UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

REPORT OF FOREIGN ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of March, 2016

Commission file number: 1-10110

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

(Exact name of Registrant as specified in its charter)

BANK BILBAO VIZCAYA ARGENTARIA, S.A.

(Translation of Registrant’s name into English)

Calle Azul, 4

28050 Madrid

Spain

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

		“Information of Prudential Relevance”   Basel Accord Pillar III   2015

Executive Summary

The Banco Bilbao Vizcaya Argentaria Group (the “Group” or “BBVA Group”) is an internationally diversified financial group with a significant presence in traditional retail banking, asset management and wholesale banking.

In addition to the operations it carries out directly, the Bank heads a group of subsidiaries, jointly-controlled businesses and associate institutions which perform a wide range of activities and which, together with the Bank, constitute BBVA Group. This allows BBVA Group to achieve a high level of geographical diversification, which is one of the levers of sustainable growth and organic generation of highly satisfactory earnings.

We are facing a new environment that poses a significant challenge for the financial industry. Technological and consumer preference changes are transforming society and the way of doing business, affecting the banking industry as has already happened in other sectors.

Moreover, the sector’s return is under pressure due to: the sluggish growth in activity and the pressure to attain margins, increased regulatory pressure and capital requirements, widespread distrust of traditional banking and the emergence of new competitors.

In this context, BBVA has a vantage point because it has a large customer base, a great deal of information, presence in attractive markets, significant know-how in risk management and a sound corporate governance model.

These strengths are the starting point of our transformation strategy, that places the customers at the core to offer them the best solutions that help them manage their money and make the best financial decisions, with the aim of having more customers, more satisfied, more loyal and more profitable.

To this end, the Group’s organizational structure was changed in May 2015 to adapt it to this new strategy, accelerate the transformation process and promote the growth of earnings of our franchises.

The Group has also defined 6 strategic priorities to guide this transformation:

In 2015, earnings were influenced by the incorporation, since April 24, of Catalunya Banc (CX) and, since the third quarter of 2015, the purchase of an additional 14.89% stake in Garanti.

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Apart from these operations, 2015 closed with positive growth in different performance areas, on both the cost management side and generation of income. As a result, the solvency position in the market was improved.

As regards liquidity, the good situation in the wholesale funding markets and constant access by BBVA and its franchises to the market were maintained, and in 2015 the liquidity and funding conditions have remained comfortable across BBVA’s global footprint.

In general, the financial soundness of the Group’s banks is based on the funding of lending activity, basically through customer funds, so the adequate trend in the weight of retail deposits continues to strengthen the Group’s liquidity position and to improve the funding structure, maintaining very favorable liquidity ratios in terms of LTD (Loan-to-Deposits) and LCR (Liquidity Coverage Ratio).

The Group’s performance in relation to managing credit risk has been favorable, reducing the NPL ratio and increasing the coverage ratio, thus strengthening the entity’s adequate position in terms of credit risk.

In solvency, BBVA ended 2015 with capital levels above the minimum levels required, in terms of phased-in and fully-loaded capital, and reached a leverage ratio that continues to compare very favorably with its peer group. In addition, the Group has waived the so-called “sovereign filter” in anticipation of the bill proposed by the European Central Bank (ECB) on the exercise of the options and powers offered by European Union law (November 2015), which is expected to come into effect in March 2016.

As regards regulation, BBVA has published its prudential capital requirements applicable to the Entity following the Supervisory Review and Evaluation Process (SREP), which establishes that BBVA should maintain a phased-in core capital ratio of 9.5% at both individual and consolidated levels. This will all be described in greater detail throughout this report.

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Introduction

Regulatory environment in 2015

Legal changes in the Community area

In December 2010, the Basel Committee on Banking Supervision proposed a set of reforms to reinforce the international capital and liquidity standards applicable to credit institutions, which make up the Basel III framework.

Within the framework of Basel III, the European Union has implemented, among others, Directive 2013/36/EU of the European Parliament and of the Council, dated June 26, 2013, relating to the activity of credit institutions and prudential supervision of credit institutions and investment firms (“Directive CRD IV”), which has been transposed to the different Member States, and Regulation (UE) 575/2013 of the European Parliament and of the Council, dated June 26, 2013, on prudential requirements for credit institutions and investment firms (“CRR” and jointly with Directive CRD IV, “CRD IV”), which applies directly in all Member States.

As a Spanish credit institution, BBVA is subject to compliance with CRD IV and CRR. CRD IV has been transposed to Spanish law through: (i) Royal Decree-Law 14/2013, dated November 29, on urgent measures for adapting Spanish law to European Union regulations on supervision and solvency of financial institutions; (ii) Act 10/2014, dated June 26, on the regulation, supervision and solvency of credit institutions; (iii) Royal Decree 84/2015, dated February 13, which implements Act 10/2014; and (iv) Bank of Spain Circulars 2/2014 and 2/2016.

The new regulations require institutions to have a higher and better quality capital level, increase capital deductions and review the requirements associated with certain assets. Unlike the previous framework, the minimum capital requirements are complemented with requirements for capital buffers and others relating to liquidity and leverage.

The capital base under the CRD IV primarily comprises the following elements (in line and with the same lettered scale as the one described in section 2.1 herein):

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TABLE 1: Calculation of the Capital Base according to CRD IV

The most relevant aspects affecting the elements making up common equity and risk-weighted assets will be detailed in greater depth in section 2.1 of this document.

In this regard, article 92 of CRR establishes that credit institutions must maintain at all times, at both individual and consolidated level, a total capital ratio of 8% of their risk-weighted assets (commonly referred to as the Pillar 1 requirement). At least 6% of the total capital ratio must comprise Tier 1 capital, of which 4.5% must in any case comprise common Tier 1 capital (CET1), and the remaining 2% may be completed with Tier 2 capital instruments.

Notwithstanding the application of the Pillar 1 requirement, CRD IV contemplates the possibility that competent authorities may require that credit institutions maintain more capital than the requirements set out in the Pillar 1 to cover risks other than those already covered by the Pillar 2 requirement (this power of the competent authority is commonly known as Pillar 2).

In addition, since January 1, 2016 and in accordance with CRD IV, credit institutions must comply at all times with the combined requirement of capital buffers, which must be covered with CET1 in addition to that established for complying with the requirements of Pillar 1 and Pillar 2.

