CaixaBank

The following risk factors had a significant influence on the Group's management in 2019, due to their impact during the year and their long-term implications for the Group:

1 Macroeconomic environment

Global economy

In 2019, the global economy has faced a considerable surge in uncertainty due to economic and geopolitical factors which, to a great extent, were already in operation in 2018. In terms of the economy, firstly, the doubts cast surrounding the speed and risks entailing the slowdown of the Chinese economy have featured prominently. Up to now, this slowdown has been gradual and the authorities still have mechanisms to temper its intensity. However, there are still concerns regarding the imbalances afflicting Spain. Similarly, the economic downturn experienced by the main developed economies results in a second factor burdening growth. This dynamic comes, on one hand, from the maturity of the economic cycle and, on the other hand, from idiosyncratic factors belonging to each country. Thus, in the US, the gradual fading of the boost from tax measures implemented at the end of 2017 and the start of 2018 is beginning to show in the economy. In the Eurozone, the manufacturing sector, and in particular the automobile sector, continues to undergo complicated circumstances.

The US's protectionist swing, which has remained active throughout 2019, has featured notably on the geopolitical front. Similarly, there has been a slight rise in tensions between the US and the European Union (EU) after the World Trade Organization's ruling in favour of the US with regard to a case of public aid granted to Airbus by the EU, which has enabled the US to impose tariffs on a range of European products. Nonetheless, it is worth stating that at the end of the year a trade agreement between the US and China now looks more likely, although only following a tough and lengthy negotiation phase that is bound to generate uncertainty until an agreement is hammered out.

These risk sources are reflected in the behaviour of the financial markets which, after the strong juncture of volatility experienced at the end of 2018, showed new aversion to risk in the summer, when the stock exchanges of the main developed economies fell due to poor financial data and to the worsening of commercial activity between the US and China. In such a context, and faced with the outlook of a more accommodative monetary policy that is sensitive to risk balance worsening, the interest rates of sovereign bonds fell significantly (to all-time lows in the case of Europe).

Eurozone

The Eurozone's risk context has been marked by geopolitical factors, mainly linked to the difficulties of reaching an agreement for the United Kingdom's withdrawal. These political uncertainties come in addition to the economic downturn that began in 2018, which has been exacerbated in 2019, partly due to the aforementioned plight suffered by the manufacturing sector and the automobile sector, in particular. Thus, after growing 1.9% in 2018, it is estimated that the sector will have only grown 1.1% in 2019 and that it will maintain a similar pace in 2020.

In the face of this context of a downturn in macroeconomic conditions, the main central banks have repositioned their monetary policies. Thus, given that inflationary pressures are relatively contained within the US, and faced with the outlook of an economic downturn, the Federal Reserve cut rates three times throughout 2019 and, furthermore, in order to stall possible cash-flow problems on the market, initiated new bond purchases. The ECB launched a new stimulus package in September 2019, with a 10-bp reduction in the deposit rate (supplemented by a tiering system), new bond purchases (EUR 20 billion a month), lower interest rates for TLTROs (operations offering long-term financing to the financial sector) and it was stated that the stimulus will continue until inflation approaches its target. Although the measures are of a lower magnitude than those of the past, they emphasise that the environment of low rates will be extended for a long period of time.

Spain

In 2019, the Spanish economy's growth rate has maintained the trend it began in 2018, and continues along a slight reduction (although it remains above the Eurozone's average rate of growth). Thus, Spain's economy has grown 2.0% in 2019 and GDP is expected to rise by 1.5% in 2020. The reason for this slowdown is, on one hand, the aforementioned decline in the international outlook, which has effected the performance of external demand, and, on the other hand, lower growth of domestic demand, as a result of the behaviour of consumers who are warier about the macroeconomic outlook. Similarly, public finances have continued to improve: the public deficit stood at 2.5% of GDP in 2018, a drop of half a point in a year, which brought Spain out of its excessive deficit situation, with the forecast further 2-tenth reduction for cyclical effects this year. However, public debt remains at high levels, close to 100% of the GDP. As this is an overview, it is worth stating that the downside risks surrounding the macroeconomic scenario are not insignificant. Those present in the international setting – such as the trade disputes between the US and China, and the UK's withdrawal process from the EU – feature most prominently. In Spain, the formation of a new coalition government after a year dominated by election dates represents a factor of stability.

Portugal

The Portuguese economy has slowed down to a certain extent due to reduced internal demand, in such a way that the growth rate for the whole of 2019 was 1.9%, slightly lower than in 2018 (2.4%). Nonetheless, the overall assessment of the Portuguese financial situation remains positive: the public accounts continue to improve, the job market is prospering, and consumer confidence remains at high levels. The good performance of the economy is reflected in the country's risk premium, which has fallen significantly in 2019. As regards the political arena, the Socialist Party won the elections on 6 October 2019 without reaching an absolute majority. It is expected that economic policy will be a continuation of the previous administration, and thus that public accounts will continue to improve. With this undercurrent, the strong growth rate shown by the real estate market is a source of concern. Although most indicators forecast a gradual moderation, given the importance of non-residents for the sector, the possibility of a sharper correction in the event that the declining international environment generates a risk aversion juncture entailing a withdrawal of foreign investment should not be ruled out.

¹Royal Decree 309/2019, of 26 April, which partially enacts Act 5/2019, of 15 March, which governs real estate credit contracts and adopts other financial measures, and Order ECE/482/2019, of 26 April, which amends Order EHA/1718/2010, of 11 June, which governs and controls the advertising of banking services and products, and Order EHA/2899/2011, of 28 October, on the transparency of banking services and customer protection.

²The initials refer to the Capital Requirements Regulation and Directive (CRR/CRD), the Bank Recovery and Resolution Directive (BRRD), and the Single Resolution Mechanism Regulation (SRMR).

2 Regulatory changes

The regulatory outline on which the Group's business model lies is crucial to its development, whether in terms of methodological or management processes. Thus, regulatory analysis represents a key point in the Group's agenda.

The main developments and enquiries open in the field of risks during 2019 are shown below:

On 21 February 2019 the Congress of Deputies approved the Property Credit Contract Regulatory Act (Ley 5/2019 reguladora de los contratos de crédito inmobiliario – LCI), reducing the expenses associated with changes in mortgage contracts and establishing measures to improve transparency in the conditions. Thus, the process of transposing the Directive 2014/17/EU of the European Parliament and of the Council closed of 4 February 2014. Similarly, on 26 April the Ministry of Economy and Business completed the CLI with the approval of a Royal Decree and a Ministerial Order¹ developing aspects as the transparency of information; calculating the financial loss and reference indexes and rates to apply; the training and skills requirements of commercial staff; and the criteria applicable to related marketing.

CaixaBank – in due time and in a suitable manner – has fulfilled the appropriate measures, carrying out necessary adjustments to internal procedures and standards, and suitably training personnel in order to ensure the correct marketing of the products affected under the standard (see section 3.2.3. Risk Culture). .

Approval and publication in the Official Journal of the European Union (OJ) of the “Proposal of CRDV Package”: once the trilogue was completed during first few months of the year, the review started in November 2016 by the European Commission of the “banking package” that covers the texts CRD V, CRR II, BRRD II and SRMR II was approved on 16 April in the plenary session of the European Parliament². The review basically transposes the standards agreed by the Basel Committee on Banking Supervision (prior to the 2017 agreement on the completion of Basel III, the adaptation of which has begun to be addressed as of the second half of 2019). This legislative package entered into force on 27 June 2019, with December 2020 as the deadline for Spain to transpose the directives, whilst the majority of changes included in the CRR II are applicable from June 2021 (December 2020 in the case of the SRMR II).

Brexit, Contingency Action Plan : the Agreement on the Withdrawal of the United Kingdom from the European Union, of 24 January 2020, entered into force on 1 February 2020. The treaty established a transition period until 31 December 2020, during which EU legislation will still be applied in the United Kingdom and allowing activities to continue with this country as they have until now. Furthermore, the European Banking Association (EBA), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have agreed to a memorandum of understanding (MoU) establishing the bases in terms of cooperation and exchange of information between EU authorities and the United Kingdom.

In the context of the Action Plan to reduce NPLs by the European Council, on 19 June the EBA launched the consultation process on its draft Guidelines on loan origination and monitoring regarding the granting, monitoring and internal governance of loans, focusing on aspects such as transparency and borrower affordability assessment. The main goal of the guidelines, which is, in principle, due to come into force in June 2020, is to ensure that institutions have robust and prudent standards for credit risk taking, management and monitoring, and that newly originated loans are of high credit quality, ensuring the possibility of loans becoming non-performing in the future is reduced, while respecting consumers' rights.

In the interest of maintaining the best standards of the market and consumer protection, CaixaBank has played a special role in analysing the implications of the guidelines subject to consultation and anticipation of the final provision of the standard.

On 22 August the ECB published a statement in which it updated its supervisory forecast regarding prudential provisions due to the new non-performing exposures (NPEs). The supervisor has adapted its Pillar 2 expectations for certain exposures converted into NPEs starting from 1 April 2018, aligning them on the calendar with the Pillar 1 requirement recently added to the CRR as regards minimum coverage for these NPEs (known as the prudential backstop).

The Group, aligned with the aim of reducing the current and future accumulation of doubtful positions, has carried out various initiatives, such as the sale of non-productive assets, as well as activities with the aim of improving the early NPL admission and management processes in order to reduce entries and adapt RAF metrics to ensure a comfortable compliance with regulatory requirements.

EBA response, on 5 August and 4 December, to the European Commission's Call of Advice on the assessment of the implementation of the finalisation of Basel III reforms by the Basel Committee on Banking Supervision. Both reports set out policy recommendations: in the fields of credit risk, operational and output floor in the first, and the Fundamental Review of the Trading Book (FRTB), the credit valuation adjustment (CVA) risk framework and an assessment of the macroeconomic impact, in the second. They notably feature, for example, the EBA's negative stance vis-a-vis the maintenance of European specifics as the factor for supporting SMEs in credit risk, and CVA scope exclusions in the field of counterparty credit risk; they are in favour of the implementation –without alterations– of the Basel Committee's proposal.

On 10 October the European Commission began the reference period, the result of which – together with the EBA's response to the Call of Advice – will be considered in the process of transposition to European standards.

CaixaBank maintains an active role, both internally and externally, in the debate on the standard, carrying out successive exercises on assessment and contrasting of reasonableness in congruence with the implications and demands of other regulatory deployments.

3 Strategic events

Strategic Events are the most relevant adverse occurrences that may represent a medium-term threat to the CaixaBank Group. Only events that the entity is exposed to due to causes that are external to its strategy are considered, even if the severity of their impact can be mitigated through management.

In order to be able to anticipate and manage their effects, in this sense, the following most relevant strategic events identified in this financial year are listed below:

Uncertainties in relation to the geopolitical and macroeconomic environment

Economic perspectives point to a gentle deceleration of economic growth in forthcoming years in Spain, but the loss of trust or the emergence or aggravation of geopolitical events could cause a stronger slowdown than expected. Among other effects, this scenario would lead to diminished demand for loans and advances and the deterioration of credit quality.

Mitigating factors: an event of this nature could have a relevant financial impact. In this regard, the Group understands that such risks are sufficiently managed by its levels of capital and liquidity, validated by compliance with both external and internal stress exercises, and reported in the annual internal capital and liquidity adequacy assessment processes.

Persistence of an environment of low interest rates

Although market expectations suggest the very gradual recovery of interest rates in the years to come, we cannot rule out the possibility that the current environment of ultra-low rates may go on for longer than expected, and that they may even decrease further.

Mitigating factors: the effects of an environment of persistently low interest rates could result in the materialisation of the structural interest rate risk and the business risk. The Group manages and controls both risks by continually monitoring compliance with the budget, measuring the impact on the economic value of the balance sheet and on the financial margin, according to generally accepted methodologies within the industry, and through the permanent analysis of the offer of new products and services that are betters suited to this environment from a perspective of balancing returns and risk.

New competitors with the possibility to disrupt

There is an expectation that the competence of newcomers will increase, such as Fintechs, Agile Banks, Global Asset Managers and Bigtechs with the potential to disrupt in terms of competence or services. This could lead to the disaggregation and disintermediation of the chain of value, which in turn would lead to an impact on margins and crossed sales, given that we would be competing with more agile, flexible companies with very light cost structures. All of this could be worsened if the regulatory requirements applicable to these new competitors were not the same as those in place for current credit institutions.

Mitigating factors: the Group considers new entrants a threat, whilst also seeing an opportunity for collaboration, learning and stimulus to meet the objectives of digitalisation and business transformation established in the Strategic Plan. The Group periodically monitors the main newcomers and the BigTech movements within the industry. The Group also has Imagin as a first-rate value proposal that it will continue to leverage. With respect to the competition from Bigtechs, the Group is committed to improving the customer experience with the added value resulting from its social sensitivity (bits and trust), whilst suggesting potential collaboration approaches (open banking).

Cybersecurity

The volume and severity of cybersecurity events increased in 2019. In parallel, regulators and supervisors have escalated the priority of this field.

