Banco Bilbao Vizcaya Argentaria : Prudential Relevance Report (Basel Accord Pillar III) 2018

Prudential Prudential

Relevance Report Relevance Report

Pillar III 2018 Pillar III 3Q2017

The English language version of this report is a free translation from the original, which was prepared in Spanish. All possible care has been taken, to ensure that the translation is an accurate presentation of the original. However, in all matters of interpretation, views or opinion expressed in the original language version of the document in Spanish take precedence over the translation.

Contents

Contents ..................................................................................................................................................... 1

Glossary ..................................................................................................................................................... 3

Correspondence between the sections of Pillar III and the Group's Consolidated Annual Report ............ 7

Index of tables .......................................................................................................................................... 10

Index of charts .......................................................................................................................................... 14

Executive summary .................................................................................................................................. 16

Introduction ............................................................................................................................................... 19

Regulatory environment in 2018 ........................................................................................................... 19

Contents of the 2018 Prudential Relevance Report ............................................................................. 21

Composition of Capital .......................................................................................................................... 26

1. General information requirements ........................................................................................................ 30

1.1. Corporate name and differences between the consolidated group for the purposes of the

solvency regulations and accounting criteria ........................................................................................ 30

1.2. Identification of dependent institutions with capital resources below the minimum

requirement. Possible impediments to capital transfer ......................................................................... 37

1.3. Exemptions from capital requirements at the individual or sub-consolidated level ................ 37

2. Own funds and Capital ......................................................................................................................... 38

• 2.1. Characteristics of the eligible capital resources ..................................................................... 38

• 2.2. Amount of capital .................................................................................................................... 41

• 2.3. IFRS9 Transitional Arrangements .......................................................................................... 44

• 2.4. Bank risk profile ...................................................................................................................... 45

• 2.5. Breakdown of minimum capital requirements by risk type ..................................................... 47

• 2.6. Procedure employed in the internal capital adequacy assessment process ......................... 50

3. Risks ..................................................................................................................................................... 51

• 3.1. General Risk Management and Control Model ...................................................................... 52

• 3.2. Credit and counterparty risk ................................................................................................... 63

• 3.3. Market risk ............................................................................................................................ 138

• 3.4. Structural risk in the equity portfolio ..................................................................................... 155

• 3.5. Structural exchange-rate risk ............................................................................................... 159

• 3.6. Interest-Rate Risk ................................................................................................................. 160

3.7 Liquidity Risk ........................................................................................................................ 163

3.8 Operational risk .................................................................................................................... 176

4

Leverage Ratio ................................................................................................................................ 185

• 4.1. Leverage Ratio definition and composition .......................................................................... 185

• 4.2. Trends in the ratio ................................................................................................................ 187

• 4.3. Governance .......................................................................................................................... 187

  5.

  Information on remuneration ....................................................................................................... 188

• 5.1. Information on the decision-making process used to establish remuneration policy for the

Identified Staff ..................................................................................................................................... 188

• 5.2. Description of the different types of employees included in the Identified Staff ................... 192

• 5.3. Key features of the remuneration system ............................................................................ 193

• 5.4. Information on the link between the remuneration of Identified Staff and the performance of

the Group ............................................................................................................................................ 199

5.5. Description of the criteria used to take into consideration present and future risks in the

remuneration processes ..................................................................................................................... 200

5.6. Main parameters and reasons for any component of the possible variable remuneration

plans and other non-cash benefits ...................................................................................................... 201

5.7. Ratios between the fixed and variable remuneration of Identified Staff ............................... 201

5.8. Quantitative information on remuneration of the Identified Staff .......................................... 202

6. Information on the Corporate Governance system ......................................................................... 206

7. Subsequent events ......................................................................................................................... 207

Annexes .................................................................................................................................................. 208

2

Glossary

ALM (Asset - Liability Management)AMAAT1 (Additional Tier 1)Basel IIIBCBS (Basel Committee on Banking Supervision)

BIS (Bank for International Settlements)

CCF (Credit Conversion Factor)CCP (Central Counterparty Clearing House)

CDS (Credit Default Swap)CET 1 (Common Equity Tier 1)

Counterparty Credit RiskCredit RiskCRM (Credit Risk Mitigation)CRR / CRD IV

CVA (Credit Valuation Adjustment)

DLGD (Downturn Loss Given Default)

D-SIB (Domestic Systemically Important Bank)

EAD (Exposure at default)

EBA (European Banking Authority)

EC (Economic Capital)

ECAI (External Credit Assessment Institutions)

EL (Expected Loss)

Mechanism for managing structural balance-sheet risk for possible mismatch between assets and liabilities and for various factors (interest rate, exchange rate, liquidity, etc.)

