 11.367 | 31 | 60 | 8.832 | - | 59 | 5.194 | - | 60
Derivatives | 6.019 | 34.043 | 121 | 3.530 | 28.593 | 109 | 3.605 | 25.833 | 85
Non-trading financial assets mandatorily at fair value through profit or loss | 3.826 | 381 | 992 | 4.305 | 92 | 1.160 | 3.127 | 78 | 1.929
Loans and advances | 210 | - | 499 | 82 | - | 1.038 | 25 | - | 1.778
Debt securities | 4 | 324 | 28 | - | 91 | 19 | 90 | 71 | 76
Equity instruments | 3.612 | 57 | 465 | 4.223 | 1 | 103 | 3.012 | 8 | 75
Financial assets designated at fair value through profit or loss | 939 | 178 | - | 1.214 | - | - | 1.313 | - | -
Debt securities | 939 | 178 | - | 1.214 | - | - | 1.313 | - | -
Financial assets at fair value through other comprehensive income | 60.976 | 7.866 | 598 | 50.896 | 9.203 | 1.084 | 45.824 | 9.323 | 1.190
Loans and advances | 33 | - | - | 33 | - | - | 33 | - | -
Debt securities | 59.982 | 7.832 | 493 | 49.070 | 9.057 | 604 | 43.788 | 9.211 | 711
Equity instruments | 961 | 34 | 105 | 1.794 | 146 | 480 | 2.003 | 113 | 479
Derivatives – Hedge accounting | 120 | 1.862 | 8 | 44 | 1.685 | - | 7 | 2.882 | 3
LIABILITIES- |  |  |  |  |  |  |  |  |
Financial liabilities held for trading | 27.587 | 58.045 | 856 | 26.266 | 61.588 | 827 | 22.932 | 56.560 | 269
Deposits | 8.381 | 23.495 | 621 | 9.595 | 32.121 | 649 | 7.989 | 29.945 | -
Trading derivatives | 7.402 | 34.046 | 232 | 4.425 | 29.466 | 175 | 3.919 | 26.615 | 267
Other financial liabilities | 11.805 | 504 | 3 | 12.246 | 1 | 2 | 11.024 | - | 1
Financial liabilities designated at fair value through profit or loss | - | 8.558 | 1.492 | - | 8.629 | 1.382 | - | 3.149 | 3.844
Customer deposits | - | 902 | - | - | 944 | - | - | 976 | -
Debt certificates (*) | - | 3.038 | 1.492 | - | 3.274 | 1.382 | - | 1.529 | 1.329
Other financial liabilities | - | 4.617 | - | - | 4.410 | - | - | 643 | 2.515
Derivatives – Hedge accounting | 53 | 2.250 | 15 | 30 | 2.192 | 11 | 223 | 2.454 | 3
(*) The information for the years 2019 and 2018 has been subject to certain modifications, related to some issuances of Garanti Group The following table sets forth the main valuation techniques, hypothesis and inputs used in the estimation of fair value of the financial instruments classified under Levels 2 and 3, based on the type of financial asset and liability and the corresponding balances as of December 31, 2020, 2019 and 2018:
Fair value of financial Instruments by levels. December 2020 (Millions of euros)
| 2020 | 2019 | 2018 |  |  |
| Level 2 | Level 3 | Level 2 | Level 3 | Level 2 | Level 3 | Valuation technique(s) | Observable inputs | Unobservable inputs
ASSETS |  |  |  |  |  |  |  |  |
Financial assets held for trading | 73.856 | 1.847 | 69.092 | 1.508 | 61.969 | 404 |  | - Issuer´s credit risk- Current market interest rates- Funding interest rates observed in the market or in consensus services- Exchange rates | - Prepayment rates- Issuer´s credit risk- Recovery rates- Funding interest rates not observed in the market or in consensus services
Loans and advances | 28.659 | 1.609 | 32.321 | 1.285 | 28.642 | 60 | Present-value method(Discounted future cash flows)
Debt securities | 11.123 | 57 | 8.178 | 55 | 7.494 | 199 | Present-value method(Discounted future cash flows)Observed prices in non active markets | - Issuer´s credit risk- Current market interest rates- Non active markets prices | - Prepayment rates- Issuer´s credit risk- Recovery rates
Equity instruments | 31 | 60 | - | 59 | - | 60 | Comparable pricing (Observable price in a similar market)Net asset value | - Brokers quotes- Market operations- NAVs published | - NAV not published
Derivatives | 34.043 | 121 | 28.593 | 109 | 25.833 | 85 |  |  |
Interest rate |  |  |  |  |  |  | Interest rate products (Interest rate Swaps, Call money Swaps and FRA): Discounted cash flows Caps/Floors: Black, Hull-White and SABR Bond options: Black Swaptions: Black, Hull-White and LGM Other Interest rate Options: Black, Hull-White and LGM Constant Maturity Swaps: SABR | - Exchange rates- Market quoted future prices- Market interest rates- Underlying assets prices: shares, funds, commodities- Market observable volatilities - Issuer credit spread levels- Quoted dividends- Market listed correlations | - Beta- Implicit correlations between tenors- interest rates volatility
Equity |  |  |  |  |  |  | Future and Equity Forward: Discounted future cash flows Equity Options: Local Volatility, Momentum adjustment | - Volatility of volatility- Implicit assets correlations- Long term implicit correlations- Implicit dividends and long term repos
Foreign exchange and gold |  |  |  |  |  |  | Future and Equity Forward: Discounted future cash flows Foreign exchange Options: Local volatility, moments adjustment | - Volatility of volatility- Implicit assets correlations- Long term implicit correlations
Credit |  |  |  |  |  |  | Credit Derivatives: Default model and Gaussian copula | - Correlation default- Credit spread- Recovery rates- Interest rate yield- Default volatility