The combined requirement of capital buffers consists of: (i) a capital conservation buffer; (ii) a specific anticyclical capital buffer; (iii) a buffer for global systemically important financial institutions (the “G-SIB buffer”); (iv) a buffer for other systemically important financial institutions (the “D-SIB buffer”); and (v) a buffer against systemic risks.

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The combination of (i) the capital conservation buffer, (ii) the specific anticyclical capital buffer and (iii) the greater of (a) the buffer for systemic risks, (b) the G-SIB buffer and (c) the D-SIB buffer (in each case as applicable to each institution)¹, comprise an institution’s combined requirement for capital buffers.

As regards BBVA, the European Central Bank (ECB), following the Supervisory Review and Evaluation Process (SREP) conducted in 2015, has required that BBVA maintain a CET1 phased-in ratio of 9.5% at both individual and consolidated level.

The ECB’s decision establishes that the required CET1 ratio of 9.5% includes: (i) the minimum CET1 ratio required by Pillar 1 (4.5%), (ii) the ratio required by Pillar 2 and (iii) the capital conservation buffer (which is 0.625% in phased-in terms and 2.5% in fully-loaded terms).

Additionally, and given that BBVA was included in 2015 on the list of global systemically important financial institutions, in 2016 BBVA will apply, at consolidated level, a G-SIB buffer of 0.25%, with the total minimum requirement for phased-in CET1 in 2016 at the consolidated level being established at 9.75%.

However, since BBVA has been excluded from the list of global systemically important financial institutions in 2016 (which is updated every year by the Financial Stability Board (FSB)), as of January 1, 2017, the G-SIB buffer will only apply to BBVA in 2016 (notwithstanding the possibility that the FSB or the supervisor may in the future include BBVA on that list).

Moreover, the supervisor has informed BBVA that it is included on the list of other systemically important financial institutions, and a D-SIB buffer of 0.5% of the fully-loaded ratio applies at the consolidated level (it will be implemented gradually from January 1, 2016 to January 1, 2019). However, BBVA will not have to meet the D-SIB buffer in 2016, since the capital requirement for 2016 under the G-SIB buffer is greater than that for the D-SIB buffer. The D-SIB buffer shall therefore only apply starting in January 1, 2017.

As of December 31, 2015, the fully-loaded CET1 ratio stood at 10.3%, strengthening the Group’s capital position. The phased-in CET1 ratio according to the new CRD-IV rules stood at 12.1% as of December 31, 2015.

In order to provide the financial system with a metric that serves as a backstop to capital levels, irrespective of the credit risk, a measure complementing all the other capital indicators has been incorporated into Basel III and transposed to the Solvency Regulations. This measure, the leverage ratio, can be used to estimate the percentage of the assets financed with Tier 1 capital.

Although the book value of the assets used in this ratio is adjusted to reflect the bank’s current or potential leverage with a given balance-sheet position, the leverage ratio is intended to be an objective measure that may be reconciled with the financial statements.

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1. General informational requirements

1.1. Company name and differences in the consolidable group for the purposes of the solvency regulations and accounting criteria

1.1. Company name and differences in the consolidable group for the purposes of the solvency regulations and accounting criteria

Banco Bilbao Vizcaya Argentaria, S.A. (hereinafter, “the Bank” or “BBVA”) is a private-law entity subject to the rules and regulations governing banking institutions operating in Spain.

The Bylaws and other public information about the Bank are available for consultation at its registered address (Plaza San Nicolás, 4 Bilbao) and on the corporate website www.bbva.com.

The Solvency Regulations are applicable at the consolidated level for the whole Group.

The Group’s consolidated financial statements are drawn up in accordance with what is laid down in the International Financial Reporting Standards adopted by the European Union (hereinafter, “EU-IFRS”).

The EU-IFRS were adapted to the sector of Spanish credit institutions by Bank of Spain Circular 4/2004 of December 22, as well as its successive amendments.

Bank of Spain Circulars 5/2013 of October 30, 2013 on public and restricted financial reporting rules and 5/2011 of November 30, 2011 on financial statement models also apply.

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On the basis of accounting criteria, companies are considered to form part of a consolidated group when the controlling institution holds or can hold, directly or indirectly, control of them. An institution is understood to control another entity when it is exposed, or is entitled to variable returns as a result of its involvement in the subsidiary and has the capacity to influence those returns through the power it exercises on the subsidiary. For such control to exist, the following aspects must be fulfilled:

a) Power: An investor has power over a subsidiary when it has current rights that provide it with the capacity to direct its relevant activities, i.e. those that significantly affect the returns of the subsidiary.

b) Returns: An investor is exposed, or is entitled to variable returns as a result of its involvement in the subsidiary when the returns obtained by the investor for such involvement may vary based on the economic performance of the subsidiary. Investor returns may be positive only, negative only or both positive and negative.

c) Relationship between power and returns: An investor has control over a subsidiary when it not only has power over the subsidiary and is exposed, or is entitled to variable returns for its involvement in the subsidiary, but also has the capacity to use its power to influence the returns it obtains due to its involvement in the subsidiary.

Therefore, in drawing up the Group’s consolidated Financial Statements, all dependent companies and consolidated structured entities have been consolidated by applying the full consolidation method.

Jointly-controlled entities, as well as joint ventures (those over which joint control arrangements are in place), are valued using the equity method.

The list of all the companies forming part of the BBVA Group is included in the appendices to the Group’s Annual Consolidated Financial Statements.

For the purposes of the Solvency Regulations, as set out in Spanish Law 36/2007, heading two, section 3.4, the consolidated group comprises the following subsidiaries:

Likewise, the special-purpose entities whose main activity implies a prolongation of the business of any of the institutions included in the consolidation, or includes the rendering of back-office services to these, will also form part of the consolidated group.

However, according to the provisions of this law, insurance entities and some service firms do not form part of consolidated groups of credit institutions.

Therefore, for the purposes of calculating solvency requirements, and hence the drawing up of this Information of Prudential Relevance, the scope of consolidated institutions is different from the scope defined for the purposes of drawing up the Group’s Financial Statements.

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The effect of the difference between the two regulations is basically due to:

This section includes an exercise in transparency aimed at offering a clear view of the process of reconciliation between the book balances reported in the Public Balance Sheet (attached to the Group’s Annual Consolidated Financial Statements) and the book balances this report uses (regulatory scope), revealing the main differences between both scopes.

TABLE 2: Reconciliation of the Public Balance Sheet from the accounting perimeter to the regulatory perimeter

Below is a table summarizing the main sources of the differences between the amount of exposure in regulatory terms (Exposure) and the book balances according to the Financial Statements:

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TABLE 3: Main sources of the differences between original exposure and the book balance

This shows the headings of the Public Balance Sheet by EO, EAD and RWAs, which are the risk concepts on which this document is based.

