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Derivative financial instruments | 12 Months Ended
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Dec. 31, 2021
Derivative financial instruments |
Derivative financial instruments | 13. Derivative financial instruments The following table details quantitative information on the notional amounts and carrying amounts of the derivative instruments used for hedging by type of risk hedged and type of hedge:
| December 31, 2021
| Nominal amount |  | Carrying amount of hedging instruments
|  | Asset (1) |  | Liability (2)
Interest rate risk |  |  |  |  |
Fair value hedges | 40,000 |  |  | 1,282 |  |  | — |
Cash flow hedges | 20,000 |  |  | — |  |  | (538) |
Interest rate and foreign exchange risk |  |  |  |  |
Fair value hedges | 428,067 |  |  | 783 |  |  | (20,908) |
Cash flow hedges | 455,864 |  |  | 8,740 |  |  | (7,009) |
| 943,931 |  |  | 10,805 |  |  | (28,455) |
| December 31, 2020
| Nominal amount |  | Carrying amount of hedging instruments
|  | Asset (1) |  | Liability (2)
Interest rate risk |  |  |  |  |
Fair value hedges | 85,667 |  |  | 1,831 |  |  | (233) |
Cash flow hedges | 60,000 |  |  | — |  |  | (1,541) |
Interest rate and foreign exchange risk |  |  |  |  |
Fair value hedges | 344,489 |  |  | 2,856 |  |  | (3,848) |
Cash flow hedges | 221,508 |  |  | 23,091 |  |  | — |
Foreign exchange risk |  |  |  |  |
Cash flow hedges | 71,353 |  |  | — |  |  | (3,589) |
| 783,017 |  |  | 27,778 |  |  | (9,211) |
(1)Included in the consolidated statement of financial position under the line Derivative financial instruments - assets. (2)Included in the consolidated statement of financial position under the line Derivative financial instruments - liabilities. As part of the financial risk management, the Bank has used the following hedging relationships: - Fair value hedge - Cash flow hedge - Net investment hedge For control purposes, derivative instruments are recorded at their nominal amount in control accounts. Interest rate swaps are made either in a single currency or cross currency for a prescribed period to exchange a series of interest rate flows, which involve fixed for floating interest payments, and vice versa. The Bank also engages in certain foreign exchange forward contracts to serve customers’ transaction needs and to manage foreign currency risk. All such positions are hedged with an offsetting contract for the same currency. The Bank manages and controls the risks on these foreign exchange hedges by establishing counterparty credit limits by customer and by adopting policies that do not allow for open positions in the loan and investment portfolios. The Bank also has used foreign exchange forward contracts to hedge the foreign exchange risk associated with the Bank’s equity investment in a non-U.S. dollar functional currency foreign entity. Derivative and foreign exchange forward instruments negotiated by the Bank are executed mainly over-the-counter (OTC). These contracts are executed between two counterparties that negotiate specific agreement terms, including notional amount, exercise price and maturity. A. Fair value hedges This type of hedge is used to mitigate the risk of changes in foreign exchange currency rates, as well as changes in interest rate risk. Within the derivative financial instruments used by the Bank for fair value hedging are interest rate swap contracts whereby a series of interest rate flows in a single currency are exchanged over a prescribed period and cross currency swaps contracts that generally involve the exchange of both interest and principal amounts in two different currencies. The Bank’s exposure to interest rate risk is disclosed in Note 5(C)(i). Interest rate risk to which the Bank applies hedge accounting arises from fixed-rate euro medium term notes and other long-term notes