Advanced method approach used by the entity for calculating the consolidated capital requirements by operational risk

Additional Tier 1 capital consists of hybrid instruments, basically CoCos and preferred securities

Set of proposals for reforming banking regulation, published starting December 16, 2010 and to be implemented in a phased approach

An international forum for cooperation in banking supervision, whose mission is to enhance the quality of banking supervision at global level

An independent international organization that promotes international financial and monetary cooperation and acts as a bank for central banks

The ratio between the actual amount available for a commitment that could be used and therefore, would be outstanding at the time of default, and the actual amount available for the commitment

Entity which stands between the counterparty entities, acting as a buyer against the sellers and as a seller against the buyers

A financial derivative between a Beneficiary and Guarantor by which the Beneficiary pays the Guarantor a premium in exchange for receiving protection in the case of credit events for a determined period of time

The entity's highest-quality capital

This is a risk that arises from the possibility of losses derived from positions in derivatives and repos

This is a risk arising from the possibility that one party to a financial instrument contract will fail to meet its contractual obligations for reasons of insolvency or inability to pay, and cause a financial loss for the other party

A technique used to reduce the credit risk associated with one or more of the entity's current exposures

Solvency Regulation on prudential requirements of credit institutions and investment firms (Regulation EU 575/2013)

Value Adjustments for counterparty credit risk

Loss given default at a period of stress in the economic cycle

Other systemically important institutions (O-SIIs)

Maximum loss at the counterparty's time of default

Independent institution responsible for promoting the stability of the financial system, the transparency of markets and financial products, and protecting depositors and investors

The amount of capital considered necessary to cover unexpected losses if actual losses are greater than expected losses

The external credit assessment institution designated by the entityRatio between the amount that is expected the amount that is expected to be lost in an exposure, due to potential default by a counterparty or dilution over a one-year period, and the amount outstanding at the time of default

FSB (Financial Stability Board)FTD (First to default)

GRM

GRMC

G-SIBs (Global Systemically Important Banks)

IAA (Internal Assessment Approach)ICAAP (Internal Capital Adequacy Assessment Process)

ILAAP (Internal Liquidity Adequacy Assessment Process)

IMA (Internal Model Approach)IMM (Internal Model Method)IRB (Internal Rating-Based approach)IRC (Incremental Risk Capital)LCRLDA (Loss Distribution Approach)

LDP

LGD (Loss Given Default)

LGD BE (Loss Given Default Best Estimate)

Liquidity RiskLMUs (Liquidity Management Units)LR (Leverage Ratio)LRLGD

LtSCD (Loan to Stable Customer Deposits)

An international body that aims to increase the efficiency and stability of the international financial sector, supervising it and making recommendations

Derivative in which the two parties negotiate protection against the first default of any of the entities in the basket

Global Risk Management

Global Risk Management Committee

Financial institutions that due to their large size, importance in the market and connection to each other, could trigger a serious crisis in the international financial system if they face economic problems

Method of internal assessment used for the calculation of securitisation exposures in the investment portfolio

Internal Capital Adequacy Assessment ProcessInternal Liquidity Adequacy Assessment ProcessApproach that uses internal models to calculate the exposure originated by market risk

Internal model method used to calculate exposure originated by counterparty risk

Internal model method used to calculate exposure originated by credit risk. This method may be broken down into two types: FIRB (Foundation IRB) and AIRB (Advanced IRB)

Change applied to the exposure by market risk calculated using the internal method that quantifies the risk not captured by the VaR model, specifically in migration and default events

Liquidity coverage ratio

Aggregate Loss Distribution Model: this methodology estimates the distribution of losses by operational event by convoluting the frequency distribution and the loss given default distribution of these events

Low Default Portfolios

Loss in the event of default

Loss in the "current" default portfolio

The risk of an entity finding it difficult to meet its payment commitments fully and in due time; or when to meet them it has to resort to finance under burdensome terms which may harm the bank's image or reputation

These are financial self-sufficient entities in BBVA Group created with the aim of preventing and limiting liquidity risk, and avoiding possible contagion from a crisis affecting only one or more of these entities

This measurement estimates the relative amount of assets, off-balance-sheet obligations and contingent obligations to be paid, delivered or guaranteed, including an entity's obligations derived from finance received, commitments acquired, derivatives contracts or repurchase agreements, but excluding the obligations that may only be executed during the entity's liquidation, which are financed with TIER 1 capital

Long-Run Loss Given Default

A ratio that measures the relation between net lending and stable customer deposits

Market Risk

This is a risk due the possibility that there may be losses in the value of positions held due to movements in the market variables that affect the