TABLE 4: Opening of the headings of the Public Balance Sheet for EO, EAD and RWAs

As detailed in Note 3 of the Group’s Annual Consolidated Financial Statements, during fiscal year 2015 the Group took over control of the Garanti Group (third quarter) and the acquisition of the Catalunya Banc Group (during the second quarter), these transactions affected the comparative against the previous year in all items of the consolidated balance and consolidated earnings.

Investments

Acquisition of an additional 14.89% in Garanti

On November 19, 2014, the Group concluded a new agreement with Dogus Holding S.A., Ferit Faik Sahenk, Dianne Sahenk and Defne Sahenk (hereinafter “Dogus”) on matters including the acquisition of 62,538,000,000 additional shares in Garanti (equivalent to 14.89% of the entity’s share capital) for a total maximum payment of 8.90 Turkish lira per lot (Garanti trades in lots of 100 shares each).

The same agreement included the stipulation that if Dogus was paid a dividend against 2014 earnings, the amount would be deducted from the amount payable by BBVA. As of April 27, 2015, Dogus received the divided paid to Garanti shareholders of 0.135 Turkish lira per lot.

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The Group concluded the purchase on July 27, 2015; once all the necessary regulatory authorizations had been obtained. Following the acquisition of the new shares, the Group’s stake in Garanti stands at 39.9%.

The total price actually paid by BBVA is 8.765 Turkish lira per share (approximately 5,481 million Turkish lira or €1,857 million, applying an exchange rate of 2.9571 Turkish lira to the euro).

In accordance with the IFRS-EU, as a result of the coming into effect of the new agreement, BBVA Group valued the 25.01% stake held previously in Garanti (currently considered as a joint venture and appraised by the equity method) at fair value and consolidate the financial statements of Garanti into the BBVA Group’s consolidated financial statements starting on the date of effective control.

The aforementioned valuation at fair value has had a non-recurring negative impact on the “Gains (losses) on derecognized assets not classified as non-current assets held for sale” (See Note 48 of the Group’s Annual Consolidated Financial Statements) of the BBVA Group’s consolidated income statements for 2015, resulting in a negative net impact on the “Net income attributed to parent company” heading on the consolidated income statement of BBVA Group for 2015 of approximately €1,840 million. The recognition of this accounting impact has not entailed any additional cash divestment for BBVA. Most of this impact consisted of conversion differences due to the depreciation of the Turkish lira against the euro in the period from the initial acquisition by BBVA of 25.01% of Garanti to the takeover. These conversion differences were already registered practically in full as valuation adjustments, lowering BBVA Group’s consolidated equity on that date.

The aforementioned agreements with the Dogus group include an arrangement for the management of the bank and the appointment of most of the members of its Board of Directors by the BBVA Group (7 out of 10). The 39.9% holding in Garanti was consolidated in the BBVA Group because of the cited management agreements.

As of December 31, 2015, Garanti contributed to the consolidated Group with a volume of assets of approximately €90,000 million, of which approximately €55,000 million correspond to “Loans and advances to customers”, and a volume of “Financial liabilities at amortized cost” of approximately €75,000 million.

Garanti’s contribution to the consolidated income statement corresponding to 2015 without considering the valuation at fair value of the holding on the aforementioned date of effective control was €371 million.

The amount contributed by Garanti to the net attributable profit of the Group if said business combination had been made at the beginning of 2015, would be €539 million, excluding the aforementioned valuation at fair value.

While these consolidated annual financial statements were drawn up, the calculation had not concluded to determine, in accordance with IFRS-3, the existence or not of goodwill related to this acquisition, though the Group expects no significant changes in the asset and liability appraisals related to this acquisition.

The Group’s estimate as of December 31, 2015, according to the acquisition method, which compares the fair values assigned to the acquired assets and assumed liabilities of Garanti, together with the identified intangible assets, and the payment in cash made by the Group as consideration for the operation, generated a difference of €622 million, which is entered in the chapter “Intangible Assets – Goodwill” in the consolidated balance as of December 31, 2015 (attached hereto), though, as mentioned above, this estimate is merely temporary. In accordance with IFRS-3, the term to complete the necessary adjustments on the initial acquisition calculation is one year.

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Acquisition of Catalunya Banc

On July 21, 2014, the Governing Board of the Fund for Orderly Bank Restructuring (FROB) awarded BBVA, under a competitive bid process, the acquisition of Catalunya Banc, S.A. (“Catalunya Banc”).

On April 24, 2015, after securing the mandatory regulatory authorizations from the competent authorities, the purchase of 1,947,166,809 shares of Catalunya Banc, S.A. (representing approximately 98.4% of its share capital) was formalized at a price of approximately €1,165 million.

As of December 31, 2015, Catalunya Banc contributed to the consolidated Group with a volume of assets of approximately €40,000 million, of which approximately €19,000 million correspond to “Loans and advances to customers”, and a volume of “Financial liabilities at amortized cost” of approximately €36,000 million.

The amount contributed by Catalunya Banc to the consolidated profit of the Group if said business combination had been made at the beginning of 2015 is not representative.

As of December 31, 2015, according to the acquisition method, the comparison between the fair values assigned at the time of the purchase to the assets and liabilities acquired from Catalunya Banc, together with the identified intangible assets, and the payment in cash made by the Group to FROB as consideration for the operation, generated a difference of €26 million, which is entered in the chapter “Negative goodwill” of the Consolidated Income Statement for 2015. In accordance with IFRS-3, the term to complete the necessary adjustments on the initial acquisition calculation is one year (See Note 18.1 of the Group’s Annual Consolidated Financial Statements).

Divestments

Partial sale of China CITIC Bank Corporation Limited (CNCB)

On January 23, 2015, the BBVA Group announced it had signed an agreement to sell 4.9% of the share capital of China CITIC Bank Corporation Limited (CNCB) to UBS AG, London Branch (UBS); which, in turn signed a number of agreements, according to which the CNCB shares would be transferred to a third party and the final economic beneficiary of the ownership of these shares shall be Xinhu Zhongbao Co. Ltd. (Xinhu).

On March 12, 2015, after securing the mandatory regulatory authorizations from the competent authorities, the purchase was formalized.

The sale price paid by UBS was HKD 5.73 per share, and the total amount was HKD 13,136 million, equivalent to €1,555 million (calculated at the exchange rate of EUR/HK$= 8.45 valid at the close of the operation).