Commodities |  |  |  |  |  |  | Commodities: Momentum adjustment and discounted cash flows |
Non-trading financial assets mandatorily at fair value through profit or loss | 381 | 992 | 92 | 1.160 | 78 | 1.929 |  |  |
Loans and advances | - | 499 | - | 1.038 | - | 1.778 | Specific liquidation criteria regarding losses of the EPA proceedings PD and LGD of the internal models, valuations and specific criteria of the EPA proceedings Discounted future cash flows |  | - Prepayment rates- Business plan of the underlying asset, WACC, macro scenario- Property valuation
Debt securities | 324 | 28 | 91 | 19 | 71 | 76 | Present-value method(Discounted future cash flows) | - Issuer credit risk- Current market interest rates | - Prepayment rates- Issuer credit risk- Recovery rates
Equity instruments | 57 | 465 | 1 | 103 | 8 | 75 | Comparable pricing (Observable price in a similar market)Net asset value | - Brokers quotes- Market operations- NAVs published | - NAV provided by the administrator of the fund
Financial assets designated at fair value through profit or loss | 178 | - | - | - | - | - | Present-value method(Discounted future cash flows) | - Issuer credit risk- Current market interest rates |
Debt securities | 178 | - | - | - | - | -
Financial assets at fair value through other comprehensive income | 7.866 | 598 | 9.203 | 1.084 | 9.323 | 1.190 |  |  |
Debt securities | 7.832 | 493 | 9.057 | 604 | 9.221 | 711 | Present-value method(Discounted future cash flows)Observed prices in non active markets | - Issuer´s credit risk- Current market interest rates- Non active market prices | - Prepayment rates- Issuer credit risk- Recovery rates
Equity instruments | 34 | 105 | 146 | 480 | 113 | 479 | Comparable pricing (Observable price in a similar market)Net asset value | - Brokers quotes- Market operations- NAVs published | - NAV provided by the administrator of the fund
Hedging derivatives | 1.862 | 8 | 1.685 | - | 2.882 | 3 |  |  |
Interest rate |  |  |  |  |  |  | Interest rate products (Interest rate Swaps, Call money Swaps and FRA): Discounted cash flows Caps/Floors: Black, Hull-White and SABR Bond options: Black Swaptions: Black, Hull-White and LGM Other Interest rate Options: Black, Hull-White and LGM Constant maturity Swaps: SABR | - Exchange rates- Market quoted future prices- Market interest rates- Underlying assets prices: shares, funds, commodities- Market observable volatilities - Issuer credit spread levels- Quoted dividends- Market listed correlations |
Equity |  |  |  |  |  |  | Future and Equity Forward: Discounted future cash flows Equity Options: Local volatility, Momentum adjustment |
Foreign exchange and gold |  |  |  |  |  |  | Future and Equity Forward: Discounted future cash flows Foreign exchange Options: Local volatility, moments adjustment |
Credit |  |  |  |  |  |  | Credit Derivatives: Default model and Gaussian copula |
Commodities |  |  |  |  |  |  | Commodities: Momentum adjustment and Discounted cash flows |
Fair Value of financial Instruments by Levels.(Millions of Euros)
| 2020 | 2019 | 2018 |  |  |
| Level 2 | Level 3 | Level 2 | Level 3 | Level 2 | Level 3 | Valuation technique(s) | Observable inputs | Unobservable inputs
LIABILITIES |  |  |  |  |  |  |  |  |
Financial liabilities held for trading | 58.045 | 856 | 61.588 | 827 | 56.560 | 269 |  |  |
Deposits | 23.495 | 621 | 32.121 | 649 | 29.945 | - | Present-value method(Discounted future cash flows) | - Interest rate yield- Funding interest rates observed in the market or in consensus services- Exchange rates | - Funding interest rates not observed in the market or in consensus services
Derivatives | 34.046 | 232 | 29.466 | 175 | 26.615 | 267 |  |  |
Interest rate |  |  |  |  |  |  | Interest rate products (Interest rate Swaps, call money Swaps and FRA): Discounted cash flows Caps/Floors: Black, Hull-White and SABR Bond options: Black Swaptions: Black, Hull-White and LGM Other Interest rate Options: Black, Hull-White and LGM Constant Maturity Swaps: SABR | - Exchange rates- Market quoted future prices- Market interest rates- Underlying assets prices: shares, funds, commodities- Market observable volatilities - Issuer credit spread levels- Quoted dividends- Market listed correlations | - Beta- Correlation between tenors- Interest rates volatility
Equity |  |  |  |  |  |  | Future and Equity forward: Discounted future cash flows Equity Options: Local volatility, momentum adjustment | - Volatility of volatility- Assets correlation
Foreign exchange and gold |  |  |  |  |  |  | Future and Equity Forward: Discounted future cash flows Foreign exchange Options: Local volatility, moments adjustment | - Volatility of volatility- Assets correlation
Credit |  |  |  |  |  |  | Credit Derivatives: Default model and Gaussian copula | - Correlation default- Credit spread- Recovery rates- Interest rate yield- Default volatility