issuances (“Certificados Bursatiles”), fixed-rate loans and advances, whose fair value fluctuates when benchmark interest rates change. The Bank hedges interest rate risk only to the extent of benchmark interest rates because the changes in fair value of a fixed-rate note or loan are significantly influenced by changes in the benchmark interest rate (USD Libor or SOFR). Hedge accounting is applied where economic hedging relationships meet the hedge accounting criteria. Before fair value hedge accounting is applied by the Bank, the Bank determines whether an economic relationship between the hedged item and the hedging instrument exists based on an assessment of the qualitative characteristics of these items and the hedged risk that is supported by quantitative analysis. The Bank considers whether the critical terms of the hedged item and hedging instrument closely align when assessing the presence of an economic relationship. The Bank assesses whether the fair value of the hedged item and the hedging instrument respond similarly to similar risks. The Bank further supports this qualitative assessment by using regression analysis to assess whether the hedging instrument is expected to be and has been highly effective in offsetting changes in the fair value of the hedged item. The sources of ineffectiveness mainly come from forward rates, discount rates and cross currency basis (cost of the operation). The following table details the notional amounts and carrying amounts of derivative instruments used in fair value hedges by type of risk and hedged item, along with the changes during the years used to determine and recognize the ineffectiveness of the hedge:
| December 31, 2021
| Nominal amount |  | Carrying amount of hedging instruments |  | Changes in fair value used to calculate hedge ineffectiveness (3) |  | Ineffectiveness recognized in profit or loss (3)
|  | Asset (1) |  | Liability (2) |  |
Interest rate risk |  |  |  |  |  |  |  |  |
Borrowings and debt | 40,000 |  |  | 1,282 |  |  | — |  |  | (19) |  |  | 22 |
Interest rate and foreign exchange risk |  |  |  |  |  |  |  |  |
Loans | 3,006 |  |  | 333 |  |  | — |  |  | (23) |  |  | (119) |
Borrowings and debt | 425,061 |  |  | 450 |  |  | (20,908) |  |  | (18,614) |  |  | (1,283) |
Total | 468,067 |  |  | 2,065 |  |  | (20,908) |  |  | (18,656) |  |  | (1,380) |
| December 31, 2020
| Nominal amount |  | Carrying amount of hedging instruments |  | Changes in fair value used to calculate hedge ineffectiveness (3) |  | Ineffectiveness recognized in profit or loss (3)
|  | Asset (1) |  | Liability (2) |  |
Interest rate risk |  |  |  |  |  |  |  |  |
Loans | 10,667 |  |  | — |  |  | (132) |  |  | 84 |  |  | 1 |
Securities at FVOCI | 5,000 |  |  | — |  |  | (101) |  |  | (29) |  |  | (20) |
Borrowings and debt | 70,000 |  |  | 1,831 |  |  | — |  |  | 199 |  |  | (27) |
Interest rate and foreign exchange risk |  |  |  |  |  |  |  |  |
Loans | 4,075 |  |  | 356 |  |  | — |  |  | 178 |  |  | (149) |
Borrowings and debt | 340,414 |  |  | 2,500 |  |  | (3,848) |  |  | (2,524) |  |  | (468) |
Total | 430,156 |  |  | 4,687 |  |  | (4,081) |  |  | (2,092) |  |  | (663) |
(1)Included in the consolidated statement of financial position under the line Derivative financial instruments - assets. (2)Included in the consolidated statement of financial position under the line Derivative financial instruments - liabilities. (3)Included in the consolidated statement of profit or loss under the line Loss on financial instruments, net. A. Fair value hedges (continued) The following table details the notional amounts and carrying amounts of the fair value hedged items by type of risk and hedged item, along with the changes during the period used to determine and recognize the ineffectiveness of the hedge:
| December 31, 2021