In addition to the 4.9% and until completing 6.34%, different in-market sales were made during 2015. The total impact of said sales on the BBVA Group’s consolidated financial statements is of a net gain of around €705 million. The gross tax gain entered under “Gains (losses) on non-current assets held-for-sale not classified as discontinued transactions” of the attached Consolidated Income Statement for 2015 (See Note 49 of the Group’s Annual Consolidated Financial Statements).

As of December, 31 2015, the book value of the stake held in CNCB rose to €910 million, equivalent to a stake of 3.26%, which is entered in the chapter “Available-for-sale financial asset” of the consolidated balance on said date.

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Sale of the stake in Citic International Financial Holdings Limited (CIFH)

On December 23, 2014, the Group signed an agreement to sell its 29.68% stake in Citic International Financial Holdings Limited (CIFH), the unlisted subsidiary of CNCB headquartered in Hong Kong, to China CITIC Bank Corporation Limited. The sale price of this stake was set at HKD 8,162 million.

On August 27, 2015 the sale of said stake was completed with no significant impact on the consolidated earnings of the Group.

There is no institution in the Group not included in the consolidated Group for the purpose of the solvency regulations whose capital are below the regulatory minimum requirement.

The Group operates in Spain, Mexico, the United States and 30 other countries, largely in Europe and Latin America. The Group’s banking subsidiaries around the world are subject to supervision and regulation (with respect to issues such as compliance with a minimum level of regulatory capital) by a number of regulatory bodies.

The obligation to comply with these capital requirements may affect the capacity of these banking subsidiaries to transfer funds to the parent company via dividends or other means.

In some jurisdictions in which the Group operates, the law lays down that dividends may only be paid with the funds legally available for this purpose.

In accordance with the exemption from capital requirements compliance for Spanish credit institutions belonging to a consolidated group (at individual or subconsolidated level) established in the CRR, the Group obtained exemption from the supervisor on December 30, 2009 for the following companies (this exemption was ratified through ECB decision 1024/2013):

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2. Capital resources

2.1. Characteristics of the eligible capital

2.2. Amount of capital

2.3. Bank risk profile

2.4. A breakdown of minimum capital requirements by risk type

2.5. Procedure employed in the internal capital adequacy assessment process

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2.1. Characteristics of the eligible capital resources

Considered for the purpose of calculating the minimum capital requirements, under the solvency regulations, are the elements and instruments corresponding to Tier 1 capital, which is defined as the sum of ordinary Tier 1 capital (CET1) and additional Tier 1 capital (AT1) as defined in Part Two, Title I, Chapters I to III of the CRR, as well as their corresponding deductions, in accordance with articles 36 and 56, respectively.

Also considered are the elements of Tier 2 capital defined in Part Two of Chapter IV, section I of the CRR. In addition, it considers the deductions to be those defined as such in section II of the same Chapter.

In line with the stipulations of the solvency regulation, the level of ordinary Tier 1 capital essentially comprises the following elements:

Capital is, moreover, adjusted mainly through the following deductions:

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The application of some of the above deductions (mainly intangible assets and LCFs) shall be carried out gradually over a transition period of 5 years in general (phased in), as set out in the current regulation.

Other deductions that may be applicable could comprise significant stakes in financial institutions and assets for deferred taxes arising from temporary differences that exceed the 10% limit of the CET1, and the deduction for exceeding the overall 17.65% limit of the fully loaded CET1 according to article 48, section 2 of the CRR.

In addition, the Group includes as total eligible capital the additional Tier 1 capital instruments defined in articles 51 and 484 of the CRR, including the corresponding adjustments, in accordance with article 472 of the CRR:

Lastly, the entity also includes in its capital resources the eligible Tier 2 capital. This is largely made up of the following elements:

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It will also include the book balances of generic allowances referring to securitized exposures which have been excluded from the risk-weighted exposures calculation under the IRB method, for the part not exceeding 0.6% of the risk-weighted exposures that would have corresponded to these securitized exposures, had they not been excluded. There is no treatment defined for the surplus of allowances over expected loss in portfolios assessed under the IRB approach above the 0.6% limit.

The book balance for generic allowances for losses reached in keeping with the accounting regulations and which corresponds to those portfolios to which the standardized approach is applied, for an amount up to 1.25% of the weighted risks that have been the basis for the coverage calculation, is also considered as eligible additional capital.

Generic allowances for losses for those securitized assets that have been excluded from the risk-weighted exposures under the standardized approach are also eligible up to a limit of 1.25% of the weighted risks that would have corresponded to them, had they not been excluded. The surplus over the 1.25% limit is deducted from exposure.

Annex VI to this report presents the Group’s issues of perpetual contingent convertible securities and issues of preference shares, which as explained above, form part of additional Tier 1 capital:

This annex also details the Group’s issues of subordinated debt as of December 31, 2015, calculated as Tier 2 capital:

2.2. Amount of capital

The accompanying table shows the amount of eligible capital, net of deductions, of the different elements comprising the capital base:

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TABLE 5: Amount of capital

The process followed is shown below, according to the recommendations issued by the EBA and in line with the exercise of transparency conducted by the Bank. Based on the shareholders’ equity reported in the Group’s Annual Consolidated Financial Statements and by applying the deductions and adjustments shown in the table below, the regulatory capital figure for solvency purposes is arrived at:

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TABLE 6: Reconciliation of the Public Balance Sheet from the accounting perimeter to the regulatory perimeter

2.3. Bank risk profile

BBVA Group has a General Risk Control and Management Model (hereinafter, “the Model”) adapted to its business model, organization and the geographical areas in which it operates. It allows it to operate within the framework of the control and risk management strategy defined by the Bank’s company bodies and adapt to an economic and regulatory environment, addressing management globally and adapted to the circumstances at any particular time. The Model establishes a system of risk management that is adapted to the entity’s risk profile and strategy.

The risks inherent in the business that make up the risk profile of BBVA Group are as follows:

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The chart below shows the total risk-weighted assets broken down by type of risk as of December 31, 2015:

CHART 1: RWAs distribution by risk type

2.4. A breakdown of minimum capital requirements by risk type

In accordance with article 92 of the CRR, the entities must at all times comply with the following capital requirements:

Regardless of article 92 of the CRR, after the Supervisory Review and Evaluation Process (SREP), the minimum ordinary Tier 1 capital level should be 9.5%.