Commodities |  |  |  |  |  |  | Commodities: Momentum adjustment and discounted cash flows |
Short positions | 504 | 3 | 1 | 2 | - | 1 | Present-value method(Discounted future cash flows) |  | - Prepayment rates- Issuer´s credit risk- Current market interest rates
Financial liabilities designated at fair value through profit or loss | 8.558 | 1.492 | 8.629 | 1.382 | 3.149 | 3.844 | Present-value method(Discounted future cash flows) | - Prepayment rates- Issuer´s credit risk- Current market interest rates | - Prepayment rates- Issuer´s credit risk- Current market interest rates
Derivatives – Hedge accounting | 2.250 | 15 | 2.192 | 11 | 2.454 | 3 |  |  |
Interest rate |  |  |  |  |  |  | Interest rate products (Interest rate Swaps, Call money Swaps and FRA): Discounted cash flows Caps/Floors: Black, Hull-White and SABR Bond options: Black Swaptions: Black, Hull-White and LGM Other Interest rate Options: Black, Hull-White and LGM Constant Maturity Swaps: SABR | - Exchange rates- Market quoted future prices- Market interest rates- Underlying assets prices: shares, funds, commodities- Market observable volatilities - Issuer credit spread levels- Quoted dividends- Market listed correlations | - Beta- Implicit correlations between tenors- interest rates volatility
Equity |  |  |  |  |  |  | Future and Equity Forward: Discounted future cash flows Equity Options: Local volatility, momentum adjustment | - Volatility of volatility- Implicit assets correlations- Long term implicit correlations- Implicit dividends and long term repos
Foreign exchange and gold |  |  |  |  |  |  | Future and Equity Forward: Discounted future cash flows Foreign exchange Options: Local Volatility, moments adjustment | - Volatility of volatility- Implicit assets correlations- Long term implicit correlations
Credit |  |  |  |  |  |  | Credit Derivatives: Default model and Gaussian copula | - Correlation default- Credit spread- Recovery rates- Interest rate yield- Default volatility
Commodities |  |  |  |  |  |  | Commodities: Momentum adjustment and discounted cash flows |
Main valuation techniqu es The main techniques used for the assessment of the majority of the financial instruments classified in Level 3, and its main unobservable inputs, are described below: The net present value (net present value method): This technique uses the future cash flows of each financial instrument, which are established in the different contracts, and discounted to their present value. This technique often includes many observable inputs, but may also include unobservable inputs, as described below: Credit Spread: This input represents the difference in yield of a debt security and the reference rate, reflecting the additional return t hat a market participant would require to take the credit risk of that debt security. Therefore, the credit spread of the debt security is part of the discount rate used to calculate the present value of the future cash flows. Recovery rate: This input rep resents the percentage of principal and interest recovered from a debt instrument that has defaulted. Comparable prices (similar asset prices): This input represents the prices of comparable financial instruments and benchmarks used to calculate a referenc e yield based on relative movements from the entry price or current market levels. Further adjustments to account for differences that may exist between financial instrument being valued and the comparable financial instrument may be added. It can also be assumed that the price of the financial instrument is equivalent to the comparable instrument. Net asset value: This technique utilizes certain assumptions to use net asset value as representative of fair value, which is equal to the total value of the ass ets and liabilities of a fund published by the managing entity. Gaussian copula: This model is used to integrate default probabilities of credit instruments referenced to more than one underlying CDS. The joint density function used to value the instrument is constructed by using a Gaussian copula that relates the marginal densities by a normal distribution, usually extracted from the correlation matrix of events approaching default by CDS issuers. Black 76: variant of Black Scholes model, whose main applic ation is the valuation of bond options, cap floors and swaptions where the behavior of the Forward and not the Spot itself, is directly modeled. Black Scholes: The Black Scholes model postulates log-normal distribution for the prices of securities, so that the expected return under the risk neutral measure is the risk free interest rate. Under this assumption, the price of vanilla options can be obtained analytically, so that inverting the Black- Scholes formula, the implied volatility for process of the pr ice can be calculated. Heston: This model, typically applied to equity OTC options, assumes stochastic behavior of volatility. According to which, the volatility follows a process that