| Carrying amount of hedged items |  | Line in the consolidated statement of financial position that includes the carrying amount of the hedged items |  | Accumulated amount of fair value hedge adjustments included in the carrying amount of the hedged items |  | Change in fair value of the hedged items used to calculate hedge ineffectiveness(1)
| Asset |  | Liability
Interest rate risk |  |  |  |  |  |  |  |  |
Borrowings and debt | — |  |  | (41,315) |  |  | Borrowings and debt, net |  | — |  |  | 41 |
Interest rate and foreign exchange risk |  |  |  |  |  |  |  |  |
Loans | 2,717 |  |  | — |  |  |  |  | (751) |  |  | (96) |
Borrowings and debt | — |  |  | (406,724) |  |  | Borrowings and debt, net |  | 18,919 |  |  | 17,331 |
Total | 2,717 |  |  | (448,039) |  |  |  |  | 18,168 |  |  | 17,276 |
| December 31, 2020
| Carrying amount of hedged items |  | Line in the consolidated statement of financial position that includes the carrying amount of the hedged items |  | Accumulated amount of fair value hedge adjustments included in the carrying amount of the hedged items |  | Change in fair value of the hedged items used to calculate hedge ineffectiveness(1)
| Asset |  | Liability |  |  |
Interest rate risk |  |  |  |  |  |  |  |  |
Loans | 10,837 |  |  | — |  |  | Loans, net |  | 74 |  |  | (83) |
Securities at FVOCI | 5,113 |  |  | — |  |  | Securities and other financial assets, net |  | 85 |  |  | 9 |
Borrowings and debt | — |  |  | (71,937) |  |  | Borrowings and debt, net |  | (292) |  |  | (226) |
Interest rate and foreign exchange risk |  |  |  |  |  |  |  |  |
Loans | 3,789 |  |  | — |  |  | Loans, net |  | (654) |  |  | (327) |
Borrowings and debt | — |  |  | (339,688) |  |  | Borrowings and debt, net |  | 1,083 |  |  | 2,056 |
Total | 19,739 |  |  | (411,625) |  |  |  |  | 296 |  |  | 1,429 |
(1)Included in the consolidated statement of profit or loss under the line Loss on financial instruments, net. A. Fair value hedges (continued) The following table details the maturity of the notional amount for the derivative instruments used in fair value hedges:
|  | December 31, 2021
Maturity |  | Interest rate swaps |  | Cross currency swaps |  | Total
Fair value hedge |  |  |  |  |  |
Less than 1 year |  | 40,000 |  |  | 271,646 |  |  | 311,646 |
Over 1 to 2 years |  | — |  |  | 3,006 |  |  | 3,006 |
Over 2 to 5 years |  | — |  |  | 153,415 |  |  | 153,415 |
Total |  | 40,000 |  |  | 428,067 |  |  | 468,067 |
|  | December 31, 2020
Maturity |  | Interest rate swaps |  | Cross currency swaps |  | Total
Fair value hedge |  |  |  |  |  |
Less than 1 year |  | 85,667 |  |  | — |  |  | 85,667 |
Over 1 to 2 years |  | — |  |  | 271,646 |  |  | 271,646 |
Over 2 to 5 years |  | — |  |  | 72,843 |  |  | 72,843 |
Total |  | 85,667 |  |  | 344,489 |  |  | 430,156 |
B. Cash flow hedges This type of hedge is used to mitigate the risk of changes in foreign exchange currency rates, as well as changes in interest rate risk, that could include variability in the future cash flows. Within the derivative financial instruments used by the Bank for cash flow hedging are interest rate swaps contracts whereby a series of interest rate flows in a single currency are exchanged over a prescribed period, cross currency swaps contracts that generally involve the exchange of both interest and principal amounts in two different currencies, and foreign exchange forward contracts, an agreement to purchase or sell foreign currency at a future date at agreed-upon terms. The Bank’s exposure to market risk is disclosed in Note 5 (C) (i) and (ii). The Bank determines the amount of the exposure to which it applies hedge accounting by assessing the potential impact of changes in interest rates and foreign currency exchange rates on the future cash flows. This assessment is performed using analytical techniques, such as cash flow sensitivity analysis. As noted