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The total amount of capital requirements is made up mainly of the following items:

Credit risk is the possible loss assumed by an economic agent as a result of failure to comply with the contractual obligations of the counterparties with which it interacts. When calculating the risk-weighted exposures, the credit institutions may apply the standard method or the method based on internal ratings, when allowed by the competent authorities.

Counterparty risk-weighted exposures corresponding to repo and derivative operations (section 5.3. of the present document).

Market risk arises from losses in the value of an asset associated with the fluctuation of its price on the market.

Exchange-rate risk arises when an economic agent places part of its assets in a currency or financial instrument denominated in a currency different from the one used by that agent for its day-to-day transactions.

The capital requirements with respect to the credit valuation adjustment risk resulting from OTC derivative instruments that are not credit derivatives recognized for the purpose of reducing the amount of credit risk-weighted exposures.

The capital requirements determined in accordance with title III of the CRR, with respect to operational risk.

In addition, as stated in the introductory section of the present document, Basel III, unlike the previous framework, introduces capital buffers as a complement to the minimum capital requirements. A transition period ending in 2019 has been established to facilitate the adaptation of financial institutions to the minimum capital requirements.

The third part of the CRR sets out the capital requirements, in accordance with the new Basel III framework, as well the techniques for calculating the different minimum regulatory capital ratios.

Below is the total capital requirements broken down by type of risk as of December 31, 2015 and December 31, 2014. The total amount for credit risk includes the positions in securitizations (standardized and advanced measurement approaches) and the holding in equities.

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TABLE 7: Capital requirements by risk type

2.5. Procedure employed in the internal capital adequacy assessment process

To comply with the requirement of Pillar II of the Basel Accord, BBVA carries out the internal capital adequacy assessment process in accordance with the supervisor’s guidelines.

The Group’s budgeting process is where it makes the calculations both for economic capital at risk allocated by the different business areas and for the regulatory capital base.

Economic capital is calculated by internal models that collect the historical data existing in the Group and calculate the capital necessary for pursuit of the activity adjusted for risks inherent to it. These calculations include additional risks to those contemplated in regulatory Pillar I.

The following points are assessed within the internal capital adequacy assessment process:

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Furthermore, a stress test is performed using a scenario in which macroeconomic values are estimated for an environment of greater economic downturn than the one budgeted, as determined by BBVA Research, and the consequences of this on the Group’s activity (increased NPA, lower activity levels, higher volatility in the financial markets, falls in the stock market, operating losses, liquidity crises, etc.) and its impact on the capital base (earnings, reserves, capacity to issue equity instruments, allowances, risk-weighted assets, etc.).

Estimations are also made on the possible cyclical nature of the models used. The stress scenarios cover recession situations in sufficiently long periods (20-30 years). Finally, backtesting is carried out on the data presented for the previous year.

This process concludes with a document which is made available to the supervisor every year, for supervision of the targets and the action plan presented, enabling a dialog to be set up between the Supervisor and the Group concerning capital and solvency.

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3. Risks

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3.1. General risk control and management model

BBVA Group has a General Risk Control and Management Model (hereinafter, “the Model”) adapted to its business model, organization and the geographical areas in which it operates. It allows it to operate within the framework of the control and risk management strategy defined by the Bank’s company bodies and adapt to an economic and regulatory environment, addressing management globally and adapted to the circumstances at any particular time. The Model establishes a system of risk management that is adapted to the entity’s risk profile and strategy.

This Model is applied comprehensively in the Group and is made up of the basic elements set out below:

The Group promotes the development of a risk culture that ensures the consistent application of the risk control and management Model within the Group and guarantees that the risk function is understood and permeates throughout all the levels of the organization.

3.1.1. Governance and organization

The risk governance model in BBVA is characterized by the strong involvement of its corporate bodies, both in establishing the risk strategy and in the continuous monitoring and supervising of its implementation.

Thus, as explained below, it is the corporate bodies that approve the risk strategy and the corporate policies for the different types of risks. The risk function is responsible within the scope of its management for implementing and developing the risk strategy, being answerable for it to the corporate bodies.

The responsibility for the day-to-day management of risks corresponds to the businesses, which engage in their business following the policies, rules, procedures, infrastructures and controls that are based on the framework set by the company bodies and defined by the risk function.

To carry out this work adequately, the risk function in the BBVA Group has been set up as a single, global function that is independent of the commercial areas.

3.1.1.1. Corporate governance layout

The BBVA Group has developed a system of corporate governance that is in line with the best international practices and adapted it to the requirements of the regulators in the country in which its different units operate.

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The Board of Directors (hereinafter “the Board) approves the risk strategy and supervises the internal control and management systems. Specifically, the strategy approved by the Board includes at least the statement of the Group’s Risk Appetite, the fundamental metrics and the basic structure of limits by geographical areas, risk types and asset classes, as well as the bases of the risk control and management Model. The Board also ensures that the budget is aligned with the approved Risk Appetite.

On the basis established by the Board of Directors, the Executive Committee approves the specific corporate policies for each type of risk. In addition, this committee approves the Group’s risk limits and monitors them. It is informed both of the overruns of the limits and of any appropriate corrective measures that have been taken.

Finally, the Board of Directors has created a specialized committee for risks, the Risks Committee (RC). This committee analyzes and monitors risk periodically in the area of the attributions of the corporate bodies, and assists the Board of Directors and the Executive Committee in determining and monitoring the risk strategy and corporate policy strategy, respectively. Among its most important work is detailed control and monitoring of the risks affecting the Group overall, which allows it to ensure that the risk strategy is effectively integrated into management and the corporate policies approved by the corporate bodies are applied.

The head of the risk function in the executive line, the Corporate Risk Officer (CRO) carries out his work with the independence, authority, rank and resources required. He is appointed by the Bank’s Board of Directors, as a member of its senior management, and has direct access to its corporate bodies (the Board of Directors, the Executive Committee and the Risks Committee), to which he reports regularly on the risk situation in the Group.

To perform his functions better, the CRO is supported by a structure made up of cross-cutting risk units in the corporate area and specific risk units in the Group’s geographical and/or business areas. Each of these units has its own Risk Manager in charge of the geographical and/or business areas, who within the scope of his competence, carries out the functions of risk management and control and is responsible for applying the corporate policies and rules approved at Group level consistently, while adapting them if necessary to local requirements and reporting these matters to the local corporate bodies.

The Risk Managers of the geographical and/or business areas answer to both the CRO and the head of the geographical and/or business area. This system of co-dependence aims to ensure the interdependence of the local risk function from the operational functions, and allows them to be aligned with the Group’s corporate policies and objectives with respect to risks.