reverts to a long-term level and is correlated with the underlying equi ty instrument. As opposed to local volatility models, in which the volatility evolves deterministically, the Heston model is more flexible, allowing it to be similar to that observed in the short term today. Libor market model: This model assumes that the dynamics of the interest rate curve can be modeled based on the set of forward contracts that compose the underlying interest rate. The correlation matrix is parameterized on the assumption that the correlation between any two forward contracts decreases a t a constant rate, beta, to the extent of the difference in their respective due dates. The input “Credit default volatility” is a volatility input of the credit factor dynamic applied in rate/credit hybrid operative. The multifactorial frame of this model makes it ideal for the valuation of instruments sensitive to the slope or curve, including interest rate option. Local Volatility: In the local volatility models of the volatility, instead of being static, evolves over time according to the level of moneyness of the underlying, capturing the existence of smiles. These models are appropriate for pricing path dependent options when use Monte Carlo simulation technique is used. Adjustments to the valuation for risk of default Under IFRS 13 the credit risk valuation adjustments must be considered in the classification of assets and liabilities within fair value hierarchy, because of the absence of observable data of probabilities of default and recoveries used in the calculation. These adjustments are calculated by estimating Exposure At Default, Probability of Default and Loss Given Default, which are based on the recovery levels for all derivative products on any instrument, dep osits and repos at the legal entity level (all counterparties under a same master agreement), in which BBVA has exposure. Credit Valuation Adjustment (hereinafter “CVA”) and Debit Valuation Adjustments (hereinafter “DVA”) are included in the valuation of d erivatives, both assets and liabilities, to reflect the impact on the fair value of the counterparty credit risk and its own, respectively. The Group incorporates in its valuation, for all exposures classified in any of the categories valued at fair value, both the counterparty credit risk and its own. In the trading portfolio, and in the specific case of derivatives, credit risk is recognized through such adjustments. As a general rule, the calculation of CVA is the sum of the expected positive exposure in time t, the probability of default between t-1 and t, and the Loss Given Default of the counterparty. Consequently, the DVA is calculated as the sum of the expected negative exposure in time t, the probability of default of BBVA between t-1 and t, and the Loss Given Default of BBVA. Both calculations are performed throughout the entire period of potential exposure. The calculation of the expected positive and negative exposure is done through a Montecarlo simulation of the market variables involved in all trades’ valuation under the same legal netting set. The information needed to calculate the probability of default and the loss given default of a counterparty comes from the credit markets. The counterparty’s Credit Default Swaps are used if liquid quot es are available. If a market price is not available, BBVA has implemented a mapping process based on the sector, rating and geography of the counterparty to assign probabilities of default and loss given default calibrated directly to market. The amounts recognized in the consolidated balance sheet as of December 31, 2020, 2019 and 2018 related to the valuation adjustments to the credit assessment of the derivative asset as “Credit Valuation Adjustments” (“CVA”) was €-142 million, €-106 and €-163 million r espectively, and the valuation adjustments to the derivative liabilities as “Debit Valuation Adjustment” (DVA) was €124 million, €117 and €214 million, respectively. The impact recorded under “Gains or (-) losses on financial assets and liabilities held fo r trading, net” in the consolidated income statement as of December 31, 2020, 2019 and 2018 corresponding to the mentioned adjustments was a net impact of €-29 million, €67 and €-24 million respectively. Additionally, as of December 31, 2020, 2019 and 201 8, €-9, €-8 and €-12 million related to the “Funding Valuation Adjustments” (“FVA”) were recognized in the consolidated balance sheet, being the impact on results €-1 million, €4 and €-2 million, respectively. Unobservable inputs Quantitative information of unobservable inputs used to calculate Level 3 valuations is presented below as of December 31, 2020, 2019 and 2018:
Unobservable inputs. December 2020
Financial instrument | Valuation technique(s) | Significant unobservable inputs | Min | Average | Max | Units
Debt Securities | Present value method | Credit Spread | 4,32 | 47,01 | 564,22 | b.p.
