BANCO BILBAO VIZCAYA ARGENTARIA, S.A. AND ... - BBVA

provided for the instrument (after deducting the costs required for foreclosure and subsequent
sale).
• The various types of risk to which each instrument is subject.
• The circumstances in which collections will foreseeably be made.
These cash flows are discounted using the original effective interest rate. If a financial instrument has a
variable interest rate, the discount rate for measuring any impairment loss is the current effective rate
determined under the contract.
As an exception to the rule described above, the market value of quoted debt instruments is deemed to be a
fair estimate of the present value of their future cash flows.
Impairment losses determined collectively
The quantification of impairment losses is determined on a collective basis in the following two cases:
• Assets classified as impaired of customers in which the amount of their operations is less than €1
million.
• Asset portfolio not impaired currently but which presents an inherent loss.
Inherent loss, calculated using statistical procedures, is deemed equivalent to the portion of losses incurred
at the date of preparing the accompanying interim consolidated financial statements that has yet to be
allocated to specific transactions.
The Group estimates collectively the inherent loss of credit risk corresponding to operations realized by
Spanish financial entities of the Group (approximately 57% on “Loans and receivables” of the Group as of
June 30, 2010), using the parameters set by Annex IX of the Circular 4/2004 from Bank of Spain (in force as
of June 30, 2010 on the base of its experience and the Spanish banking sector information in the
quantification of impairment losses and provisions for insolvencies for credit risk.
Notwithstanding the above, the Group can avail of the proprietary historic records used in its internal ratings
models (IRBs), which were approved by the Bank of Spain for some portfolios in 2008, albeit only for the
purposes of estimating regulatory capital under the new Basel Accord (BIS II). It uses these internal ratings
models to calculate the economic capital required in its activities and uses the expected loss concept to
quantify the cost of credit risk for incorporation into its calculation of the risk-adjusted return on capital of its
operations.
The provisions required under Circular 4/2004 from Bank of Spain standards fall within the range of
provisions calculated using the Group’s internal ratings models.
To estimate the collective loss of credit risk corresponding to operations with nonresident in Spain registered
in foreign subsidiaries, are applied methods and similar criteria, taking like reference the Bank of Spain
parameters but adapting the default’s calendars to the particular circumstances of the country. However, in
Mexico for consumer loans, credit cards and mortgages portfolios, as well as for credit investment
maintained by the Group in the United States are using internal models for calculating the impairment losses
based on historical experience of the Group (approximately 15.55% of the “Loans and receivables” of the
Group as of June 30, 2010).
Following is a description of the methodology used to estimate the collective loss of credit risk corresponding
to operations with resident in Spain:
1. Impaired financial assets
The debt instruments, whoever the obligor and whatever the guarantee or collateral, that have past-due
amounts with more than three months, taking into account the age of the past-due amounts, the guarantees
or collateral provided and the economic situation of the customer and the guarantors.
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