3.1.1.2. Organizational and committee structure

As mentioned above, the risk function comprises the corporate area risk units, which carry out cross-cutting functions, and the risk units of the geographical and/or business areas.

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At the same time, they ensure that the approved corporate policies and rules are applied consistently at Group level, adapting them where appropriate to local requirements; they are provided with the adequate infrastructures for the control and management of their risks and report, where appropriate, to the corporate bodies and senior management.

Thus the local risk units work with the corporate risk units with the aim of adapting to the risk strategy at Group level and pooling all the information necessary to monitor changes in risks.

The risk function’s decision-making process is based on a committee structure. The Global Risk Management Committee (GRMC) is the main committee in the risk function. It proposes, checks, and approves, where appropriate, items such as the internal regulatory framework for risks, the procedures and infrastructures needed to identify, evaluate, measure and manage the risks faced by the Group in carrying out its business, and the admission of the operations with the most relevant risks.

The members of this Committee are the CRO and the heads of the risk units of the corporate area and the most representative geographical and/or business areas.

The Global Risk Management Committee (GRMC) operates through various support committees, including the following:

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The following chart illustrates the risk management-related functions of each Committee at the BBVA Group:

CHART 2: BBVA Group’s risk management government and organization

Each geographical and/or business area has its own risk management committee (or committees), with objectives and content similar to those of the corporate area, which develop their functions consistently and in line with the corporate policies and regulations on risks.

Within this organizational scheme, the risk function ensures the integration and application across the whole Group of a consistent risk strategy, regulatory framework, infrastructures and risk controls, while benefiting from customer insight and the proximity of each geographical and/or business area and transmitting the corporate culture on this matter to the Group’s different organizational levels.

3.1.1.3. Internal Risk Control and Internal Validation

The Group has a specific Internal Risk Control unit. Its main function is to ensure there is a sufficient internal regulatory framework, a process and measures defined for each type of risk identified in the Group (and for those other types of risk for which the Group may be potentially affected). It controls their application and operation, as well as ensuring the integration of the risk strategy into the Group’s management.

The Internal Risk Control unit is independent of the units that develop the risk models, manage processes and execute controls. Its scope of action is global, from the geographical point of view and the type of risks.

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The Group’s Internal Risk Control Director is responsible for the function; he reports its activities and informs the CRO and the Board’s Risks Committee of its work plans, as well as assisting the Board on such matters as it requires.

For these purposes the Risks area also has a Technical Secretary’s Office, which is also independent of the units that develop the risk models, manage the processes and execute the controls. The Technical Secretary’s Office offers the Committee the technical support it needs to perform its duties better.

The unit has a structure of teams at both corporate level and in the most relevant geographical areas in which the Group operates. As in the case of the Corporate Area, local units are independent of the business areas that execute the processes, and of the units that execute the controls, and report functionally to the Internal Risk Control unit. This unit’s lines of action are established at Group level, and it is responsible for adapting and executing them locally, as well as for reporting the most relevant aspects.

In addition, the Group has an Internal Validation unit, which is also independent of the units that develop the risk models and of those that use them in management. Its functions include revision and independent validation at internal level of the models used for the control and management of risks in the Group.

3.1.2. Risk appetite

The Group’s Risk Appetite as approved by the Board of Directors determines the risks and their level that the Group is prepared to assume to achieve its business objectives. These risks are expressed in terms of capital, financial structure, profitability, recurring revenue, cost of risk and other metrics. The determination of Risk Appetite has the following objectives:

Risk Appetite is manifested through the following elements:

BBVA’s risk policy is aimed at maintaining the risk profile made explicit in the Group’s Risk Appetite Statement, which is manifested in a series of metrics that approximate it (Fundamental Metrics and Limits).

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The corporate risks area works with the different geographical and/or business areas to define their Risk Appetite so that it is coordinated across the group and to ensure that the profile is in line with the definition.

The BBVA Group assumes a certain level of risk in order to provide financial services and products for its customers and obtain attractive levels of return for shareholders. The organization has to understand, manage and control the risks it assumes.

The aim of the organization is not to eliminate all risks, but to assume a prudent level of risks that allows it to generate returns while maintaining acceptable capital and fund levels and generating recurrent earnings.

BBVA’s Risk Appetite expresses the levels and types of risk that the Bank is prepared to assume to carry out its strategic plan without significant deviations, even in situations of tension. The Risk Appetite is integrated into management and determines the basic lines of the Group’s activity, as it establishes the framework within which the budgeting process is developed.

CHART 3: Risk Appetite

3.1.2.1. Fundamental Metrics

These are the metrics that characterize the entity’s objective behavior (defined in the statement), allowing an expression of the risk culture at all levels in a systematic and comprehensible way. They synthesize the entity’s objectives and so they are useful for communicating with the stakeholders.

The fundamental metrics are strategic, propagated across the whole Group, comprehensible and easy to calculate, objectifiable at the business/geographical area level and subject to future projections. Examples of said metrics are detailed in the chart above (core metrics).

3.1.2.2. Limits

Metrics that determine the strategic positioning of the entity for the different risk types: credit, ALM (Asset & Liability Management), liquidity, markets, operational, etc. The following aspects differentiate these metrics from Fundamental Metrics:

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They are therefore levers for remaining within the thresholds defined in the fundamental metrics and used to manage day-to-day risk. They include tolerance limits, sublimits and alerts established at the business/geographical, portfolio and product level.

During 2015, Risk Appetite metrics trended consistently with the profile established according to the operating limits set or marked by the different areas in the organization.

3.1.3. Decisions and processes

The transfer of Risk Appetite to ordinary management is supported by three basic aspects:

3.1.3.1. A uniform body of regulations

The corporate GRM area is responsible for defining and developing corporate policies, specific regulations, procedures and schemes for delegation according to which the risk decisions have to be adopted within the Group

This process aims for the following objectives:

The approval of corporate policies for all kinds of risks corresponds to the Bank’s corporate bodies, while the corporate risk area approves the rest of the regulations.

The risk units of the geographical and/or business areas comply with this body of regulations and, where necessary, adapt it to local requirements, in order to have a decision-making process that is appropriate to the local level and in line with the Group’s policies.

If such adaptation is necessary, the local risks area must inform the corporate GRM area, which has to ensure consistency in the body of regulations at Group level. Where appropriate, it must thus give its prior approval to the modifications proposed by the local risk areas.