Recovery Rate | 0,00% | 37,06% | 40,00% | %
| 0,10% | 99,92% | 143,87% | %
Equity/Fund instruments (*) | Net Asset Value |  |
Comparable Pricing |
Security Finance | Present value method | Repo funding curve | (1,00%) | 0,00% | 1,00% | Abs Repo rate
Credit Derivatives | Gaussian Copula | Correlation Default | 30,40% | 44,87% | 60,95% | %
Black 76 | Price Volatility | - | Vegas
Equity Derivatives | Option models on equities, baskets of equity, funds | Dividends (**) |
Correlations | (100%) | 100% | 100% | %
Volatility | 6,52 | 29,90 | 141,77 | Vegas
FX Derivatives | Option models on FX underlyings | Volatility | 4,11 | 10,00 | 16,14 | Vegas
IR Derivatives | Option models on IR underlyings | Beta | 0,25 | 2,00 | 18,00 | %
Correlation Rate/Credit | (100) |  | 100 | %
Credit Default Volatility | - | - | - | Vegas
(*) Due to the diversity of valuation models of equity valuations, we would not include all the unobservable inputs or the quantitative ranges of them. (**) The range of unobservable dividends is too wide range to be relevant.
Unobservable inputs. December 2019
Financial instrument | Valuation technique(s) | Significant unobservable inputs | Min | Average | Max | Units
Loans and advances | Present value method | Repo funding curve | (6) | 16 | 100 | b.p.
Debt securities | Comparable pricing | Credit spread | 18 | 83 | 504 | b.p.
Recovery rate | 0,00% | 28,38% | 40,00% | %
| 0,01% | 98,31% | 135,94% | %
Equity instruments (*) | Comparable pricing Net asset value |  |
Credit option | Gaussian Copula | Correlation default | 19,37% | 44,33% | 61,08% | %
Equity OTC option | Heston | Forward volatility skew | 35,12 | 35,12 | 35,12 | Vegas
Local volatility | Dividends (**) |
Volatility | 2,49 | 23,21 | 60,90 | Vegas
FX OTC options | Black Scholes/Local Vol | Volatility | 3,70 | 6,30 | 10,05 | Vegas
Interest rate options | Libor Market Model | Beta | 0,25 | 2,00 | 18,00 | %
Correlation rate/Credit | (100) |  | 100 | %
Credit default Volatility | - | - | - | Vegas
(*) Due to the diversity of valuation models of equity valuations, we would not include all the unobservable inputs or the quantitative ranges of them. (**) The range of unobservable dividends is too wide range to be relevant.
Unobservable inputs. December 2018
Financial instrument | Valuation technique(s) | Significant unobservable inputs | Min | Average | Max | Units
Debt securities | Comparable pricing | Credit spread | 37 | 152 | 385 | b.p.