Mitigating factors: the Group is also well aware of the importance and extent of the existing threat, and thus is constantly reviews the technological environment and applications: in its aspects of integrity and confidentiality of information, as well as the availability of systems and business continuity, both with planned reviews and continuous auditing by monitoring the defined risk indicators. Furthermore, the Group is conducting the analyses needed to adapt its security protocols to new challenges, and has defined a new strategic plan for information security, so that it can remain on the cutting edge of information protection in accordance with the best market standards.

Risks related to climate change

Conceptually, the risks associated with climate change are classified as physical risks and transitional risks. The former emerge as a result of climatic and geological events and changes in the balance of ecosystems, and can be gradual or abrupt. They can entail physical damage to assets (infrastructures, properties), disruptions in production or supply and/or changes in the productivity of economic activities (agriculture, energy production). Meanwhile, transitional risks are associated with the fight against climate change and the transition towards a low-carbon economy. They include factors such as regulatory changes, the development of alternative energy-efficient technologies, changes in market preferences or reputational factors associated to activities with a high impact.

Mitigating factors: CaixaBank actively manages environmental risks and those associated to climate through the different lines of activity of its Road Map, including:

Implementing an Environmental Risk Management Policy.
Defining and deploying environmental and climate change governance to supervise fulfilment of the Group's objectives.
Risk Metrics, ensuring that they comply with the risk appetite defined, applicable regulations and stakeholder expectations.
External Reporting in accordance with applicable regulations and best practices.
Communication that effectively and transparently provides the information required by stakeholders on this matter.
Taxonomy: structure and categorise customers, products and services from an environmental and climate change perspective, in accordance with global standards and regulatory requirements currently being developed.
Business opportunities: ensure that CaixaBank capitalises on current and future business opportunities relating to sustainable funding/investment under the framework of the Environmental Strategy, including the issuance of sustainable and/or green bonds.

Specifically, in relation to modelling physical and transitional risks, since mid-2019, CaixaBank has participated in the second pilot project of UNEP FI to implement the recommendations of the TCFD (Taskforce on Climate-related Financial Disclosures) in the banking sector (TCFD Banking Pilot Phase II) with a focus on developing methodologies and tools to analyse physical and transitional climate-related risk scenarios.

Pressure from the legal, regulatory or supervisory environment.

The risk of increased pressure from the legal, regulatory or supervisory environment are some of the risks identified in the risk self-assessment that could entail a higher impact in the short-medium term. Specifically, we have observed a need to continually monitor new legislative proposals and changes to regulations in force, given the high activity of legislators and regulators in the financial sector; there is a greater concern to minimise errors in the consulting processes regarding different legal issues and regulatory interpretation; reducing the lawsuit management shortcomings; and improving the management of the requirements of regulators/supervisors and of the penalty proceedings that may be brought.

Greater concern is also placed on personal data privacy and protection and in compliance with regulations and standards related to activities carried out by employees or agents that may harm the interests and rights of our customers.

Mitigating factors: As part of the risks of the Group Taxonomy, its management and control is regularly monitored. Following on from this, the monitoring indicators of its risk appetite have also been improved by the management and governance bodies.

The main features of the Group’s risk management and control framework are described below to provide a comprehensive overview thereof:

3.2.1Governance and organisation

The organisational diagram in relation to the governance of the Group's risk management is displayed below:

Directors

The Board of Directors is the highest decision making body, except for matters reserved for the annual General Meeting. The Board of Directors sets and monitors the business model and strategy, monitors the result of the Risk Assessment proces, establishes the Corporate Risk Taxonomy and the Risk Appetite Framework, and is in charge of internal governance policies and risk management and control, supervising the organisation of the Group to implement and monitor these.

Board steering committee meeting with greater frequency than the Board itself. All the competencies of the Board that can be delegated are delegated thereto.

Advises the BoD on the strategy and overall risk appetite, informs on the RAF and proposes to the Board risk policies.

Monitor the internal control, the internal audit and risk management systems. Monitor the process of preparing and presenting financial information.

Informs the BoD of the appointment, assessment of competences, knowledge and experience of the members of the BoD and of the key management personnel. It monitors the actions of the Group with regard to CSR.

Establishes the general principles and governance framework of the BoD remuneration policy and for senior executives, and reports on the general remuneration policy.

Assists the BoD on all matters related to technological innovation and digital transformation, and in monitoring and analysing trends and innovations when they may affect the strategy and business model.

Senior Management^*

Within the Management Committee, the Chief Risk is ultimately resposible for the Group's risks, with full access to the governing bodies.

ALCO "Assets and Liabilities Committee"
Regulation Committee
Business Committee
Group Internal Control Body
Recovery and Resolution Plan Committee
Information Management and data Quality Committee
Efficiency Committee
Transparency Committee
Corporate responsibility and Reputation Committee
Environmental Risk Committee

Has powers to approve asset operations, in compliance with the powers granted by the BoD.

Under the presidency of the Corporate Risk Management Fun (CRMF), the Global risk Committee comprehensively manages, controls and monitors the risks included in the Group's Corporate Risks Catalogue, together with their implications for capital adequacy management and capital consumption.

Risk Policy Committee
Global Default and Recovery Committee
Operational Risk Committee
Models Committee
Impairment Committee

^* Acting within the framework of the assigned duties it comprises several committees for risk governance, management and control.

N.B. Not all committees ar shown.

The Chief Risks Officer (CRO) is a member of the Management Committee, and is the person ultimately responsible for coordinating the management, monitoring and control of the Group's risks. The CRO operates independently of the business areas and has full access to the Governing Bodies of the Group.

One of the General Management's most important missions, in collaboration with other areas of the Group, is to head up the process of implementing instruments across the entire branch network to ensure integral risk management, the ultimate aim being to attain a balance between the risks assumed and the expected returns.

The Corporate Risk Management Function, as the element responsible for the development and implementation of the risk management and control framework and the second line of defence (see Note 3.2.4.), acts independently of the risk-taking areas and has direct access to the Group’s Governing Bodies, especially the Risk Committee, reporting regularly to its members on the status of the Group’s risk profile and any expected changes thereof.

3.2.2Strategic risk management system

The Group has a strategic risk management system in place to identify, measure, monitor, control and report risks that is based on the following processes:

Risk Assessment

The Group conducts a risk self-assessment process every six months, seeking to:

Identify, assess, classify and internally report significant changes in inherent risks assumed in its environment and business model.
Make a self-assessment of its risk management, control and governance capacity, as a tool to help detect best practices and weaknesses in relation to risks.

The result of this self-assessment is reported at least annually, first to the Global Risk Committee and then to the Risk Committee, before finally being submitted to the Board of Directors for approval.

The Risk Assessment is one of the main sources for identifying strategic events (see note 3.1. Environment and risk factors) .

Corporate Risk Taxonomy

The Group has a Corporate Risk Taxonomy that facilitates the internal and external monitoring and reporting of risks:

Business

Obtaining results below market expectations or Group targets that, ultimately, prevent the company from reaching a level of sustainable retuns that exceeds the cost of capital.
Eligible own funds/Capital adequacy

Risk caused by a restriction of the CaixaBank Group's ability to adapt its level of capital to regulatory requirements or to a change in its risk profile.
Liquidity and funding

Risk of insufficient liquid assets or limited access to market financing to meet contractual maturities of liabilities, regulatory requirements, or the investment needs of the Group.

Credit

Risk of a decrease in the value of the CaixaBank Group's assets due to uncertainty about a customer's or counterparty's ability to meer its obligations to the Group.
Impairment of other assets

Reduction of the carrying amount of shareholdings and non-financial assets (tangible, intangible, tax assets and other assets) of the CaixaBank Group.
Market

The value decrease of the assets or value increase of the liabilities included in the trading portfolio, due to fluctuations in rates, exchange rates, credit spreads, external factors or prices on the markets where those assets/liabilities are traded.
Structural rates

Negative impact on the economic value of the balance sheet's items or on the financial margin due to changes in the temporary structure of interest rates and its impact on asset and liability intruments and those outside of the Group's balance sheet not recorded financial assets held for trading.
Actuarial

Risk of a loss or adverse change to the value of the commitments assumed through insurance or pension contracts with custumers or employees due to the differences between the estimate for the actuarial variables used in the tariff model and reserves and the actual performance of these.

Legal/Regulatory

The potential loss or decrease in the profitability of the CaixaBank Group as a result of changes in the legislation, of the incorrect management of court or administrative injunctions, or of the claims or complaints received.
Conducto

The application of conduct criteria that run contrary to the interests of customers and stakeholders, or acts or omissions that are not compliant with the legal or regulatory framework, or with internal codes and rules, or with codes of conduct and ethical and good practice standards.
Technological

Risk of losses due to hardware or software inadequacies or failures in technical infrastructure, due to cyberattacks or other circumstances, that could compromise the availability, integrity, accessibility an security of the infrastructures and data.
Other operational risks

Losses or damages caused by errors or faults in processes, due to external events, or actions of third parties outside the Group, whether accidentally or intentionally. It includes, among other, risk factors related to outsourcing, the use of quantitative models, the custody of securities or external fraud.
Reliability of financial information

Deficiencies in the accuracy, integrity and criteria of the process used when preparing the data necessary to evaluate the financial and equity position of the CaixaBank Group.
Reputational

The possibility that the CaixaBank Group's competitive edge could be blunted by loss of trust by some of its stakeholders, based on their assessment of real or purported actions or omissions carried out by the Group, its Senior Management or Governing Bodies, or due to the bankruptcy of related unconsolidated entities (step-in risk)

The Corporate Risk Taxonomy is subject to ongoing review, particularly on risks of a material impact. The taxonomy is reported at least annually, first to the Global Risk Committee and then to the Risk Committee, before finally being submitted to the Board of Directors for approval.

Risk Appetite Framework

The Risk Appetite Framework (RAF) is a comprehensive and forward-looking tool used by the Board of Directors to determine the types and thresholds of risk it is willing to assume in achieving the Group's strategic objectives. These goals are not only displayed through risk tolerance levels but the RAF also considers minimum risk appetite statements, such as the tax risk monitoring under legal risk covered in the Corporate Risk Taxonomy. The RAF therefore sets the risk appetite for the Bank's activities.

Body in change		Equivalence in Risk Taxonomía	Board of Directors (advised by the Risk Committee) Statements and primary metrics LEVEL 1	Global Risk Committee Metrics developing and supplementing LEVEL 1 metrics LEVEL 2	Risk management/control areas Management mechanisms LEVEL 3
Priority dimensions	Loss buffer The objective is to maintain a medium-low risk profile and a comfortable capital adecuacy, to strengthen customers' trust through financial solicity.	Business profitability Eligible own funds / Capital adequacy Credit Impairment of other assets Market Structural rates Actuarial	Profitability Ratios Regulatory solvency ratios Calculations using advanced models and methodologies Accounting figures (cost of risk and NPL ratio)	Detailed metrics deriving from the factorial decomposition of LEVEL 1 metrics or from a greater breakdown. They also include more complex and specialised risk measurement parameters	Training and communication Methodologies used to measure risk and assess assets and liabilities (monitoring th RAF) Limits, policies and powers Incentives and appointments Tools and processes
	Funding and liquidity Certainty of its capability to comply with its financing obligations and needs, under adverser market conditions, through stable and diversified financing.	Liquideity and funding	Regulatory and internal liquicity metrics that oversee the upholding of comfortable liquicity levels
	Business composition Leader in retail banking and generation of revenue and capital in balance and diversified manner.	Credit	Indicators that encourage diversification (e.g. by borrower, sector) and minimise exposure to non-strategic assets
	Franchise Activity with high standards of ethics and governance, fostering sustainability, action and operational excellence.	Legal and regulatory Conduct Technological Other operational risks Reliability of financial information Reputational	Quantitative metrics on non-financial risks (i.e. reputational, operational) Metrics of number of complying incidents
			Alert System Reports Monthly to the Global Risk Committee Green Tolerance The Global Risk Committee fosters an action plan and draws up a schedule Non-compliance If a previous plan existed, explanation of why the corrective measures have not worked and definition of a proposal of action taken for the approval of the Risk Committee Recovery Plan Governance process of the Recovery Plan to reduce the possibility of bankruptcy Quarterly to the Risk Committee Trend of metrics and LEVEL 1 projection Status of non-complicance and action plans Half-yearly to the Board of Directors Trend of metrics and LEVEL 1 protection Status of non-compliance and action plans	Alert System Reports Through threshold benchmarks

Risk planning

The Group has institutional processes in place for assessing – from a risk viewpoint – changes to the balance sheet (current, future and hypothetical) in stress scenarios. The Group plans the expected performance of the different factors and ratios that define the future risk profile, as part of the current Strategic Plan, the compliance of which is regularly monitored.

Additionally, changes in this profile are evaluated for potential stress scenarios, in both internal and regulatory tests (ICAAP, ILAAP, EBA stress tests). In this way, the management team and governing bodies are provided with an overview of the Group’s resilience in the face of internal and/or external events.

