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

For trading and hedging derivatives, this information reflects the maximum credit exposure better than the
amount shown on the balance sheet because it does not only include the market value on the date of the
transactions (the carrying amount only shows this figure); it also estimates the potential risk of these
transactions on their due date.
Regarding the renegotiated financial assets as of June 30, 2010, the BBVA Group did not perform any
renegotiations that resulted in the need to reclassify doubtful risks as outstanding risks. The amount of
financial assets that would be irregular had their conditions not been renegotiated is not significant with
respect to the Group's total loan portfolio as of June 30, 2010.
Mitigation of credit risk, collateral and other credit enhancements, including risk hedging and
mitigation policies
In most cases, maximum exposure to credit risk is reduced by collateral, credit enhancements and other
actions which mitigate the Group’s exposure.
The Group applies a credit risk hedging and mitigation policy deriving from a banking approach focused on
relationship banking. On this basis, the provision of guarantees is a necessary but not sufficient instrument
when taking risks; therefore for the Group to assume risks, it needs to verify the payment or resource
generation capacity to ensure the amortization of the risk incurred.
The above is carried out through a prudent risk management policy which consists of analyzing the financial
risk in a transaction, based on the repayment or resource generation capacity of the credit recipient, the
provision of guarantees in any of the generally accepted ways (cash collateral, pledged assets, personal
guarantees, covenants or hedges) appropriate to the risk undertaken, and lastly on the recovery risk (the
asset’s liquidity).
The procedures for the management and valuation of collaterals are set out in the internal Manual on Credit
Risk Management Policies, which the Group actively uses in the arrangement of transactions and in the
monitoring of both these and customers.
This Manual lays down the basic principles of credit risk management, which includes the management of
the collateral assigned in transactions with customers. Accordingly, the risk management model jointly
values the existence of an adequate cash flow generation by the obligor that enables him to service the debt,
together with the existence of suitable and sufficient guarantees that ensure the recovery of the credit when
the obligor’s circumstances render him unable to meet their obligations.
The procedures used for the valuation of the collateral are consistent with the market's best practices, which
involve the use of appraisal for real estate guarantees, market price for shares, quoted value of shares in a
mutual fund, etc.
All collaterals assigned are to be properly instrumented and recognized in the corresponding register, as well
as receive the approval of the Group’s Legal Units.
The following is a description of the main collateral for each financial instrument class:
• Financial assets held for trading: The guarantees or credit enhancements obtained directly from the
issuer or counterparty are implicit in the clauses of the instrument. In trading derivatives, credit risk is
minimized through contractual netting agreements, where positive- and negative-value derivatives with
the same counterparty are offset for their net balance. There may likewise be other kinds of
guarantees, depending on counterparty solvency and the nature of the transaction.
• Other financial assets designated at fair value through profit or loss: The guarantees or credit
enhancements obtained directly from the issuer or counterparty are inherent in the structure of the
instrument.
• Available for sale financial assets: The guarantees or credit enhancements obtained directly from
the issuer or counterparty are inherent in the structure of the instrument.
• Loans and receivables:
- Loans and advances to credit institutions: These have the counterparty’s personal guarantee.
- Total lending to customers: Most of these operations are backed by personal guarantees
extended by the counterparty. The collateral received to secure loans and advances to other
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