Recovery rate | 0,00% | 32,06% | 40,00% | %
| 1,00% | 88,00% | 275,00% | %
Equity instruments (*) | Comparable pricing Net asset value |  |
Credit option | Gaussian Copula | Correlation default | 0,00% | 37,98% | 60,26% | %
Equity OTC option | Heston | Forward volatility skew | 47,05 | 47,05 | 47,05 | Vegas
Local volatility | Dividends (**) |
Volatility | 13,79 | 27,24 | 65,02 | Vegas
FX OTC options | Black Scholes/Local Vol | Volatility | 5,05 | 7,73 | 9,71 | Vegas
Interest rate options | Libor Market Model | Beta | 0,25 | 9,00 | 18,00 | %
Correlation rate/Credit | (100) |  | 100 | %
Credit default Volatility | - | - | - | Vegas
(*) Due to the diversity of valu ation models of equity valuations, we would not include all the unobservable inputs or the quantitative ranges of them. (**) The range of unobservable dividends is too wide range to be relevant. Financial assets and liabilities classified as Level 3 The changes in the balance of Level 3 financial assets and liabilities included in the accompanying consolidated balance sheets are as follows:
Financial assets Level 3: Changes in the year (Millions of Euros)
| 2020 | 2019 | 2018
| Assets | Liabilities | Assets | Liabilities | Assets | Liabilities
Balance at the beginning | 3.754 | 2.220 | 3.527 | 4.115 | 835 | 1.386
Changes in fair value recognized in profit and loss (*) | 609 | 293 | 112 | 71 | (167) | (28)
Changes in fair value not recognized in profit and loss | (89) | (4) | 2 | - | (4) | -
Acquisitions, disposals and liquidations (**) | (699) | (393) | 5 | 595 | 2.102 | 2.710
Net transfers to Level 3 | 549 | 287 | 77 | (2.751) | 761 | 47
Exchange differences and others | (160) | (35) | 31 | 189 | - | -
Discontinued operations (***) | (518) | (5) | - | - | - | -
Balance at the end | 3.446 | 2.363 | 3.754 | 2.219 | 3.527 | 4.115
(*) Profit or loss that is attributable to gains or losses relating to those financial ass ets and liabilities held as of December 31, 2020, 2019 and 2018. Valuation adjustments are recorded under the heading “Gains (losses) on financial assets and liabilities (net)”. (**) Of which, in 2020, the assets roll forward is comprised of €326 million of acquisitions, €1,014 million of disposals and €11 million of liquidations. The liabilities roll forward is comprised of €115 million of acqu isitions, €449 million of sales and €11 million of liquidations. (***) Amount in 2020 are mainly due to the stake in BBVA USA (see Notes 3 and 21). During the 2020 financial year, the level of significance of the unobservable inputs used to determine the fair value hierarchy of loans and advances to customers at amortized cost has been reviewed, resulting in a greater exposure classified as Level 3. This review has been carried out in the context of availability of new information, more adjusted to the changes that have occurred both in market conditions and in the composition of the credit portfolio. The effect on the consolidated results and solvency ratios, resulting from this review, does not represent any change (see Note 8.2). During 2019, certain interest rate yields were adapted to those observable in the market, which mainly affected the valuation of certain deposit classes recorded under “Financial liabilities at amortized cost” and certain insurance products recorded under “Financial liabiliti es designated at fair value through profit or loss - Other financial liabilities”, and, as a result thereof, their classification changed from Level 3 to Level 2. Additionally, €1,285 million in assets held for trading and €649 million in liabilities held for trading were classified in Level 3, mainly due to certain reverse repurchase and repurchase agreements, due to the non-observability and liquidity in the interest rate yield for the financing of assets applied in the calculation of their fair value. As of December 31, 2020, 2019 and 2018, the profit/loss on sales of financial instruments classified as Level 3 recognized in the accompanying consolidated income statement was not material. Transfers between levels The Global Valuation Area, in collaboratio n with the Group, has established the rules for an appropriate financial instruments held for trading classification according to the fair value hierarchy defined by IFRS. On a monthly basis, any new assets added to the portfolio are classified, according to this criteri on, by the subsidiaries. Then, there is a quarterly review of the portfolio in order to analyze the need for a change in classification of any of these assets. The financial instruments transferred between the different levels of measurement for th e years ended December 31, 2020, 2019 and 2018 are at the following amounts in the accompanying consolidated ba lance sheets as of December 31, 2020, 2019 and 2018:
Transfer between Levels. December 2020 (Millions of Euros)
| From: | Level 1 | Level 2 | Level 3
| To: | Level 2 | Level 3 | Level 1 | Level 3 | Level 1 | Level2
ASSETS |  |  |  |  |  |  |
Financial assets held for trading |  | 1.460 | 11 | 203 | 548 | 4 | 98
Non-trading financial assets mandatorily at fair value through profit or loss |  | 9 | 11 | 4 | - | - | 17
Financial assets designated at fair value through profit or loss |  | 143 | - | - | - | - | -
Financial assets at fair value through other comprehensive income |  | 484 | - | 135 | 96 | - | 6
Derivatives – Hedge accounting |  | - | - | - | 8 | - | -
Total |  | 2.096 | 23 | 342 | 652 | 4 | 122
LIABILITIES |  |  |  |  |  |  |
Financial liabilities held for trading |  | 8 | 3 | - | 268 | - | 13
Financial liabilities designated at fair value through profit or loss |  | - | - | - | 56 | - | 27
Total |  | 8 | 3 | - | 324 | - | 40
Transfer between levels (Millions of Euros).