3.2.3Risk Culture

1 General risk management principles

The general principles guiding risk management in the Group can be summarised as follows:

Risk is inherent to the Group’s business.
Risk is the ultimate responsibility of the Board of Directors.
Risk is the ultimate responsibility of the Board of Directors.
Management throughout the full cycle of transactions.
Joint decision-making, with an authorisation system always requiring approval by two employees.
Independence of business and operating units.
Approval based on the borrower’s repayment ability and an appropriate return.
The use of standard criteria and tools.
Decentralised decision-making.
Use of advanced techniques.
Allocation of appropriate reserves.
Ongoing training and development of responsibilities.

2 Training

In the area of Risks, Senior Management defines the content of all training for functions supporting the Board/Senior Management covering specific matters that help high-level decision-making, as well as the rest of the organisation's functions, especially as regards branch network personnel. This is carried out to ensure: communication of the RAF throughout the whole organisation; the decentralisation of decision-making; the updating of risk analysis competencies; and optimisation of risk quality.

The Group structures its training programme through the Risk School. It sees training as a strategic tool to provide support to business areas, whilst providing a conduit for disseminating the Group's risk policies, providing training, information and tools for all of the personnel. This proposal comprises a training circuit for specialising in risk management. This is linked to the professional development of the entire workforce from Retail Banking staff through to specialists in any field.

The figures for the Group's main training initiatives in the field of promoting risk culture are as follows:

Risk culture and training:

Course	Title	Group trained	Nº of individuals year
Basic Banking Risk course (fourth edition)	Basic level university qualification	Generalist managers and staff from the business network of branches and other stakeholders who may need a basic knowledge of the organisation’s risk management criteria to carry out their work	272
Postgraduate diploma in Banking Risk Analysis (seventh edition)	University diploma	Business network branch deputy managers and managers and other stakeholders who, given their role, may be involved in approving loans or may require in-depth knowledge of risk	318
Specialist training in risks for AgroBank branches (first edition)	Speciality	Employees that make up the AgroBank branch network	1.957
Specialist training in risks for BusinessBank branches (first edition)	Speciality	Employees that make up the BusinessBank branch network	277
Specialist training in risks for Private Banking branches (first edition)	Speciality	Employees that make up the Private Banking network	552
New training in Property Credit Contract Act 5/2019 (first and second edition)	University qualification	A refresher course on the new act 5/2019 intended for employees that comprise the Retail, Business and Risk network	9,842

3 Communication

Promoting the corporate risk culture is a key element for maintaining a robust and coherent framework in line with the Group's risk profile. The corporate risk intranet is a particularly relevant tool in this regard, providing a dynamic environment for directly communicating key updates in the risk environment. It is notable for its content on news, institutional information, sector information and training.

4 Performance assessment and remuneration

As described in the RAF section, the Group works to ensure that the motivation of its employees is consistent with its risk culture and compliance with the levels of risk that the Board is prepared to take on.

Along these lines, there are compensation schemes directly linked to the annual progress of the RAF metrics and which are specified in the Annual Remunerations Report.

3.2.4Internal Control Framework

The Group has an Internal Control Framework in accordance with: i) the EBA Guidelines on Internal Governance of 21 March 2018, implementing internal governance requirements established in Directive 2013/36/EU of the European Parliament, and ii) with other regulatory guidelines on control functions applicable to financial institutions and to the recommendations of the CNMV, providing a reasonable degree of assurance that the Group will achieve its objectives.

Additionally, CaixaBank has completed the establishment – in the Group's interest – of general activity principles and criteria in practically all its activity fields, through the approval of the corresponding corporate policies. These policies have been forwarded to the subsidiaries that – within their scope of autonomy and responsibilities – have adapted, applied and developed them, taking into account their applicable specific regulatory field.

The guidelines for the Group's Internal Control Framework are set out in the Internal Corporate Control Policy and are structured around the "three lines of defence" model, in line with regulatory guidance and best practices in the sector:

Corporate risks	First line of defence ⁽¹⁾	Second line of defence			Third line of defence
			RMF⁽²⁾
		C	CRMF	IFC
Business	Accounting, Management Control and Capital EM				Internal audit
Eligible own funds / Capital adequacy	Accounting, Management Control and Capital EM
Funding and liquidity	Finance EM
Credit	Business GM, Risk GM, CIB and International Banking EM, NPL, Recoveries and Foreclosed Assets EM
Impairment of other assets	Intervention, Management Control and Capital EM, Legal Advice EM and Foreclosed Assets EM
Market	Finance EM
Structural rate	Finance EM
Actuarial	Insurance EM
Legal and regulatory	Legal Advice EM
Conduct	Business GM, Legal Advice EM, Finance EM and CIB and International Banking EM
Technological	Resources EM
Other operational risks	Resources EM, Business GM and CIB and International Banking EM
Reliability of financial information	Accounting, Management Control and Capital EM
Reputational	EM of Communication, Institutional Relationships, Brand and CSR and GM of Business

¹ Areas of the Management Committee are identified, as well as other specific fields in particular.

² Risk Management Function (RMF), comprising the Corporate Risk Management Function & Planning and Internal Financial Control (IFC).

C- Compliance GM - General Management EM - Executive Management

First line of defence

It comprises the business lines (risk-taking areas) and supporting functions that bring about the Group's exposure to risks during the course of its activity. They take risks and are responsible for their ongoing management. They are responsible for developing and maintaining effective controls over their businesses, and for identifying, managing and measuring, controlling, mitigating and reporting the main risks that arise throughout their activity. Among other activities, their tasks include the identification, assessment and notification of exposures, considering the bank's risk appetite, the authorised risk limits and policies, procedures and controls in place.

The manner in which the business line carries out its responsibilities must reflect the Bank's current risk culture, as defined by the Board of Directors.

These functions may be embedded in the business units and support areas. However, when a situation's complexity, intensity or need for focus require it, specific control units with greater specialism are set up to ensure that the risks are properly controlled.

Second line of defence

The functions included in the second line of defence act independently of the business units and comprise:

The establishment of risk management and control policies in coordination with the first line of defence, assessing their subsequent compliance.
The identification, measurement and monitoring of the risks (including emerging risks), contributing to the definition and implementation of risk indicators aligned with the RAF.
They coordinate the compliance and monitoring of strategic risk management processes: Risk Assessment, the Corporate Risk Taxonomy and the RAF.
Regular monitoring of the effectiveness of first line of defence indicators and second line of defence indicators, in relation to the established risk profiles.
Following up control weaknesses that are identified, as well as establishing and implementing Action Plans.
Performing independent checks on the internal models.

The activities of the second line of defence, in the same way as i) the identified weaknesses, ii) the monitoring of action plans and iii) the opinion on the adequacy of the control environment in the Group, are regularly reported to the bodies responsible for the control environment, following the established hierarchy, as well as to supervisory bodies.

(1) Reports to the Financial Accounting, Control and Capital Executive Body.

The second line of defence is organised among the Risk Management Function (RMF) and Compliance. The RMF comprises the following areas:

Corporate Risk Management Function & Planning (CRMF)

The CRMF is responsible for identifying, measuring, assessing, managing and reporting the risks under its remit, having a comprehensive view of all the Group's risks. For that purpose, all the aspects considered as relevant for exercising its responsibilities that are implemented by second line of defence functions without hierarchical dependency will be reported to the CRMF.

In addition, on matters that fall within its remit, the CRMF: i) monitors the internal organisation of the second line of defence, general plans and activities, and assessed their effectiveness; ii) oversees the appropriate scaling of the second line of defence in order to ensure effective management of its responsibilities, monitors its objectives as well as improvement projects relating to risk management and monitoring processes and systems; and iii) provides assurance to Management and Governing Bodies that risk control policies and procedures are in place in the organisation, and that they are designed correctly and applied effectively, evaluating the risk control environment. In addition, the CRMF must strengthen coordination mechanisms of Risk Management Units of the first, second and third lines of defence, as necessary.

Model Validation and Risk (MVR)

The CaixaBank Internal Validation Function is carried out by the Model Validation and Risk unit, which reports to the RMF. Its objective is to issue an independent technical report on the suitability of internal models used for internal management purposes, and/or of a regulatory nature, within the Group. Its scope of action includes reviewing the methodological aspects, the integration into management (adaptation of the use of models, among others), verifying the existence of an IT environment with sufficient data quality, and other transversal aspects (such as governance of the model or other documental aspects).

The Validation Function's activities are aligned with regulatory requirements of the various oversight mechanisms.

The findings of any Validation Function review activity are used as the basis for an overall opinion and issuance of recommendations, where necessary.

Internal Financial Control (IFC)

The Internal Financial Control department, which falls within the Executive Financial Accounting, Control and Capital department, is functionally integrated into the RMF and performs functions as the second line of defence in relation to the following risks: i) business; ii) Eligible own funds/capital adequacy; iii) impairment of other assets; and iv) the reliability of the financial information.

As regards Compliance (C)

The Office of Compliance is a function that is dependent upon the CEO and reports directly, within the scope of its activities, to Senior Management, to Governance Bodies and to supervisory bodies (Bank of Spain, ECB, Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences SEPBLAC, Treasury, CNMV and other bodies).

The Compliance supervision model is based on four main management mechanisms: i) defining and maintaining a detailed taxonomy of risks in each area of activity; ii) Annual compliance plan, where the activities for overseeing and reviewing internal procedures are determined according to their criticality; iii) monitoring gaps (control deficiencies or regulatory breaches) identified, either by the first line of defence, via the activities integrated in the Compliance Plan, or by reports from external experts, reports on the inspections of the supervisory bodies, customer complaints, etc. and improvement Action Plans, which are subject to regular monitoring; iv) reporting and scaling of the relevant information, monitoring inspections or deficiencies in the area of Compliance.

Furthermore, the Compliance function carries out advisory activities on the matters that fall under its responsibility, and carries out actions to develop and transform the Compliance “culture”. This is done by redesigning technology-based processes, through awareness-raising and communication plans conducted throughout the organisation, and through training activities, establishing a compulsory regulatory training plan which is linked to the annual bonus.

Another activity that is undertaken is to ensure that best practices in integrity and rules of conduct are followed. To do this, among other things, a confidential whistle-blowing channel is provided.

Third line of defence

In order to establish and preserve the function's independence, Internal Audit Executive Management functionally reports to the Chair of the Board of Director's Audit and Control Committee, without prejudice to the fact that it must report to the Chairman of the Board of Directors for the due compliance of duties.

Internal Audit has a rule book governing how it operates, which has been approved by the Board of Directors. It establishes that it is an independent and objective assurance and consultation function, established to add value and improve operations. Its objective is to provide reasonable assurance to Senior Management and the Governing Bodies with regard to:

The effectiveness and efficiency of internal control systems in offsetting the risks associated with the Group's activities;
Compliance with prevailing legislation, especially the requirements of Supervisors and the appropriate application of the defined RAF.
Compliance with internal policies and regulations, and alignment with best practices and uses in the sector, for adequate internal governance of the Group.
The reliability and integrity of financial and operational information, including the effectiveness of Internal Control over Financial Reporting (ICFR).

Its main supervisory functions include:

The adequacy, effectiveness and implementation of policies, regulations and procedures.
The effectiveness of controls.
Adequate measurement and monitoring of first line of defence and second line of defence indicators.
The existence and correct implementation of action plans to remedy shortcomings in controls.
The validation, monitoring and assessment of the control environment by the second line of defence.

Its functions also include: i) preparing the multi-year Annual Audit Plan based on risk assessments, which includes regulatory requirements and tasks and projects requested by Senior Management/the Management Committee and the Audit and Control Committee; ii) reporting regularly on the conclusions of the work carried out and shortcomings identified to Governing Bodies, Senior Management, external auditors, supervisors and other applicable control and management areas; and iii) adding value by preparing recommendations to address weaknesses detected in reviews and monitoring their implementation by the appropriate centres.

3.3.1Overview

Credit risk corresponds to a decrease in the value of the CaixaBank Group’s assets due to uncertainty about a customer's or counterparty’s ability to meet its obligations to the Group. It is the Group's most significant risk financial activity, based on banking and insurance marketing, treasury operations and long-term equity instruments.

The maximum credit risk exposure of the financial instruments included under the financial instruments headings on the asset side of the balance sheet, including counterparty risk, are set out below:

Maximum exposure to credit risk (Millions of euros)
	31-12-2019		31-12-2018
	Maximum exposure to credit risk	Hedging	Maximum exposure to credit risk	Hedging
Financial assets held for trading (Note 11)	1,176		1,103
Equity instruments	457		348
Debt securities	719		755
Financial assets not designated for trading compulsorily measured at fair value through profit or loss (Note 12)	427		704
Equity instruments	198		232
Debt securities	63		145
Loans and advances	166		327
Financial assets at fair value with changes in other comprehensive income (Note 13)	18,371		21,888
Equity instruments	2,407		3,565
Debt securities	15,964		18,323
Financial assets at amortised cost (Note 14)	249,408	(4,706)	248,299	(5,717)
Debt securities	17,395	(6)	17,064	(4)
Loans and advances	232,013	(4,700)	231,235	(5,713)
Central banks	6		5
Credit institutions	5,155	(2)	7,550
Customers	226,852	(4,698)	223,680	(5,713)
Trading derivatives and hedge accounting	3,854		3,906
Assets under the insurance business (Note 17)	72,683		61,688
TOTAL ACTIVE EXPOSURE	345,919	(4,706)	337,588	(5,717)
TOTAL GUARANTEES GIVEN AND CONTINGENT COMMITMENTS (*)	98,340		89,027	(355)
TOTAL	444,259	(4,706)	426,615	(6,072)

(*) The CCF (Credit Conversion Factors), for guarantees given and loan commitments, at 31 December 2019 and 2018, amount to EUR 71,818 and EUR 59,416 million.