above for fair value hedges, by using derivative financial instruments to hedge exposures to changes in interest rates and foreign currency exchange rates, the Bank exposes itself to credit risk of the counterparties to the derivatives, which is not offset by the hedged items. This exposure is managed similarly to that of fair value hedges. The Bank determines whether an economic relationship exists between the cash flows of the hedged item and the hedging instrument based on an assessment of the qualitative characteristics of these items and the hedged risk that is supported by quantitative analysis. The Bank considers whether the critical terms of the hedged item and the hedging instrument closely align when assessing the presence of an economic relationship. The Bank assesses whether the cash flows of the hedged item and the hedging instrument respond similarly to the hedged risk, such as the benchmark interest rate or foreign currency. The Bank further supports this qualitative assessment by using sensitivity analysis to assess whether the hedging instrument is expected to be and has been highly effective in offsetting changes in the present value of the hedged item. The Bank assesses hedge effectiveness using the hypothetical derivative method, which creates a derivative instrument to serve as a proxy for the hedged transaction. The terms of the hypothetical derivative match the critical terms of the hedged item and it has a fair value of zero at inception. The sources of ineffectiveness arise mainly because of the differences in discount rates (OIS - Overnight Index Swap). B. Cash flow hedges (continued) The maximum length of time over which the Bank has hedged its exposure to the variability in future cash flows on forecasted transactions is 6 years. The Bank recognized the lifetime associated cost of foreign exchange forward contracts where the hedge item is either asset or liability, as interest income or interest expense in the consolidated statement of profit or loss, as an adjustment to the yield of the hedge item creating an accumulated reserve in OCI in the consolidated statement of financial position, reclassified to profit or loss at their maturity.
| December 31, 2021
|  |  | Carrying amount of hedging instruments |  | Change in fair value used for calculating hedge ineffectiveness |  | Changes in the fair value of the hedging instruments recognized in OCI (3) |  | Ineffectiveness recognized in profit or loss (4) |  | Amount reclassified from the hedge reserve to profit or loss (4)
| Nominal amount |  | Asset (1) |  | Liability (2) |  |  |  |
Interest rate risk |  |  |  |  |  |  |  |  |  |  |  |  |
Borrowings and debt | 20,000 |  |  | — |  |  | (538) |  |  | 562 |  |  | 560 |  |  | (2) |  |  | (423) |
Interest rate and foreign exchange risk |  |  |  |  |  |  |  |  |  |  |  |  |
Borrowings and debt | 455,864 |  |  | 8,740 |  |  | (7,009) |  |  | (21,267) |  |  | (20,920) |  |  | 347 |  |  | — |
Foreign exchange risk |  |  |  |  |  |  |  |  |  |  |  |  |
Loans | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (3,589) |
Total | 475,864 |  |  | 8,740 |  |  | (7,547) |  |  | (20,705) |  |  | (20,360) |  |  | 345 |  |  | (4,012) |
| December 31, 2020
|  |  | Carrying amount of hedging instruments |  | Change in fair value used for calculating hedge ineffectiveness |  | Changes in the fair value of the hedging instruments recognized in OCI (3) |  | Ineffectiveness recognized in profit or loss (4) |  | Amount reclassified from the hedge reserve to profit or loss (4)
| Nominal amount |  | Asset (1) |  | Liability (2) |  |  |  |
Interest rate risk |  |  |  |  |  |  |  |  |  |  |  |  |
Borrowings and debt | 60,000 |  |  | — |  |  | (1,541) |  |  | (443) |  |  | (442) |  |  | 1 |  |  | (75) |
Interest rate and foreign exchange risk |  |  |  |  |  |  |  |  |  |  |  |  |