|  | 2019 | 2018
| From: | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3
| To: | Level 2 | Level 3 | Level 1 | Level 3 | Level 1 | Level2 | Level 2 | Level 3 | Level 1 | Level 3 | Level 1 | Level2
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets held for trading |  | 74 | - | 1.119 | 502 | 1 | 160 | 1.171 | 2 | 2 | 6 | - | 2
Non-trading financial assets mandatorily at fair value through profit or loss |  | - | - | 23 | 2 | - | 44 | - | - | 9 | 67 | - | 24
Financial assets designated at fair value through profit or loss |  | - | - | - | - | 1 | - | - | - | - | - | - | -
Financial assets at fair value through other comprehensive income |  | 6 | 6 | 4 | 209 | - | 454 | 134 | 72 | - | 515 | - | -
Derivatives – Hedge accounting |  | - | - | - | 26 | - | 10 | - | - | - | 52 | 118 | 49
Total |  | 79 | 6 | 1.145 | 739 | 2 | 667 | 1.305 | 74 | 11 | 641 | 118 | 75
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Financial liabilities held for trading |  | 1 | - | - | - | - | - | - | - | - | 138 | - | 37
Financial liabilities designated at fair value through profit or loss |  | - | - | - | 27 | - | 2.679 | - | - | - | - | - | -
Derivatives – Hedge accounting |  | - | - | - | 27 | - | 125 | - | - | - | - | - | -
Total |  | 1 | - | - | 54 | - | 2.804 | - | - | - | 138 | - | 37
The amount of financial instruments that were transferred between levels of valuation during the year ended December 31, 2020, is not material relative to the total portfolios, and corresponds to the above changes in the classification between levels these financial instruments modified some of their features, specifically: Transfers between Levels 1 and 2 represent mainly debt securities and equity instruments, which are either no longer listed on an active market (transfer from Level 1 to 2) or have just started to be listed (transfer from Level 2 to 1). Transfers from Level 2 to Level 3 are mainly due to transactions of financial assets held for trading, non-trading financial assets mandatorily valu ed at fair value, hedging derivatives, financial liabilities held for trading and financial liabilities designated at fair value through profit or loss. Transfers from Level 3 to Level 2 generally affect derivative and debt securities transactions, for whi ch inputs observable in the market have been obtained. Sensitivity a nalysis Sensitivity analysis is performed on financial instruments with significant unobservable inputs (financial instruments included in level 3), in order to obtain a reasonable range o f possible alternative valuations. This analysis is carried out on a monthly basis, based on the criteria defined by the Global Valuation Area taking into account the nature of the methods used for the assessment and the reliability and availability of inp uts and proxies used. In order to establish, with a sufficient degree of certainty, the valuation risk that is incurred in such assets without applying diversification criteria between them. As of December 31, 2020, the effect on profit for the year and to tal equity of changing the main unobservable inputs used for the measurement of Level 3 financial instruments for other reasonably possible unobservable inputs, taking the highest (most favorable input) or lowest (least favorable input) value of the range deemed probable, would be as follows:
Financial instruments Level 3: Sensitivity analysis (Millions of Euros)
| Potential impact on consolidated income statement | Potential impact on other comprehensive income
| Most favorable hypothesis | Least favorable hypothesis | Most favorable hypothesis | Least favorable hypothesis
ASSETS |  |  |  |
Financial assets held for trading | 10 | (40) | - | -
Loans and Advances | 1 | (1) | - | -
Debt securities | 5 | (5) | - | -
Equity instruments | 1 | (31) | - | -
Derivatives | 3 | (3) | - | -
Non-trading financial assets mandatorily at fair value through profit or loss | 229 | (60) | - | -
Loans and advances | 204 | (29) | - | -
Debt securities | 15 | (15) | - | -
Equity instruments | 9 | (16) | - | -
Financial assets at fair value through other comprehensive income | - | - | 22 | (23)
Total | 239 | (101) | 22 | (23)