The maximum exposure to credit risk is the gross carrying amount, except in the case of derivatives, which is the exposure value according to the mark-to-market method, which is calculated as the sum of:

Current exposure: the highest value between zero and the market value of an operation or of a portfolio of operations in a set of operations that can be offset with a counterparty that would be lost in the event of non-payment of the counterparty, assuming that none of the value of the operations will be recovered in the event of insolvency or settlement beyond the collateral received.
Potential risk: variation of the credit exposure as a consequence of the future changes of the valuations of operations that can be offset with a counterparty during the residual term until maturity.

Potential risk: variation of the credit exposure as a consequence of the future changes of the valuations of operations that can be offset with a counterparty during the residual term until maturity.

The following principles and policies support the credit risk management at the Group:

An appropriate relationship between income and the expenses borne by consumers.
An appropriate relationship between income and the expenses borne by consumers.
Pre-contractual information and information protocols that are appropriate to the personal circumstances and characteristics of each customer and operation.
An appropriate independent assessment of real estate collateral.

3.3.2Credit risk cycle

The full credit risk management cycle covers the entire life of the transaction, from feasibility studies and the approval of risks as per established criteria, to monitoring solvency and returns and, ultimately, to recovering non-performing assets. Diligent management of each of these stages is essential to successful recovery.

3.3.2.1Approval and granting

The process for admitting and approving new loans is based on the analysis of four key issues: the parties involved, the purpose of the loan, the ability to repay and the characteristics of the transaction.

The electronic-file-based power system assigns an approval level by default to employees holding a position of responsibility according to the delegation established by Management as the standards associated with their position.

The authority system is based on the study of four key parameters:

Amount

The amount applied for plus any risk already granted. The amount of the operation is defined through two alternative methods according to the sector to which the operations belong:

Product-weighted loss: based on the expected-loss calculation formula, it takes into account the risk appetite according to the nature of each product. This system is used for applications where the principal borrower is a legal person.
Nominal: it factors in the nominal amount and guarantees of risk operations. It applies to individuals.

Guarantee

The group of assets and/or funds pledged to secure fulfilment of a repayment obligation.

General Risk Policy:

Raft of policies identifying and assessing the relevant variables of each type of transaction. They mainly involve specific processing with reference to operations of a small relative amount, refinancing, person's alerts, risk monitoring activity, debt ratios and scoring diagnosis.

Term:

Term of the requested transaction, correlated with the purpose of the transaction. There are specific policies according to the type of operation and its term, which require a higher level of authority for their approval.

In order to streamline the loan approval process for individuals and self-employed workers, there is a risk approval centre that handles applications from individuals and commits to providing a response within 48 hours. In addition, applications are pre-approved in certain cases through specific channels. Furthermore, applications by legal entities are distributed on a regional level via Risk Acceptance Centres (RACs), which manage the applications within their power levels, and transfer them to specialised Central Service centres in the event the application exceeds their powers. Except those that can be approved at branch level or by the Business Area Manager, the risk of operations can only be approved when countersigned by a business manager and risk manager.

In particular, the internal organisation of Business Risk Approvals at Central Services is based on the following specialised structure, according to the type of risk and marketing channel:

Corporate Risk:

Centralises business groups with annual turnover above EUR 200 million in Corporate centres.
Project Finance:

Includes all transactions presented under the project finance scheme.
Business Risk:

Legal persons or business groups with turnover up to EUR 200 million and those with turnover over EUR 200 million not managed by Corporate centres.
Real Estate Risk:

Covers developers in any segment, regardless of turnover, and real estate investment companies.
Tourism and Agri-food Risk:

Covers all companies and business groups that operate in the tourism and food and agriculture sectors. It also includes self-employed professionals in the farming sector.
Individual Risk Approval:

Centralises the granting of loans to individuals (retail customers and self-employed professionals, the latter not including self-employed professionals in the farming sector).
Institutional Banking:

Comprises autonomous or central government institutions, town councils and local institutions in regional capitals or towns with more than 30,000 inhabitants, and members of economic groups or management groups whose representative/parent meets the aforementioned criteria.
Sovereign, Country and Financial Institution risk:

responsible for granting and managing country risk and banking risk inherent in funding transactions for the various segments.

Lastly, the Permanent Credit Committee holds the power to approve individual operations up to EUR 100 million, provided the accumulated risk with the customer is equal to or lower than EUR 150 million and, in general, it holds powers to approve operations that involve exceptions to the characteristics of those that can be approved in branches and in the RACs. In the event of exceeding the aforementioned amounts, the power of approval corresponds to the Executive Committee.

For pricing purposes, all the factors associated with the operation will be considered. In other words, costs involving structure, financing, customer historical profitability and expected loss of the operation. In addition to these costs, operations must provide a minimum contribution to economic capital requirements, which will be calculated net of tax.

Tools related to pricing and RAR (Risk-Adjusted Return) allow the highest standards to be reached in controlling the balance between risk and return, making it possible to identify the factors determining the returns of each customer more easily and, thus, to analyse customers and portfolios in accordance with their adjusted returns.

The Chief Business Officer is responsible for approving the prices of the operations. Following on from this, the determination of the prices is subject to a power system focused on obtaining minimum compensation and, additionally, on establishing margins according to different businesses.

3.3.2.2Mitigation of the risk

The Group's credit risk management profile is characterised by a prudent granting policy, at a price in keeping with the conditions of the borrower and suitable hedges/guarantees. In any case, long-term operations must have more robust guarantees due to the uncertainty deriving from the passing of time. These guarantees should never be used to substitute a lack of repayment capacity or an uncertain outcome for the operation.

For accounting purposes, effective guarantees or collateral are collateral and personal guarantees that can be demonstrated as valid as risk mitigators, according to: i) the amount of time required for their enforcement; ii) the ability to realise the guarantees; and iii) the experience in realising the same. The different types of guarantees and collateral, along with the policies and procedures in their management and assessment, are as follows:

Personal guarantees: most of these relate to risk operations with companies in which the collateral provided by the shareholders, irrespective of whether they are individuals or legal entities, is considered relevant. For individuals, collateral is estimated on the basis of asset declarations. Where the backer is a legal entity, it is analysed as the borrower for the purposes of the approval process.
Collateral: the main types of collateral accepted are:
- Guarantees pledged or set up for the solvency of holders and guarantors: they notably include the pledge of operations of liabilities or the intermediated balances. To be admitted as collateral, financial instruments must, among other requirements: i) be free of liens and charges; ii) their contractual definition must not restrict their pledge; and iii) their credit quality or change in value must not be related to the borrower. The pledge remains in place until the loan matures, it is repaid early, or it is derecognised.
- Mortgage guarantees or those affecting to specific goods: this is a real right on immovable property given as security for an obligation.

Internal policies establish the following:

The procedure for approval of guarantees and the requirements for drawing up operations, e.g. the documentation that must be supplied to the Group and the mandatory legal certainty of this documentation.
The review processes for the appraisals registered, in order to ensure proper monitoring and control of the guarantees. Regular processes are also carried out to check and confirm the appraisal values, in order to detect any anomalies in the procedures used by the valuation companies supplying the Group.
The outlay policy, mainly concerning property development and self-development operations.
The loan-to-value (LTV) of the operation. The capital to be granted in mortgage operations is limited to percentages of the value of the guarantee, which is defined as the lowest of the appraisal value and, if the transaction is a purchase, the value shown on the official deed. IT systems calculate the level of approval required for each type of transaction.
Credit derivatives: guarantors and counterparty. The Group occasionally uses credit derivatives, contracted with entities with a high credit level and protected by collateral contracts, to hedge against credit risk.

The breakdown of guarantees received in the approval of the Group's lending transactions is as follows:

Categorisation by stage of the affected guarantees and credit investment (*) (Millions of euros)
	31-12-2019			31-12-2018			01-01-2018(**)
	Gross amount	Allowances for impairment	Value of collateral	Gross amount	Allowances for impairment	Value of collateral	Gross amount	Allowances for impairment	Value of collateral
Stage 1:	201,418	(574)	288,562	194,618	(688)	290,246	191,744	(966)	317,649
Unsecured loans	85,996	(374)	0	78,459	(320)	0	75,395	(907)
Real estate collateral	108,218	(116)	281,058	110,276	(201)	284,512	107,094	(119)	301,993
Other collateral	7,204	(84)	7,504	5,883	(167)	5,734	9,255	60	15,656
Stage 2:	15,541	(708)	21,552	16,328	(741)	24,636	15,663	(589)	14,415
Unsecured loans	5,270	(378)	0	4,883	(339)	0	5,974	(445)
Real estate collateral	9,833	(249)	21,109	10,856	(302)	24,099	9,050	(130)	14,018
Other collateral	438	(81)	443	589	(100)	537	639	(14)	397
Stage 3:	8,387	(3,416)	9,929	10,733	(4,292)	15,605	13,781	(6,018)	15,456
Unsecured loans	2,257	(1,658)	0	2,614	(1,550)	0	3,630	(2,946)
Real estate collateral	5,962	(1,656)	9,831	7,897	(2,630)	15,527	9,896	(2,931)	15,352
Other collateral	168	(102)	98	222	(112)	78	255	(141)	104
Loans	225,346	(4,698)	320,043	221,679	(5,721)	330,487	221,188	(7,573)	347,520
Stage 1:	1,672			2,015	(6)	0	1,870	(5)
Advances	1,672	0	0	2,015	(6)	0	1,870	(5)
Total	227,018	(4,698)	320,043	223,694	(5,727)	330,487	223,058	(7,578)	347,520

(*) Includes loans and advances to customers under the headings "Financial assets at amortised cost" (Note 14) and "Financial assets not designated for trading compulsorily measured at fair value through profit or loss" (Note 12).

(**) See Note 1.4 - Comparison of information.

On the other hand, counterparty risk mitigation measures are specified in section 3.3.5.

3.3.2.3Monitoring and measurement of credit risk

The Group has a monitoring and measurement system that guarantees the coverage of any borrower and/or operation through methodological procedures adapted to the nature of each holder and risk:

1 Borrower monitoring processes

Scope

Individualised monitoring

Major risks:

By economic group of borrowers

EUR 20 million, in general.
EUR 10 million if they have operation with "Watch-list performing" risk.
EUR 5 million, if porfolio has sig. expected loss (>EUR 200 thou.).
EUR 1.2 million if it corresponds to Corpote Banking.
Other individually significant assets.

Market and balance sheet risk:

Per borrower

When there is market information.

Collective monitoring

Rest of operations/borrowers.

2 Quantification and assessment of the credit risk

Rating methodology

Manual

Monitoring reports with ratings for each borrower.

Automatic

Model based on statistical patterns, (Early Alert Model, EAM), the PD calibrated with a forward-looking view and other relevant alerts.

3 Defining the accounting classification

Staging: assessment of the existence of SICR and default

Single names (SN)

Borrowers that, due to their exposure volume or associated risk, require customised and expert treatment.
File on SN and ongoing and proactive management via triggers.

Rest (NON-SN)

Classification through automatic processes.
There is alignment between the monitoring rating and accounting classification.

4 Based on the expected loss

En base a la pérdida esperada

Stage 2 and Stage 3

Calculation of the manual provision based on expert opinion.

Rest (stage 1 and stage 2/3 non-sn)

Monitoring.
Hedging determined through statical models based on the Group's experience and forecasts of relevant variables.

1 Borrower monitoring processes

The aim is to determine the quality of the risk assumed with the borrower ("Monitoring Rating") and actions that need to be taken according to the result, including the estimation of impairment. The targets of risk monitoring are the borrowers that hold the debt instruments and off-balance sheet exposures that bear credit risk, and the profit or loss is a reference for the future granting policy.

The Credit Risk Monitoring Policy is prepared based on the type and specific nature of the exposure, segregated into differentiated areas, in accordance with the various credit risk measurement methods.

The Monitoring Rating is an assessment of each customer’s situation and risks. The different ratings are, from best to worse: imperceptible, low, medium, medium-high and non-performing; and they can be generated manually (in the case of the scope of borrowers under individualised monitoring) or automatically (for the rest).

According to the scope of monitoring and rating relating to the borrowers, monitoring can be:

Individualised: applied to exposures of a significant amount and/or that have specific characteristics. The monitoring of major risks leads to the issuance of group monitoring reports, concluding in a monitoring rating for the borrowers in the group.
Collective: the ratings are obtained by combining a statistical model, referred to as the Early Alert Model (EAM), the Probability of Default (PD) calibrated with a forward-looking view (consistent with the PD used to calculate the credit risk hedges) and other relevant alerts. Both the EAM and the PD are obtained at least on a monthly basis, and daily in the case of the alerts.