Borrowings and debt | 221,508 |  |  | 23,091 |  |  | — |  |  | 23,380 |  |  | 23,481 |  |  | 101 |  |  | (1,697) |
Foreign exchange risk |  |  |  |  |  |  |  |  |  |  |  |  |
Loans | 71,353 |  |  | — |  |  | (3,589) |  |  | (3,466) |  |  | (3,465) |  |  | 1 |  |  | (1,927) |
Total | 352,861 |  |  | 23,091 |  |  | (5,130) |  |  | 19,471 |  |  | 19,574 |  |  | 103 |  |  | (3,699) |
(1) Included in the consolidated statement of financial position under the line Derivative financial instruments - assets. (2) Included in the consolidated statement of financial position under the line Derivative financial instruments - liabilities. (3) Included in equity in the consolidated statement of financial position under the line Other comprehensive income. (4) Included in the consolidated statement of profit or loss under the line Loss on financial instruments, net. B. Cash flow hedges (continued) The following table details the nominal amounts and carrying amounts of the cash flow hedged items by type of risk and hedged item, along with the changes during the period used to determine and recognize the ineffectiveness of the hedge:
| December 31, 2021
| Carrying amount of hedged items |  | Line in the consolidated statement of financial position that includes the carrying amount of the hedged items |  | Change in the fair value of the hedged items used to calculate the hedge ineffectiveness (1) |  | Cash flow hedge reserve
| Asset |  | Liability |  |  |
Interest rate risk |  |  |  |  |  |  |  |  |
Borrowings and debt | — |  |  | (20,041) |  |  | Borrowings and debt, net |  | (560) |  |  | — |
Interest rate and foreign exchange risk |  |  |  |  |  |  |  |  |
Borrowings and debt | — |  |  | (470,181) |  |  | Borrowings and debt, net |  | 20,920 |  |  | 10,756 |
Total | — |  |  | (490,222) |  |  |  |  | 20,360 |  |  | 10,756 |
| December 31, 2020
| Carrying amount of hedged items |  | Line in the consolidated statement of financial position that includes the carrying amount of the hedged items |  | Change in the fair value of the hedged items used to calculate the hedge ineffectiveness (1) |  | Cash flow hedge reserve
| Asset |  | Liability |  |  |
Interest rate risk |  |  |  |  |  |  |  |  |
Borrowings and debt | — |  |  | (20,045) |  |  | Borrowings and debt, net |  | 442 |  |  | 1,440 |
Interest rate and foreign exchange risk |  |  |  |  |  |  |  |  |
Borrowings and debt | — |  |  | (243,817) |  |  | Borrowings and debt, net |  | (23,481) |  |  | (1,980) |
Foreign exchange risk |  |  |  |  |  |  |  |  |
Loans | 74,509 |  |  | — |  |  | Loans, net |  | 3,465 |  |  | 562 |
Total | 74,509 |  |  | (263,862) |  |  |  |  | (19,574) |  |  | 22 |
(1) Included in the consolidated statement of profit or loss under the line Loss on financial instruments, net. B. Cash flow hedges (continued) The following table details the maturity of the derivative instruments used in cash flow hedges:
|  |  | December 31, 2021
Maturity |  |  |  | Interest rate swaps |  | Cross currency swaps |  | Total
Cash flow hedge |  |  |  |  |  |  |  |
Less than 1 year |  |  |  | — |  |  | 108,779 |  |  | 108,779 |
Over 1 to 2 years |  |  |  | 20,000 |  |  | 30,332 |  |  | 50,332 |
Over 2 to 5 years |  |  |  | — |  |  | 299,684 |  |  | 299,684 |
More than 5 years |  |  |  | — |  |  | 17,069 |  |  | 17,069 |
Total |  |  |  | 20,000 |  |  | 455,864 |  |  | 475,864 |
—
|  | December 31, 2020
Maturity |  | Foreign exchange forwards |  | Interest rate swaps |  | Cross currency swaps |  | Total
Cash flow hedge |  |  |  |  |  |  |  |
Less than 1 year |  | 71,353 |  |  | 40,000 |  |  | — |  |  | 111,353 |
Over 2 to 5 years |  | — |  |  | 20,000 |  |  | 197,854 |  |  | 217,854 |
More than 5 years |  | — |  |  | — |  |  | 23,654 |  |  | 23,654 |
Total |  | 71,353 |  |  | 60,000 |  |  | 221,508 |  |  | 352,861 |

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