8.2 Fair value of financial instruments carried at cost, by valuation criteria The valuation technique used to calculate the fair value of financial assets and liabilities carried at cost are presented below: Financial assets Cash, balances at central banks and other demand deposits / loans to central banks / short-term loans to credit institutions/ Repurchase agreements: in general, their fair value is assimilated to their book value, due to the nature of the counterparty and because they are mainly short-term balances in which the book value is the most reasonable estimation of the value of the asset. Loans to credit institutions which are not short-term and loans to customers: In general, the fair value of th ese financial assets is determined by the discount of expected future cash flows, using market interest rates at the time of valuation adjusted by the credit spread and taking all kind of behavior hypothesis if it is considered to be relevant (prepayment f ees, optionality, etc.). Debt securities: Fair value estimated based on the available market price or by using internal valuation methodologies. Financial liabilities Deposits from central banks: for recurrent liquidity auctions and other monetary policy i nstruments of central banks / short-term deposits, from credit institutions / repurchase agreements / short term customer deposits: their book value is considered to be the best estimation of their fair value. Deposits of credit institutions which are not short-term and term customer deposits: these deposits will be valued by discounting future cash flows using the interest rate curve in effect at the time of the adjustment adjusted by the credit spread and incorporating any behavioral assumptions if this p r oves relevant (early repayments, optionalities, etc.). Debt certificate (Issuances): The fair value estimation of these liabilities depend on the availability of market prices or by using the present value method: discount of future cash flows, using mark et interest rates at valuation time and taking into account the credit spread. The following table presents the fair value of key financial instruments carried at amortized cost in the accompanying consolidated balance sheets as of December 31, 2020, 2019 and 2018, broken down according to the method of valuation used for the estimation:
Fair value of financial instruments at amortized cost by levels (Millions of euros)
| 2020 | 2019 | 2018
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3
ASSETS |  |  |  |  |  |  |  |  |
Cash, cash balances at central banks and other demand deposits | 65.355 | - | 165 | 44.111 | - | 192 | 58.024 | - | 172
Financial assets at amortized cost | 35.196 | 15.066 | 324.005 | 29.391 | 217.279 | 196.119 | 21.419 | 204.619 | 193.819
LIABILITIES |  |  |  |  |  |  |  |  |
Financial liabilities at amortized cost | 90.839 | 255.278 | 144.889 | 67.229 | 289.599 | 159.082 | 58.225 | 269.128 | 182.948
The main valuat ion techniques and inputs used to estimate the fair value of financial instruments accounted for at cost and classified in levels 2 and 3 is shown below. These are broken down by type of financial instrument and the balances correspond to those as of December 31, 2020, 2019 and 2018:
Fair Value of financial Instruments at amortized cost by valuation technique. December 2020 (Millions of Euros)
| 2020 | 2019 | 2018 | Valuation technique(s) | Main inputs used
| Level 2 | Level 3 | Level 2 | Level 3 | Level 2 | Level 3
ASSETS |  |  |  |  |  |  |  |
Financial assets at amortized cost | 15.066 | 324.005 | 217.279 | 196.119 | 204.619 | 193.819 | Present-value method(Discounted future cash flows) |
Central banks | - | - | - | 2 | - | 1 | - Credit spread- Prepayment rates- Interest rate yield
Loans and advances to credit institutions | 1.883 | 12.641 | 9.049 | 4.628 | 4.934 | 4.291 | - Credit spread- Prepayment rates- Interest rate yield
Loans and advances to customers | 3.904 | 310.924 | 194.897 | 190.144 | 190.666 | 183.645 | - Credit spread- Prepayment rates- Interest rate yield
Debt securities | 9.279 | 440 | 13.333 | 1.345 | 9.019 | 5.881 | - Credit spread- Interest rate yield
LIABILITIES |  |  |  |  |  |  |  |
Financial liabilities at amortized cost | 255.278 | 144.889 | 289.599 | 159.082 | 269.128 | 182.948 |  |
Deposits from central banks | - | 207 | 129 | - | 196 | - | Present-value method(Discounted future cash flows) | - Issuer´s credit risk- Prepayment rates- Interest rate yield
Deposits from credit institutions | 22.914 | 4.633 | 21.575 | 6.831 | 22.281 | 9.852
Deposits from customers | 210.097 | 129.525 | 245.720 | 135.514 | 240.547 | 135.270
Debt certificates | 14.413 | 4.848 | 14.194 | 11.133 | 6.104 | 25.096
Other financial liabilities | 7.854 | 5.676 | 7.981 | 5.604 | - | 12.730

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