Furthermore, the EAM and PD models are subject to the Model Policy of the Group and they must fulfil the requirements included therein.

2 Quantification and assessment of credit risk

Credit risk quantifies losses that might derive from failure by borrowers to comply with their financial obligations, based on two concepts: expected loss and unexpected loss.

Expected Loss (EL):

this is the average or mathematical expectation of potential anticipated losses calculated by multiplying the three following factors: probability of default (PD), exposure at default (EAD) and loss given default (LGD).

Unexpected loss:

an estimate of the outstanding debt in the event of default by the customer. This measurement is significant for financial instruments with a repayment structure that varies according to customer drawdowns (in general, any revolving credit product).

Credit risk parameters are estimated based on the historical default experience. To do so, the Bank has a set of tools and techniques for the specific needs of each type of risk, described below according to how they affect the three factors for calculating the expected loss:

EAD:

estima la deuda pendiente en caso de incumplimiento del cliente. Esta magnitud es relevante para aquellos instrumentos financieros que tienen una estructura de amortización variable en función de las disposiciones que haga el cliente (generalmente, cualquier producto revolving)

The estimate is based on observing internal default experience, relating the drawdown levels upon default to drawdown levels over the 12 preceding months. To build the model, several variables are considered, such as product type, term to maturity and customer characteristics.

PD:

the Group uses management tools covering virtually all of its lending business to help predict the probability of default associated with each borrower.

These tools, implemented in the branch network and the risk monitoring and granting channels, were developed on the basis of NPL experience and include the measurements required to fine-tune the results both to the business cycle, with a view to securing relatively stable measures in the long term and to recent experience and future projections. The models can be classified according to their orientation toward the product or customer:

Product-oriented tools are used mainly within the scope of authorisation of new retail banking operations (approval scorings) and take account of the debtor’s characteristics, information deriving from the customer relationship, internal and external alerts, as well as the specific characteristics of the operation to determine its probability of default.
Customer-oriented tools assess the debtor’s probability of default. They comprise behavioural 'scoring' models for monitoring the risk of individuals and ratings or companies.

Rating tools for companies are specific according to the customer segment. The rating process for micro-enterprises and SMEs, in particular, is based on a modular algorithm, which rates three different sets of data: the financial statements, the information drawn from dealings with customers, internal and external alerts and certain qualitative factors.

As regards large corporations, the Group has models that require the expert judgment of analysts and seek to replicate and be coherent with the ratings of rating agencies. In view of the lack of sufficient frequency of internal default rates for drawing up purely statistical models, the models in this segment were built in line with the Standard & Poor’s methodology, enabling the public global default rates to be used, making the methodology much more reliable.

The customers are scored and rated on a monthly basis in order to keep the credit rating up-to-date, except for the rating of large corporations, which is updated at least annually, or in the event significant events that can alter credit quality. For legal entities, the financial statements and qualitative information is updated periodically to achieve the maximum level of coverage of the internal rating.

LGD:

quantifies the unrecoverable debt in the event of customer default.

The historic loss given default is calculated using internal information, taking into account the cash flows associated with contracts from the moment of default. The models allow different loss given defaults to be obtained based on the guarantee, the loan to value ratio (LTV), the product type, the borrower's credit quality and, for uses in which it is required by regulation, the recessional conditions of the economic cycle. An estimate is also made of the indirect expenses (office staff, infrastructure costs and similar) associated with the recovery process. In the case of large corporations, loss given default also includes elements of expert judgment, coherent with the rating model.

In addition to regulatory use to determine the Group's minimum own funds and the calculation of hedges, the credit risk parameters (PD, LGD and EAD) are used in a number of management tools, e.g. the risk-adjusted return calculation tool, pricing tools, customer pre-qualification tools, as well as in monitoring tools and alert systems.

3 Defining the accounting classification

The accounting classification of operations with credit risk among the different Stages of IFRS 9 is defined in the event of a default and/or significant increase in credit risk (SICR) since the operation's initial recognition.

It will be considered that there has been an SICR –and therefore the operations will be classified as Stage 2– when there are weaknesses that may involve assuming significantly higher losses than expected at the time the loan is granted. To identify weaknesses in operations and borrowers, the Group has the monitoring and rating processes described in 2| Quantification and assessment of credit risk. The following shall be considered a weakness: a significant deterioration in the monitoring rating or a relative increase of relevant PD with respect to the start of the operation.

In addition, the following operations will be classified as Stage 2: i) operations included in sustainability agreements that have not reached the end of their trial period; ii) refinancing, refinanced or restructured operations that should not be reclassified as non-performing and that are still in the trial period; iii) operations made by insolvent borrowers that should not be classified as Stage 3 or write-offs; and iv) operations with amounts past due of over 30 days, unless proven otherwise.

Unless they are identified as refinancing, refinanced or restructured operations, those that no longer meet the conditions to qualify for Stage 2 will be classified as Stage 1.

With respect to refinancing, refinanced or restructured operations that classify as Stage 2 due to failing to proceed to classify them as Stage 3 on the date of refinancing or restructuring or due to having been reclassified from the Stage 3 category, they will remain identified as Stage 2 for a probationary period until they meet all the following requirements: i) it is concluded that they are unlikely to have financial difficulties and therefore it is highly probable that they will meet their obligations vis-a-vis the entity in both time and form; ii) a minimum period of two years has elapsed from the date of authorisation of the restructuring or refinancing operation, or, if later, from the date of its reclassification from Stage 3; iii) one of the borrowers must have no other operations with past due amounts for more than 30 days at the end of the trial period; and iv) the borrower has covered all the principal and interest payments from the date of authorisation of the restructuring or refinancing operation, or, if later, from the date of its reclassification from stage 3.

Furthermore, the borrower must have made regular payments of an amount equivalent to the whole amount (principal and interest) falling due at the date of the restructuring or refinancing operation, or that were derecognised as a result of it, or when it is deemed more appropriate given the nature of the operations that the borrower complies with other objective criteria that demonstrate their payment capacity. This implies that there are no contractual clauses that may delay repayments, such as grace periods for the principal.

It will be considered that there has been a default and, therefore, an operation will be classified at Stage 3 when – regardless of the borrower and the guarantee – there is an amount overdue (capital, interests or contractually agreed costs) by more than 90 days, as well as the operations of all other holders when operations with past due amounts of over 90 days account for more than 20% of the amounts pending collection.

Operations classified in Stage 3 due to the customer being non-performing will be reclassified to Stage 1 or Stage 2 when, as a result of collecting part of the overdue amounts, the reasons that caused their classification as Stage 3 disappear and there remain no reasonable doubts regarding their full repayment by the borrower for other reasons.

Además, se clasificarán en Stage 3 las siguientes operaciones: i) operations with legally demanded balances; ii) operations in which the collateral execution process has been initiated; iii) operations made by insolvent borrowers that should not be classified as write-offs; iv) refinancing, refinanced or restructured operations classifiable as non-performing including those that having been classified as non-performing before the trial period, are refinanced or restructured or that have amounts that are more than 30 days past-due; and v) operations with borrowers who, after an individualised review, pose reasonable doubts regarding full repayment (principal and interest) in the contractually agreed terms.

Unless they are identified as refinancing, refinanced or restructured operations, those classified as Stage 3 for reasons other than the customer being non-performing can be reclassified to Stage 1 or Stage 2 if, as a result of an individualised study, the reasonable doubts regarding their full repayment by the holder in the contractually agreed terms disappear and there are no amounts overdue by more than ninety days on the date of reclassification to Stage 1 or Stage 2.

In the case of refinanced, restructured or refinancing operations, in order to consider the credit quality of the operation to have improved and, therefore, to proceed to reclassify it to Stage 2, all the following criteria must be verified in general: i) a period of one year has elapsed from the refinancing or restructuring date; ii) the borrower has covered all the principal and interest payments (i.e. the operation has no overdue amounts) thereby reducing the renegotiated principal, from the date of authorisation of the restructuring or refinancing operation, or, if later, from the date of its reclassification to the non-performing category; iii) furthermore, regular payments must have been made of an amount equivalent to the whole amount (principal and interest) falling due at the date of the restructuring or refinancing operation, or that were derecognised as a result of it, or when it is deemed more appropriate given the nature of the operations that the borrower complies with other objective criteria that demonstrate their payment capacity; and iv) one of the borrowers must have no other operations with past due amounts for more than 90.

The exposures of borrowers declared subject to bankruptcy proceedings without an application for liquidation shall be reclassified to Stage 2 if the borrower has paid at least 25% of the credit from the entity that is affected by the bankruptcy proceedings (once the agreed debt reduction, if any, has been deducted), or if two years have elapsed since the order approving the creditors’ agreement was registered with the Commercial Register, provided that this agreement is being faithfully performed and the equity and financial situation of the corporation dispels any doubts regarding full repayment of its debts, all unless interest has been agreed that is noticeably lower than the market rate.

The process for determining the borrower's accounting classification is specified below:

Single Name

These borrowers are constantly assessed as regards the existence of evidence or indications of impairment, as well as a potential significant increase in credit risk (SICR) from the initial recognition, and losses associated with the assets of this portfolio are assessed.

In order help with the proactive management of evidence and indications of impairment and a significant increase in risk, the Group has developed triggers, for borrowers and for the operation, that are grouped according to the sector to which they belong, since the latter conditions the type of information required to analyse the credit risk and the sensitivity to the changes of variables indicative of the impairment. The triggers are an indication of impairment of the asset affecting the customer or the operations. These triggers are assessed by the analyst to determine the classification of the customer's operations in Stage 2 or Stage 3:

Global triggers:

Financial difficulties of the issuer or debtor: subjective doubtful triggers (i.e. unfavourable financial information on the debtor, measured via various ratios on their financial statements) and triggers of a minimum of Stage 2 (due to deterioration of the monitoring rating).
A breach of contract, such as a default or delinquency in interest or principal payments: Stage 3 triggers (i.e. non-payments exceeding 90 days) and triggers of a minimum of Stage 2 (non-payments exceeding 30 days).
In the event of financial difficulties, the borrowers are given concessions or advantages that would otherwise not be considered. Trigger of a minimum of Stage 2 (refinancing).
Probability of the borrower declaring bankruptcy or restructuring. Stage 3 trigger (declaration of insolvency).
Market triggers. There are triggers referring to identifying financial difficulties of the debtor or issuer, referring to breaches of contractual clauses or to the disappearance of an active market for the financial security.

Specific triggers:

For sectors such as property developers, project finance and public administrations.

In cases in which, in the opinion of the analyst, contracts are classified as Stage 2 or Stage 3, the expert calculation of the specific provision is used.

Other contracts (not Single Name):

As previously stated, when the borrower's monitoring rating has significantly deteriorated or when there is a relative increase of relevant PD with respect to the start of the operation, the Entity proceeds to classify the contract at accounting Stage 2. For these purposes, the classification is revised on a monthly basis, using the most recent monitoring rating and PD classification, which are also updated at least monthly.

All other classification criteria in Stage 2 or Stage 3 are also revised monthly.

4 Determining the accounting hedge

The aim of the IFRS 9 requirements as regards impairment is to ensure recognition of the expected credit losses of operations, assessed collectively or individually, considering all the reasonable and substantiated information available, including forward-looking information.

Principles for measuring expected credit losses for the purpose of defining the credit risk loss hedges

The calculated accounting hedging or provision is defined as the difference between the gross carrying amount of the operation and the estimated value of future expected cash flows, discounted at the original effective interest rate of the operation, considering the effective guarantees received.

The Group estimates the expected credit losses of an operation so that these losses reflect:

a
A weighted and non-biased amount, determined through the assessment of a series of possible results;
b
The time value of the money, and
c
The reasonable and substantial information that is available at the reference date, at no disproportionate cost or effort, on past events, current conditions and forecasts of future economic conditions.

In line with applicable rules, the hedging calculation method is set according to whether the borrower is individually significant and its accounting category.

If, in addition to being individually significant, the customer has operations that are non-performing (whether for reasons of delinquency or for other reasons) or in Stage 2, the specific allowances for the non-performing operations will be estimated through a detailed analysis of the status the borrower and the expected flows, which will be assessed using discounted future cash flow models based on forecasts that estimate the customer's capacity to generate future flows from their activities.
In all other cases, hedging is estimated collectively using internal methodologies, subject to the Policy of Models and Parameters in force, based on past experience of portfolio defaults and recoveries, and factoring in the updated and adjusted value of the effective guarantees. Additionally, future economic condition predictions will be considered under various scenarios.

To determine hedging for credit losses of portfolios under collective analysis, models are used to estimate the PD; probability of correcting defaulting cycles (specifically its complementary measurement, PNC); loss given loss (LGL) in the event of no correction; recoverable value models for mortgage guarantees (haircuts); and adjustments to include lifetime or forward-looking effects, according to the agreement's accounting classification.