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3.1.3.2. Risk planning

Risk planning ensures integration in Risk Appetite management through a cascade process of establishing limits, where the function of corporate area and geographical and/or business area risk units is to guarantee this process is aligned with the Group’s Risk Appetite.

It is equipped with tools for aligning and tracking the Risk Appetite defined at the aggregated level by business areas, legal entities, risk types, concentrations and any other level considered necessary.

The process of risk planning is present within the rest of the Group’s planning framework to ensure the coherence of all the other processes.

3.1.3.3. Day-to-day risk management

All risks must be managed in an integrated fashion during their life cycle, based on differentiated treatment according to their type.

The risk management cycle is made up of 5 elements:

Evaluation, monitoring and reporting is a cross-cutting element that has to ensure that the Model has a dynamic and anticipatory vision, making possible compliance with the Risk Appetite approved by the corporate bodies, even under unfavorable scenarios. This process covers all the material risk categories and has the following objectives:

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The following phases have to be developed to carry out this process:

Infrastructure constitutes the element that must ensure that the Group has the human and technological resources required for effective management and supervision of risks, performance of the functions included in the Group’s risk Model, and achievement of its objectives.

With respect to human resources, the Group’s risk function must have an adequate workforce in terms of number, skills and experience.

With respect to technology, the Group ensures the integrity of the management information systems and the provision of the infrastructure required to support risk management, including the tools appropriate to the needs derived from the different types of risks in their admission, management, valuation and monitoring.

The principles according to which the Group’s risk technology is governed are:

Through the Risk Analytics function, the Group has a corporate framework that develops measurement techniques and models, covering all the types of risk and the different purposes, and involves a uniform language for all the activities and geographical/business areas.

The execution is decentralized, allowing the Group’s global scope to be used to the full. The idea is to develop the existing risk models continuously and generate others that cover the new range of businesses that are being deployed, with the aim of strengthening anticipation and proactiveness that characterize the risk function in the Group.

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Equally, the risk units of the geographical and/or business areas must ensure they have sufficient means from the point of view of resources, structures and tools to develop risk management in accordance with the corporate model.

BBVA considers risk culture as an essential element for the consolidation and integration of the other components of the Model.

The culture transfers to all the levels of the organization the implications involved in the Group’s activities and businesses from the perspective of risk. The risk culture is based on a number of levers, including:

GRM has a variety of channels for communication that facilitate the transfer of information and knowledge between the different teams in the function and the Group, adapting the frequency, formats and recipients according to the objective set, making it easier to establish the basic principles of the risk function. Thus the culture of risks and the prudent management model begin with the corporate bodies and the Group’s management and are transmitted across the whole organization.

A well-defined and implemented system of training ensures the continuous improvement of the skills and knowledge of the Group’s professionals, and in particular those in the GRM area. It is organized into four vectors that aim to develop each of the requirements of the GRM group by providing in-depth knowledge and skills in various subjects, such as: finance and risks, tools and technology, management and expertise, and languages.

3.2. Credit and counterparty 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 financial loss for the other party. This includes management of counterparty risk, issuer credit risk, liquidation risk and country risk.

For managing risks and capital, BBVA quantifies its credit risk using two main metrics: expected loss (EL) and economic capital (EC). The expected loss reflects the average value of losses and is considered a business cost. Economic capital is the amount of capital considered necessary to cover unexpected losses if actual losses are greater than expected losses.

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These risk metrics are combined with information on profitability in value-based management, thus building the profitability-risk binomial into decision-making, from the definition of business strategy to approval of individual loans, price setting, assessment of non-performing portfolios, incentives to areas in the Group, etc.

There are three essential parameters in the process of calculating the EL and EC measurements: the probability of default (PD), loss given default (LGD) and exposure at default (EAD). These are generally estimated using historical information available in the systems. They are assigned to operations and customers according to their characteristics.

In this context, the credit rating tools (ratings and scorings) assess the risk in each transaction/customer according to their credit quality by assigning them a score. transaction seasoning, loan to value ratio, customer segment, etc.

Section 3 of this document details the definitions, methods and data used by the Group to determine the capital requirements for estimating and validating the parameters of probability of default (PD), loss given default (LGD) and exposure at default (EAD).

The credit risk for the BBVA Group’s global portfolio is measured through a Portfolio Model that includes the effects of concentration and diversification. The aim is to study the loan book as a whole, and to analyze and capture the effect of the interrelations between the different portfolios.

In addition to enabling a more comprehensive calculation of economic capital needs, this model is a key tool for credit risk management, as it establishes loan limits based on the contribution of each unit to total risk in a global, diversified setting.

The Portfolio Model considers that risk comes from various sources (it is a multi-factor model). This feature implies that economic capital is sensitive to geographic diversification, a crucial aspect in a global entity like BBVA.

These effects have been made more apparent against the current backdrop in which, despite the stress undergone by some economies, the BBVA Group’s presence in different geographical areas, subject to different shocks and different moments in the cycle, have contributed to bolster the bank’s solvency. In addition, the tool is sensitive to concentration in certain credit exposures of the entity’s large clients.

Lastly, the results of the Portfolio Model are integrated into management within the framework of the Asset Allocation project, where business concentrations are analyzed in order to establish the entity’s risk profile.

The analysis of the entity’s RWA structure shows that 88% corresponds to Credit Risk (including the surcharge for CVA).

The classification of financial assets impaired for reasons of customer default is done in an objective way and on an individual basis according to the following criterion:

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Classification of financial assets impaired for reasons other than customer default is done individually for all risks whose individual amount is significant and for which there is a reasonable doubt about their total reimbursement under the terms and conditions agreed by contract, since they show objective evidence of impairment that negatively affects the cash flows expected from a financial instrument. Objective evidence of impairment of a financial asset or group of financial assets includes observable data about the following aspects:

Write-off risks are those debt instruments whose recovery is deemed remote and should be classified as final write-offs.

3.2.2.2. Methods for determining value adjustments for impairment of assets and provisions

The impairment on financial assets is calculated by type of instrument and other circumstances that may affect it, taking into account the guarantees received by the holders of the instruments to assure (fully or partially) the performance of the transactions. The BBVA Group recognizes impairment charges directly against the impaired asset when the likelihood of recovery is deemed remote, and uses an offsetting or allowance account when it records provisions made to cover estimated losses on their full value.

The amount of the deterioration of debt instruments valued at their amortized cost is calculated by whether the impairment losses are determined individually or collectively.