The models used are re-estimated or re-trained every six months, and they are executed monthly in order to properly reflect the current economic environment at any given time. This makes it possible to reduce the differences between estimated loss and recent observations. The models will include an unbiased view of the potential forward-looking evolution to determine the expected loss, taking into account further relevant macroeconomic factors: i) GDP growth, ii) the unemployment rate, iii) 12-month Euribor and iv) changes in property prices. Following on from this, the Group generates a baseline scenario, as well as a range of potential scenarios that make it possible to perform a weighted adjustment of the estimated expected loss, based on its probability.

The calculation process is structured in two steps:

Setting the basis for the calculation of allowances, in two steps:

Calculation of the exposure amount, which is the sum of the gross carrying amount at the time of calculation plus off-balance sheet amounts (available or exposure) expected to be disbursed when the borrower fulfils the conditions to be considered non-performing.

Calculation of the recoverable value of the effective guarantees linked to the exposure. In order to establish the recoverable value of these guarantees, for real estate collateral the models estimate the amount of the future sale of the collateral, which is discounted from the total expenses incurred until the moment of the sale.

Establishing the hedging to be applied on the basis for the calculation of allowances:

This calculation factors in the probability of the borrower defaulting on the operation obligations, the probability of the situation being remedied or resolved and the losses that would occur if this did not happen.

For insignificant portfolios where it is considered that the internal model approach is not suitable due to the processes involved or a lack of past experience, the Group may use the default coverage rates established in the current national regulations.

Transactions classified as not bearing appreciable risk and those that, due to their type of collateral, are classified as not bearing appreciable risk, could have 0% accounting hedging. In the case of the latter, this percentage will only be applied to the guaranteed part of the risk.

The hedges estimated individually or collectively must be consistent with the way in which the categories into which the operations can be classified are processed. In other words, the hedging level for an operation must be higher than the hedging level that would correspond to it, if it were classified in another category of a lower credit risk.

The necessary improvements detected in the backtesting and benchmarking exercises are also incorporated into the review cycles. Similarly, the models developed are documented so they can be replicated by a third party. The documentation contains key definitions, information regarding the process of acquiring samples and data processing, methodological principles and results obtained, as well as the comparison of said results with those of previous years.

CaixaBank has a total of 81 models, in order to obtain the parameters necessary to calculate the hedges using a collective analysis. For each of the risk parameters, different models can be used to adapt to each type of exposure. Specifically, the models include those indicated below:

18

Scoring and Rating parameter models

21

PD parameter models

10

EAD parameter models

19

PNC parameter models

9

LGL parameter models

3

Haircut parameter models

1

1 LT/FL (Life-time/Forward-looking) transformation parameter model

Other subsidiaries also have additional internal models. Banco BPI, SA (Banco BPI or BPI) has a total of 56 and CaixaBank Payments & Consumer has a total of 52.

Incorporation of forward-looking information into the expected loss models

The projected variables considered are as follows:

Forward looking macroeconomic indicators (*) (% Percentages)
	Spain			Portugal
	2020	2021	2022	2020	2021	2022
GDP growth
Baseline scenario	1.5	1.5	1.4	1.8	1.7	1.6
Upside range	2.3	2.6	1.9	1.8	2.8	2.4
Downside range	0.6	0.3	0.9	1.8	0.1	0.2
Unemployment rate
Baseline scenario	12.6	11.5	10.3	6.4	6.1	6.0
Upside range	12.1	10.0	8.4	6.4	6.1	4.6
Downside range	13.6	13.7	12.9	6.4	7.9	8.3
Interest rates (**)
Baseline scenario	(0.30)	(0.11)	0.29	(0.34)	(0.34)	(0.05)
Upside range	(0.25)	0.08	0.54	(0.34)	(0.24)	0.15
Downside range	(0.35)	(0.35)	(0.30)	(0.34)	(0.34)	(0.34)
Evolution of property prices
Baseline scenario	3.2	3.0	2.9	7.4	6.1	3.8
Upside range	4.7	5.8	4.9	7.4	8.5	6.1
Downside range	1.2	(0.4)	0.9	7.4	1.3	0.3

(*) Source: CaixaBank Research

(**) The 12-month Euribor is used in the case of Spain (average for the period) and the 6-month Euribor for Portugal (end of the period).

The weighting of the scenarios considered in each of the financial years for each sector is as follows:

Weighting of occurrence of the considered scenarios (% Percentages)
	Baseline scenario	Upside scenario	Downside scenario
Spain	40	30	30
Portugal	40	30	30

In accordance with the principles of the applicable accounting standard, the hedging level factors in a forward-looking (12-month) or life-time vision, according to the accounting classification of the exposure.

The Group has carried out a sensitivity exercise on the expected loss based on the changes of the key hypotheses applied in isolation to calculate the expected loss. Along these lines, the estimated sensitivity to a change in the GDP growth forecast, as the most relevant macroeconomic figure, for the following twelve months is shown below:

Analysis on sensitivity to exposure (Millions of euros)
(Millions of euros)	Variation in expected loss in Spain	Variation in expected loss in Portugal
GDP growth *
+0.5%	(59)	(2)
-0.5%	59	2

(*) GDP-focused sensitivity calculation which, by its nature, enables the effect of rest of the macroeconomic indicators to be gathered jointly, given their high level of interdependence.

The models and the estimates on macro-economic variations are periodically reviewed to detect possible impairment in the quality of the measurements. This continual risk assessment provides information on the distribution of risk exposure in the various portfolios with respect to creditworthiness, expressed as a probability of default.

3.3.2.4NPL management

Given the mechanisms of the Group's credit risk cycle, the quality in the risk approval and monitoring processes guarantees compliance with the conditions set out when operations are granted that generate exposure to this risk. Thus, although the positions requiring activation of alternative management circuits are scant, the recovery activity is a top priority in the Group's risk management, particularly in recent years, given the goal of both curtailing the current volume of non-performing positions as well as the future generation thereof. In this sense, it has strengthened the governance model and the operational framework on the management of problematic assets, and has a comprehensive view of the whole life cycle associated with the default recoveries process and management of foreclosed assets.

The branch network is responsible for managing NPLs and recoveries, starting out as a preventive activity before default or before an obligation falls due, and ends with recovery or definitive write-off. The disaggregated nature and specialisation of the branch network make it possible to gain knowledge of customers' situations and to detect the first indications of impairment in solvency, thus allowing appropriate measures to be adopted more diligently. Following on from this, the operations and their associated guarantees are monitored and, where applicable, claims are brought to recover the debt according to the following principles: i) prevention with the early detection of default risk; ii) activities intended to help the customer find solutions to situations of payment irregularities, considering its relationship; and iii) the utmost anticipation to reach a better stance to deal with the debtor and other creditors.

Knowledge of and proximity to the customer enable especially vulnerable social situations to be managed in a differentiated way, frequently caused by an adverse macroeconomic environment experienced years ago. In this respect, the Group has also adhered to the Code of Good Practices for the viable restructuring of mortgage debts on primary residences included in Royal Decree-Act 6/2012 and its subsequent amendments, on measures to strengthen the protection of mortgage borrowers, debt restructuring and subsidised housing rentals. In this field, it has developed an Aid Plan and customised solutions for customers who are undergoing current economic hardships, who are willing to collaborate and have good historic behaviour. All these actions contribute to better progress in the default rate and strengthen the Group's connection and commitment to its customers.

The Group's policies and strategies in relation to problematic assets in the real estate development segment

The underlying criterion guiding the Group’s management of problematic assets in the real estate development segment is to help borrowers meet their obligations.

First, with the commitment of shareholders and the borrower, the Group studies the possibility of granting grace periods so that the financed land can be developed, ongoing property development can be finalized and finished units can be sold. The analysis places special importance on the feasibility of projects, thereby avoiding a higher investment for real estate whose sale is not reasonably assured.

With regard to refinancing operations, the aim is to add new guarantees to reinforce those already in place. The policy is to not exhaust the current margin of value provided by the initial guarantees with further mortgages.

Lastly, when there is no reasonable possibility that the borrower can continue to maintain its position, the mortgaged asset is acquired. The acquisition price is calculated by relying on an appraisal conducted by an appraisal firm registered on the Bank of Spain's official register. When the acquisition price is lower than the outstanding debt, the loan is written down to the foreclosure value.

Foreclosed assets

BuildingCenter is the Group's company responsible for the ownership of property assets in Spain, which basically originate from streamlining of the Group's credit activity through any of the following ways: i) acquisition at auctions held after assets have been foreclosed, mainly in relation to mortgage loans; ii) acquisition of mortgaged real estate assets of individuals, with the subsequent subrogation and cancellation of the debts; and iii) acquisition of real estate assets of companies, mainly real estate developers, to cancel their debts.

The acquisition process includes conducting full legal and technical reviews of the properties using the committees appointed for such purpose.

In all cases, purchase prices are based on appraisals performed by appraisal firms approved by the Bank of Spain and in accordance with the parameters set forth in the approved internal rules.

The strategies undertaken for the sale of these assets are as follows:

Individual sale: through Servihabitat Servicios Inmobiliarios, with which there is a servicing contract until 31 December 2023, for multi-channel marketing activities via its own branches, the external collaboration of the network of real-estate agents and an active presence on the Internet. This marketing activity comes in addition to a key factor: support in prescribing properties generated by the branch network.
Institutional sales: the Group takes into account institutional operations of sales of asset portfolios to other specialised companies.
Completion of housing developments: a number of minor measures to improve some of these developments are made to ensure they can be sold. These measures are performed using the synergies of the Group.
In-house property development: restricted to very specific transactions where the asset’s quality and characteristics mean that developing the asset is the clearest and most secure means to recovering the investment.
Rental: it is a means of benefiting from rising demand and generating recurring income, as well as creating added value on the property in the event of its future institutional sale.

The table below shows foreclosed assets by source and type of property:

Foreclosed real estate assets 31-12-2019 (*) (Millions of euros)
	Gross carrying amount	Allowances for impairment (**)	Of which from foreclosure	Net carrying amount
Real estate acquired from loans to real estate constructors and developers	1,534	(438)	(199)	1,096
Buildings and other completed constructions	1,396	(376)	(174)	1,020
Homes	1,226	(317)	(142)	909
Other	170	(59)	(32)	111
Buildings and other constructions under construction	29	(16)	(8)	13
Homes	15	(8)	(3)	7
Other	14	(8)	(5)	6
Land	109	(46)	(17)	63
Consolidated urban land	54	(16)	(6)	38
Other land	55	(30)	(11)	25
Real estate acquired from mortgage loans to homebuyers	2,322	(542)	(237)	1,780
Other real estate assets or received in lieu of payment of debt	462	(143)	(46)	319
Total	4,318	(1,123)	(482)	3,195

(*) Includes foreclosed assets classified as "Tangible assets – Investment property" amounting to EUR 2,094 million, net, and includes foreclosure rights deriving from auctions in the amount of EUR 142 million, net. Excludes foreclosed assets of Banco BPI, with a gross carrying amount of EUR 4 million, as this is not included in business in Spain.

(**) Cancelled debt associated with the foreclosed assets totalled EUR 5,450 million and total write-downs of this portfolio amounted to EUR 2,257 million, EUR 1,124 million of which are impairment allowances recognised in the balance sheet.

Foreclosed real estate assets 31-12-2018 (*) (Millions of euros)
	Gross carrying amount	Allowances for impairment (**)	Of which: from foreclosure	Net carrying amount
Real estate acquired from loans to real estate constructors and developers	1,787	(494)	(215)	1,293
Buildings and other completed constructions	1,646	(435)	(193)	1,211
Buildings and other constructions under construction	29	(16)	(9)	13
Land	112	(43)	(13)	69
Real estate acquired from mortgage loans to homebuyers	2,314	(496)	(201)	1,818
Other real estate assets or received in lieu of payment of debt	468	(146)	(46)	321
Total	4,569	(1,136)	(462)	3,432

(*) Includes foreclosed assets classified as "Tangible assets – Investment property" amounting to EUR 2,479 million, net, and includes foreclosure rights deriving from auctions in the amount of EUR 213 million, net. Excludes foreclosed assets of Banco BPI, with a gross carrying amount of EUR 27 million, as this is not included in business in Spain.

(**) Cancelled debt associated with the foreclosed assets totalled EUR 5,852 million and total write-downs of this portfolio amounted to EUR 2,420 million, EUR 1,136 million of which are impairment allowances recognised in the balance sheet.

Foreclosed real estate assets 31-12-2017 (*) (Millions of euros)
	Gross carrying amount	Allowances for impairment (**)	Of which from foreclosure	Net carrying amount
Real estate acquired from loans to real estate constructors and developers	9,889	(4,795)	(2,630)	5,094
Buildings and other completed constructions	5,275	(1.939)	(911)	3,336
Buildings and other constructions under construction	835	(463)	(176)	372
Land	3,779	(2,393)	(1,543)	1,386
Activos inmobiliarios procedentes de financiaciones hipotecarias a hogares para la adquisición de vivienda	4,535	(1,342)	(618)	3,193
Other real estate assets or received in lieu of payment of debt	1,873	(778)	(375)	1,095
Total	16,297	(6,915)	(3,623)	9,382

(*) Includes foreclosed assets classified as "Tangible assets – Investment property" amounting to EUR 3,030 million, net, and includes foreclosure rights deriving from auctions in the amount of EUR 473 million, net. Excludes foreclosed assets of Banco BPI, with a gross carrying amount of EUR 53 million, as this is not included in business in Spain.

(**) Cancelled debt associated with the foreclosed assets totalled EUR 20,083 million and total write-downs of this portfolio amounted to EUR 10,701 million, EUR 6,916 million of which are impairment allowances recognised in the balance sheet.

3.3.2.5Refinancing policies

The Group has a detailed customer debt refinancing policy that contains the same general principles issued by the EBA for this type of operation.

The risk management procedures and policies applied allow for detailed monitoring of credit transactions. In this regard, any transaction uncovered whose terms may need to be changed due to evidence of impairment of the borrower’s solvency is marked appropriately so the associated provision for impairment at the date of the change is made. Therefore, as these transactions are correctly classified and valued according to the Group’s best judgment, no additional provisions emerge in relation to the impairment of refinanced loans.

Refinancing

The breakdown of refinancing by economic sector is as follows:

Refinancing 31-12-2019 (Millions of euros)
	Without collateral		With collateral
					Maximum amount of theimpairment collateral
	Nº of operations	Gross carrying amount	Nº of operations	Gross carrying amount	Mortgage collateral	Other collateral	Due to credit risk (*)
Public administrations	23	179	415	68	47	0	(5)
Other financial corporations and individual entrepreneurs (financial business)	36	3	7	1	1	0	1
Non-financial corporations and individual entrepreneurs (non-financial business)	4,386	1,764	10,665	1,637	1,269	14	(1,007)
Of which: Financing for real estate construction and development (including land)	256	69	3,062	587	438	0	(153)
Other households	37,143	350	86,262	4,521	3,816	8	(847)
Total	41,588	2,296	97,349	6,227	5,133	22	(1,860)
Of which: in Stage 3
Public administrations	13	3	137	12	7	0	(5)
Other financial corporations and individual entrepreneurs (financial business)	26	1	6	1	1	0	(1)
Non-financial corporations and individual entrepreneurs (non-financial business)	2,604	924	7,086	880	637	7	(916)
Of which: Financing for real estate construction and development (including land)	175	55	1,905	277	194	0	(118)
Other households	19,218	212	50,986	2,854	2,259	4	(771)
Total stage 3	21,861	1,140	58,215	3,747	2,904	11	(1,693)

Memorandum items: Financing classified as non-current assets held for sale (*)

(*) Corresponds to "Non-current assets and disposal groups classified as held for sale".

Refinancing 31-12-2018 (Millions of euros)
	Without collateral		With collateral
					Maximum amount of theimpairment collateral
	Nº of operations	Gross carrying amount	Nº of operations	Gross carrying amount	Mortgage collateral	Other collateral	Due to credit risk (*)
Public administrations	51	145	445	73	40	0	(10)
Other financial corporations and individual entrepreneurs (financial business)	42	19	7	2	2	0	(13)
Non-financial corporations and individual entrepreneurs (non-financial business)	5,360	2,004	11,483	2,547	1,748	17	(1,531)
Of which: Financing for real estate construction and development (including land)	416	113	3,288	894	628	2	(294)
Other households	37,914	360	92,879	5,013	4,235	10	(947)
Total	43,367	2,528	104,814	7,635	6,025	27	(2,501)
Of which: in Stage 3
Public administrations	13	6	144	15	3	0	(10)
Other financial corporations and individual entrepreneurs (financial business)	29	13	6	1	1	0	(13)
Non-financial corporations and individual entrepreneurs (non-financial business)	3,207	1,174	7,481	1,661	957	8	(1,430)
Of which: Financing for real estate construction and development (including land)	289	78	2,007	559	340	2	(264)
Other households	20,507	235	53,896	3,094	2,432	5	(868)
Total stage 3	23,756	1,428	61,527	4,771	3,393	13	(2,321)

Memorandum items: Financing classified as non-current assets held for sale (*)

(*) Corresponds to "Non-current assets and disposal groups classified as held for sale".

Refinancing 31-12-2017 (Millions of euros)
	Without collateral		With collateral
					Maximum amount of theimpairment collateral
	Nº of operations	Gross carrying amount	Nº of operations	Gross carrying amount	Mortgage collateral	Other collateral	Due to credit risk (*)
Public administrations	54	181	466	78	53	0	(7)
Other financial corporations and individual entrepreneurs (financial business)	60	37	12	1	1	0	(26)
Non-financial corporations and individual entrepreneurs (non-financial business)	8,484	2,961	13,434	3,342	2,210	29	(1,880)
Of which: Financing for real estate construction and development (including land)	807	149	3,520	1,182	811	2	(416)
Other households	37,163	349	95,946	5,422	4,738	9	731
Total	45,761	3,528	109,858	8,843	7,002	38	(2,644)
Of which: in stage 3
Public administrations	17	64	164	19	12	0	(7)
Other financial corporations and individual entrepreneurs (financial business)	45	26	11	1	1	0	(26)
Non-financial corporations and individual entrepreneurs (non-financial business)	6,542	1,742	9,830	2,253	1,443	16	(1,792)
Of which: Financing for real estate construction and development (including land)	711	113	2,361	843	522	2	(386)
Other households	22,702	247	60,548	3,507	2,937	6	(699)
Total stage 3	29,306	2,079	70,553	5,780	4,393	22	(2,524)

Memorandum items: Financing classified as non-current assets held for sale (*)

(*) Corresponds to "Non-current assets and disposal groups classified as held for sale".

3.3.3Concentration risk

In the Corporate Risk Taxonomy, concentration risk is included within credit risk, since it is the main risk source, although it covers all types of assets, as recommended by sector supervisors and they carry out best practices.

The Group has developed mechanisms to systematically identify its overall exposure with regard to a particular customer, product, industry or geographic location. Wherever it is considered necessary, limits on relative exposures have been defined, under the RAF.

Concentration in customers or in “major risks”

The Group monitors and ensures compliance with the regulatory limits (25% of eligible own funds) and the concentration risk appetite thresholds. At year-end, no breach of the defined thresholds had been observed.

Geographical and counterparty concentration

The Group monitors and reports – to the management and governance bodies – a full perspective of accounting positions, segregated by product and issuer/counterparty, classified under loans and advances, debt securities, equity instruments, derivatives and guarantees given, that complement the other positions of the Group and of the secured investment and pension funds.

Risk by geographic area is as follows:

Concentration by geographical location 31-12-2019 (Millions of euros)
	Total	Spain	Portugal	Rest of the European Union	America	Rest of the world
Central banks and credit institutions	29,810	12,965	4,045	10,689	800	1,311
Public administrations	93,172	78,221	4,005	9,393	1,245	308
Central government	80,198	66,489	2,849	9,392	1,160	308
Other public administrations	12,974	11,732	1,156	1	85	0
Other financial corporations and individual entrepreneurs (financial business)	18,308	8,298	592	8,238	904	276
Non-financial corporations and individual entrepreneurs (non-financial business)	107,550	75,329	11,520	12,806	6,008	1,887
Real estate construction and development (including land)	6,201	5,653	540	7	0	1
Civil engineering	4,627	3,748	325	265	289	0
Other	96,722	65,928	10,655	12,534	5,719	1,886
Large corporations	61,717	37,943	6,620	10,863	4,747	1,544
SMEs and individual entrepreneurs	35,005	27,985	4,035	1,671	972	342
Other households	119,005	104,698	12,863	822	162	460
Home purchase	92,147	79,700	11,248	753	138	308
Consumer lending	16,436	15,143	1,226	25	11	31
Other	10,422	9,855	389	44	13	121
Total	367,845	279,511	33,025	41,948	9,119	4,242

Concentration by geographical location 31-12-2018 (Millions of euros)
	Total	Spain	Portugal	Rest of the European Union	America	Rest of the world
Central banks and credit institutions	38,170	18,932	4,776	12,118	744	1,600
Public administrations	89,496	77,926	3,326	6,992	909	343
Other financial corporations and individual entrepreneurs (financial business)	16,159	7,154	489	7,602	726	188
Non-financial corporations and individual entrepreneurs (non-financial business)	99,032	74,371	11,041	7,377	4,597	1,646
Other households	121,950	107,273	12,304	1,819	167	387
Total	364,807	285,656	31,936	35,908	7,143	4,164

Concentration by geographical location 31-12-2017 (Millions of euros)
	Total	Spain	Rest of the european Union	America	Rest of the world
Central banks and credit institutions	37,393	21,801	13,243	776	1,573
Public administrations	83,899	72,595	10,983	26	295
Other financial corporations and individual entrepreneurs (financial business)	15,597	6,428	8,598	391	180
Non-financial corporations and individual entrepreneurs (non-financial business)	96,801	75,205	16,848	3,437	1,311
Other households	123,134	110,016	12,515	205	398
Total	356,824	286,045	62,187	4,835	3,757

The breakdown of risk in Spain by Autonomous Community is as follows:

Concentration by autonomous community 31-12-2019 (Millions of euros)
	Total	Andalusia	Balearic Islands	Canary Islands	Castile-La Mancha	Castile-Leon	Catalonia	Madrid	Navarre	Valencian Community	Basque Country	Other (*)
Central banks and credit institutions	12,965	223			1	2	507	10,560		528	820	324
Public administrations	78,221	1,060	202	158	287	371	3,896	3,727	413	713	573	332
Central government	66,489
Other public administrations	11,732	1,060	202	158	287	371	3,896	3,727	413	713	573	332
Other financial corporations and individual entrepreneurs (financial business)	8,298	107	2	7	2	27	1,559	6,281	31	104	142	36
Non-financial corporations and individual entrepreneurs (non-financial business)	75,329	5,862	2,577	2,415	1,202	1,549	15,908	28,492	1,202	5,380	4,224	6,518
Real estate construction and development (including land)	5,653	630	199	237	22	163	1,339	2,087	171	390	171	244
Civil engineering	3,748	242	65	100	67	68	857	1,508	107	190	178	366
Other	65,928	4,990	2,313	2,078	1,113	1,318	13,712	24,897	924	4,800	3,875	5,908
Large corporations	37,943	1,053	1,328	946	260	456	6,370	19,628	420	2,005	2,857	2,620
SMEs and individual entrepreneurs	27,985	3,937	985	1,132	853	862	7,342	5,269	504	2,795	1,018	3,288
Other households	104,698	17,112	4,068	5,989	2,572	3,624	30,657	15,705	3,164	8,315	3,445	10,047
Home purchase	79,700	12.395	3,172	4,781	2,000	2,897	22,421	12,621	2,591	6,335	2,787	7,700
Consumer lending	15,143	2,773	578	913	357	416	4,739	1,817	356	1,281	409	1,504
Other	9,855	1,944	318	295	215	311	3,497	1,267	217	699	249	843
Total	279,511	24,364	6,849	8,569	4,064	5,573	52,527	64,765	4,810	15,040	9,204	17,257

Concentration by autonomous community 31-12-2018 (Millions of euros)
	Total	Andalusia	Balearic Islands	Canary Islands	Castile-La Mancha	Castile-Leon	Catalonia	Madrid	Navarre	Valencian Community	Basque Country	Other (*)
Central banks and credit institutions	18,932	133			2	1	532	16,150	1	1.244	541	328
Public administrations	77,926	1,159	145	194	192	264	4,010	3,631	533	668	659	378
Other financial corporations and individual entrepreneurs (financial business)	7,154	55	2	9	4	61	1,346	5,301	17	142	180	36
Non-financial corporations and individual entrepreneurs (non-financial business)	74,371	5,799	2,054	2,414	1,267	1,522	15,873	29,105	1,150	4,706	3,882	6,600
Other households	107,273	17,824	4,138	6,201	2,678	3,725	30,975	16,151	3,325	8,506	3,451	10,300
Total	285,656	24,970	6,339	8,818	4,143	5,573	52,736	70,338	5,026	15,266	8,713	17,642

(*) Includes autonomous communities that combined represent no more than 10% of the total.

Concentration by autonomous community 31-12-2017 (Millions of euros)
	Total	Andalusia	Balearic Islands	Canary Islands	Castile-La Mancha	Castile-Leon	Catalonia	Madrid	Navarre	Valencian Community	Basque Country	Other (*)
Central banks and credit institutions	21,801	59				2	475	20,109		280	636	240
Public administrations	72,595	1,302	173	316	135	140	4,136	3,115	557	1,018	675	629
Other financial corporations and individual entrepreneurs (financial business)	6,428	88	4	9	3	18	1,129	5,054	2	60	15	45
Non-financial corporations and individual entrepreneurs (non-financial business)	75,205	5,711	1,956	2,421	1,211	1,645	15,326	30,924	1,271	5,098	3,547	6,094
Other households	110,016	18,358	4,258	6,426	2,763	3,782	31,802	16,551	3,437	8,636	3,474	10,530
Total	286,045	25,518	6,391	9,172	4,112	5,587	52,868	75,753	5,267	15,092	8,347	17,538

Concentration by economic sector

Risk concentration by economic sector is subject to the RAF limits, differentiating between private business economic activities and public sector financing, and the channels of the internal report defined therein. Particularly, for the private business sector, a maximum concentration limit in any economic sector is established by aggregating the accounting positions recognised, excluding treasury repo/depo operations and those of the trading portfolio.