3.2.2.2.1. Impairment losses determined individually

The amount of impairment losses recorded by these instruments coincides with the positive difference between their respective book values and the present values of future cash flows. These cash flows are discounted at the instrument’s 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.

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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. The estimation of future cash flows for debt instruments considers the following:

With respect to impairment losses resulting from the materialization of insolvency risk of the obligors (credit risk), a debt instrument is impaired when:

The BBVA Group has developed policies, methods and procedures to calculate the losses that it may incur as a result of its credit risks, whether attributable to the insolvency of counterparties or to country risk.

These policies, methods and procedures are applied to the arrangement, study and documentation of debt instruments, risks and contingent commitments, as well as the detection of their deterioration and in the calculation of the amounts needed to cover the estimated losses.

3.2.2.2.2. Impairment losses determined collectively

The collectively determined losses are deemed to be equivalent to the portion of losses incurred on the date that the accompanying consolidated financial statements are prepared that has yet to be allocated to specific transactions.

Through statistical procedures using its historical experience and other specific information, the Group calculates the losses that, having occurred on the date of preparation of the accompanying consolidated financial statements, will become clear individually after the date the information is presented.

Quantification of losses incurred takes into account three basic factors: exposure at default, probability of default and loss given default.

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To calculate the LGD at each date in the balance sheet, the cash flows from the sale of collateral are estimated by calculating its sale price (in the case of real-estate collateral, the reduction it may have suffered in value is taken into account) and its cost. In the event of default, the property right is acquired contractually at the end of the foreclosure process or when the assets of borrowers in difficulty are purchased, and this right is recognized in the financial statements. After the initial recognition, these assets classified as “Non-current assets held for sale” or “Inventory” (see Notes 2.2.4 and 2.2.6 to the Group’s Annual Consolidated Financial Statements) are valued by the fair value corrected for the estimated cost of their sale or their book value, whichever is lower.

3.2.2.2.3. Methods used for provisioning for contingent exposures and commitments

Non-performing contingent exposures and commitments, except for letters of credit and other guarantees, are to be provisioned for an amount equal to the estimation of the sums expected to be disbursed that are deemed to be non-recoverable, applying criteria of valuation prudence. When calculating the provisions, criteria similar to those established for non-performing assets for reasons other than customer default are applied.

In any event, letters of credit and other guarantees provided which are classified as non-performing will be covered by applying similar criteria to those set out in the preceding section on value adjustments for impairment of assets.

Likewise, the inherent loss associated with letters of credit and other guarantees provided that are in force and not impaired is covered by applying similar criteria to those set out in the preceding section on impairment losses determined collectively.

3.2.2.3. Criteria for removing or maintaining assets subject to securitization on the balance sheet

The accounting procedure for the transfer of financial assets depends on the manner in which the risks and benefits associated with securitized assets are transferred to third parties.

Financial assets are only removed from the consolidated balance sheet when the cash flows they generate have dried up or when their implicit risks and benefits have been substantially transferred out to third parties.

Group is considered to substantially transfer the risks and benefits when these account for the majority of the overall risks and benefits of the securitized assets.

When the risks and benefits of transferred assets are substantially conveyed to third parties, the financial asset transferred is removed from the consolidated balance sheet, and any right or obligation retained or created as a result of the transfer is simultaneously recognized.

In many situations, it is clear whether the entity has substantially transferred all the risks and benefits associated with the transfer of an asset or not. However, when it is not sufficiently clear if the transfer took place or not, the entity evaluates its exposure before and after the transfer by comparing the variation in the amounts and the calendar of the net cash flows of the transferred asset. Therefore, if the exposure to the variation in the current value of the net cash flows of the financial asset does not significantly change as a result of the transfer, it is understood that the entity has not substantially transferred all the risks and benefits associated with the ownership of the asset.

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When the risks and/or benefits associated with the financial asset transferred are substantially retained, the asset transferred is not removed from the consolidated balance sheet and continues to be valued according to the same criteria applied prior to the transfer.

In the specific case of securitization funds to which Group institutions transfer their loan-books, existing contractual rights other than voting rights are to be considered with a view to analyzing their possible consolidation. It is also necessary to consider the design and purpose of each fund, as well as the following factors, among others:

Evidence of the practical ability to direct the relevant activities of the funds according to the specific needs of the business (including the decisions that may arise in particular circumstances only).

Possible existence of special relationships with the funds.

The Group’s implicit or explicit commitments to back the funds.

Whether the Group has the capacity to use its power over the funds to influence the amount of the returns to which it is exposed.

Thus, there are cases where the Group is highly exposed to the existing variable returns and retains decision-making powers over the institution, either directly or through an agent. In these cases, the securitization funds are consolidated with the Group.

3.2.2.4. Criteria for the recognition of earnings in the event of the removal of assets from the balance sheet

In order for the Group to recognize the result generated on the sale of financial instruments, the sale has to involve the corresponding removal from the accounts, which requires the fulfillment of the requirements governing the substantial transfer of risks and benefits as described in the preceding point.

The result will be reflected on the income statement, being calculated as the difference between the book value and the net value received including any new additional assets obtained minus any liabilities assumed.

When the amount of the financial asset transferred matches the total amount of the original financial asset, the new financial assets, financial liabilities and liabilities for the provision of services, as appropriate, that are generated as a result of the transfer will be recorded according to their fair value.

3.2.2.5. Key hypothesis for valuing risks and benefits retained on securitized assets

The Group considers that a substantial withholding is made of the risks and benefits of securitizations when the subordinated bonds of issues are kept and/or it grants subordinated finance to the securitization funds that mean substantially retaining the credit losses expected from the loans transferred.

The Group currently has traditional securitizations only, and no synthetic securitizations.

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Pursuant to Article 5 of the Solvency Regulations, with respect to the capital requirements for credit risk, exposure is understood to be any asset item and all items included in the Group’s memorandum accounts involving credit risk and not deducted from the Group’s eligible capital. Accordingly, inclusion is made mainly of customer lending items, with their corresponding undrawn balances, letters of credit and guarantees, debt securities and capital instruments, cash and deposits in central banks and credit institutions, assets purchased or sold under a repurchase agreement (asset and liability repos), financial derivatives (nominal) and fixed assets.

Below is a presentation of the balance of the original exposure and the allowances under the advanced measurement and standardized approaches as of December 31, 2015 and 2014. In accordance with Article 444 e) of the Solvency Regulations, only the exposure net of allowances is presented for those exposures calculated under the standardized approach.

TABLE 8: Exposure to credit risk