Loans to customers by activity were as follow (excluding advances):

Concentration by activity of loans to customers 31-12-2019 (Millions of euros)
				Secured loans carrying amount based on latest available appraisal (loan to value)
	Total	Of which: mortgage collateral	Of which: other collateral	≤ 40%	> 40% ≤ 60%	> 60% ≤ 80%	> 80% ≤100%	> 100%
Public administrations	11,066	415	353	131	184	211	167	75
Other financial corporations and individual entrepreneurs (financial business)	2,503	340	835	925	163	64	4	19
Non-financial corporations and individual entrepreneurs (non-financial business)	88,801	21,425	5,340	10,405	7,875	3,850	2,517	2,118
Real estate construction and development (including land)	5,864	5,147	70	1,494	1,828	900	637	358
Civil engineering	4,184	479	75	239	152	62	48	53
Other	78,753	15,799	5,195	8,672	5,895	2,888	1,832	1,707
Large corporations	45,068	4,663	3,074	3,153	1,591	1,207	756	1,030
SMEs and individual entrepreneurs	33,685	11,136	2,121	5,519	4,304	1,681	1,076	677
Other households	118,278	99,814	1,014	30,709	36,349	25,759	5,201	2,810
Home purchase	92,072	90,905	278	26,440	33,489	24,214	4,627	2,413
Consumer lending	16,415	3,278	396	1,767	1,066	540	202	99
Other	9,791	5,631	340	2,502	1,794	1,005	372	298
Total	220,648	121,994	7,542	42,170	44,571	29,884	7,889	5,022
Memorandum items: Refinancing, refinanced and restructured transactions	6,663	5,275	101	987	1,288	1,972	640	489

Concentration by activity of loans to customers 31-12-2018 (Millions of euros)
				Secured loans carrying amount based on latest available appraisal (loan to value)
	Total	Of which: mortgage collateral	Of which: other collateral	≤ 40%	> 40% ≤ 60%	> 60% ≤ 80%	> 80% ≤100%	> 100%
Public administrations	11,425	438	387	107	223	254	148	93
Other financial corporations and individual entrepreneurs (financial business)	1,540	363	583	617	239	79	9	2
Non-financial corporations and individual entrepreneurs (non-financial business)	81,844	21,578	4,267	9,247	7,922	3,995	2,243	2,438
Other households	121,149	103,516	1,078	30,286	37,734	28,046	6,001	2,527
Total	215,958	125,895	6,315	40,257	46,118	32,374	8,401	5,060
Memorandum items: Refinancing, refinanced and restructured transactions	7,662	6,195	200	1,156	1,547	2,279	797	616

Concentration by activity of loans to customers 31-12-2017 (Millions of euros)
				Secured loans carrying amount based on latest available appraisal (loan to value)
	Total	Of which: mortgage collateral	Of which: other collateral	≤ 40%	> 40% ≤ 60%	> 60% ≤ 80%	> 80% ≤100%	> 100%
Public administrations	11,745	668	285	153	258	378	89	75
Other financial corporations and individual entrepreneurs (financial business)	4,078	409	915	985	239	91	2	7
Non-financial corporations and individual entrepreneurs (non-financial business)	78,434	23,681	3,912	9,944	8,929	4,505	1,545	2,670
Other households	122,598	106,574	1,107	29,763	38,938	29,116	7,293	2,571
Total	216,855	131,332	6,219	40,845	48,364	34,090	8,929	5,323
Memorandum items: Refinancing, refinanced and restructured transactions	9,727	7,330	325	1,286	1,894	2,323	1,215	937

Breakdown of lonas and advances to customers by type (Millions of euros)
	31-12-2019			31-12-2018			01-01-2018 *
	Stage 1	Stage 2	Stage 3	Stage 1	Stage 2	Stage 3	Stage 1	Stage 2	Stage 3
Loan type and status
Public administrations	10,625	413	40	11,042	358	48	10,826	377	133
Other financial corporations	2,446	62	3	1,525	21	16	6,755	18	44
Loans and advances to companies and individual entrepreneurs	82,074	6,010	2,971	73,437	6,788	4,696	70,767	9,151	7,027
Real estate construction and development (including land)	8,711	1,020	680	8,351	1,211	1,147	7,184	1,744	1,877
Other companies and individual entrepreneurs	73,363	4,990	2,291	65,086	5,577	3,549	63,583	7,407	5,150
Other households	106,273	9,056	5,373	108,614	9,161	5,973	103,396	6,117	6,577
Home purchase	83,794	6,148	3,434	86,065	6,491	3,943	82,995	4,276	4,522
Other	22,479	2,908	1,939	22,549	2,670	2,030	20,401	1,841	2,055
Total	201,418	15,541	8,387	194,618	16,328	10,733	191,744	15,663	13,781

(*) See Note 1.4 - Comparison of information.

Breakdown of loans and advances to customers according to arrears status (Millions of euros)
	31-12-2019	31-12-2018	01-01-2018 *
By arrears status
Of which: default on payment of less than 30 days or up to date on payments	219,934	215,198	213,240
Of which: default on payment between 30 and 60 days	789	725	703
Of which: default on payment between 60 and 90 days	267	304	312
Of which: default on payment between 90 days and 6 months	614	608	839
Of which: default on payment between 6 months and 1 year	800	764	1,237
Of which: default on payment of more than 1 year	2,942	4,080	4,857
By interest rate type
Fixed	65,264	55,625	42,272
Floating	160,082	166,054	178,916

(*) See Note 1.4 - Comparison of information.

Breakdown of hedges of loans and advances to customers by type (Millions of euros)
	31-12-2019			31-12-2018			01-01-2018 *
	Stage 1	Stage 2	Stage 3	Stage 1	Stage 2	Stage 3	Stage 1	Stage 2	Stage 3
Public administrations	(6)		(6)	(10)		(13)			(100)
Other financial corporations	(5)	(1)	(2)	(1)		(21)	(77)	(22)	(86)
Loans and advances to companies and individual entrepreneurs	(257)	(328)	(1,669)	(350)	(410)	(2,317)	(782)	(472)	(4,063)
Real estate construction and development (including land)	(34)	(65)	(264)	(41)	(69)	(503)	(27)	(39)	(845)
Other companies and individual entrepreneurs	(223)	(263)	(1,405)	(309)	(341)	(1,814)	(755)	(433)	(3,218)
Other households	(306)	(379)	(1,739)	(327)	(331)	(1,941)	(107)	(95)	(1,769)
Home purchase	(152)	(152)	(1,000)	(164)	(162)	(1,212)	(15)	(44)	(1,026)
Other	(154)	(227)	(739)	(163)	(169)	(729)	(92)	(51)	(743)
Total	(574)	(708)	(3,416)	(688)	(741)	(4,292)	(966)	(589)	(6,018)
Of which: identified individually		(92)	(621)		(148)	(1,256)		(139)	(2,001)
Of which: identified collectively	(574)	(616)	(2,795)	(688)	(593)	(3,036)	(966)	(450)	(4,017)

(*) See Note 1.4 - Comparison of information

Concentration according to credit quality

The methodology applied to assign credit ratings to fixed income issuances is based on:

Fixed-income instruments: the regulatory banking criteria defined in the CRD IV regulation and the CRR on capital requirements, and therefore, the second best rating of all those available is used, if more than two ratings are available.
Loan portfolio: certification of the internal classifications to the Standard & Poor's methodology.

The rating of Spanish sovereign debt is A at 31 December 2019, while in 2018 it was A- and in 2017 it was BBB+.

The risk concentration according to credit quality of credit risk exposures associated with debt instruments for the Group, at the end of the financial year, is stated as follows:

Concentration according to credit quality - 31-12-2019 (Millions of euros)
	Group (Ex insurance group)										Insurance group ***
	FA at amortised cost							Financiak guarantees, loan commitments and other commitments given
	Loans and advances to customers
	Stage 1	Stage 2	Stage 3	Debt sec.	FA held for trading *	FA not held for trading **	FA at FV W/ changes in other comprehensive income	Stage 1	Stage 2	Stage 3	FA held for trading *	Available for sale financial assets *	Loans and receivables *
AAA/AA+/AA/AA-	29,717	26	0		7		932	14,108	10	0	8	1,026
A+/A/A-	26,237	108	0	10,209	369		9,774	10,105	23	0	927	52,118	15
BBB+/BBB/BBB-	28,108	261	0	4,139	246	1	4,919	19,726	286	0	131	5,413	161
INVESTMENT GRADE	84,062	395	0	14,348	622	1	15,625	43,939	319	0	1,066	58,557	176
Allowances for impairment	(257)	(3)	0	0			(2)	(13)	0	0
BB+/BB/BB-	39,130	2,565	1	300	7	56	29	16,965	597	0		133
B+/B/B-	12,439	6,279	10	0	0		0	6,002	1,190	1
CCC+/CCC/CCC-	527	2,281	70	5	0		0	310	326	56
No rating	66,766	4,021	8,306	2,742	90	6	312	27,637	447	551		73	174
NON-INVESTMENT GRADE	118,862	15,146	8,387	3,047	97	62	341	50,914	2,560	608	0	206	174
Allowances for impairment	(317)	(705)	(3,416)	(6)				(33)	(16)	(158)
Total	202,350	14,833	4,971	17,389	719	63	15,964	94,853	2,879	608	1,066	58,763	350

Concentration according to credit quality - 31-12-2018 (Millions of euros)
	Group (Ex insurance group)										Insurance group ***
	FA at amortised cost							Financiak guarantees, loan commitments and other commitments given
	Loans and advances to customers
	Stage 1	Stage 2	Stage 3	Debt sec.	FA held for trading *	FA not held for trading **	FA at FV W/ changes in other comprehensive income	Stage 1	Stage 2	Stage 3	FA held for trading *	Available for sale financial assets *	Loans and receivables *
AAA/AA+/AA/AA-	29,414	67	0	0	0	0	880	13,121	14	0	0	918	0
A+/A/A-	27,146	262	0	10,191	623	0	10,187	10,386	33	0	392	45,452	0
BBB+/BBB/BBB-	26,595	318	0	3,269	121	1	7,181	15,640	41	10	553	4,744	264
INVESTMENT GRADE	83,155	647	0	13,460	744	1	18,248	39,147	88	1	945	51,114	264
Allowances for impairment	(262)	(6)	0	0	0	0	0	(10)	0	0	0	0	0
BB+/BB/BB-	39,503	1,504	1	575	0	54	37	16,493	194	10	0	192	0
B+/B/B-	15,011	4,064	7	30	0	0	0	5,902	611	30	0	0	0
CCC+/CCC/CCC-	621	2,791	71	0	0	0	0	278	308	530	0	0	0
No rating	58,344	7,322	10,639	3,000	11	90	38	24,109	1,174	6.650	0	39	382
NON-INVESTMENT GRADE	113,479	15,681	10,718	3,605	11	144	75	46,782	2,287	722	0	231	390
Allowances for impairment	(433)	(735)	(4,277)	(5)	0	0	0	(59)	(27)	(259)	0	0	0
Total	195,939	15,587	6,441	17,060	755	145	18,323	85,929	2,375	723	945	51,345	655

(*) DEBT SEC.: Debt securities.

(**) Compulsorily measured at fair value through profit or loss.

(***) Financial assets designated at fair value through profit or loss are not included, since they mainly include investments linked to life insurance products where the investment risk is borne by the policyholder (Unit-links).

Concentration according to credit quality - 31-12-2017 (Millions of euros)
	Loans and receivables - customers - loans and advances and financial guarantees	Loans and receivables - debt sec.	Financial assets held for trading	Available for sale financial assets	Held to maturity investments
AAA/AA+/AA/AA-	43,189	17	0	588	0
A+/A/A-	38,658	70	221	1,902	0
BBB+/BBB/BBB-	51,630	482	1,787	63,727	11,071
INVESTMENT GRADE	133,477	569	2,008	66,217	11,071
BB+/BB/BB-	49,359	101	8	306	0
B+/B/B-	21,734	359	0	1	14
CCC+/CCC/CCC-	4,498	59	0	113	0
No rating	74,455	1,488	16	35	0
NON-INVESTMENT GRADE	150,046	2,007	24	455	14
Total	283,523	2,576	2,032	66,672	11,085

DEBT SEC.: Debt securities.

Concentration according to sovereign risk

The Group’s position in sovereign debt is subject to the general risk-taking policy, which ensures that all positions taken are aligned with the target risk profile:

The position in public, regional and local debt is subject to the general concentration and country risk limits established. Regular control procedures are in place for preventing new positions in countries in which there is a high risk concentration, unless express approval is given by the pertinent authority.
For fixed-income securities, a framework is in place regulating the solvency, liquidity and geographic location of all of the fixed-income issues and any similar transaction implying payment in cash for the buyer and the assumption of the issuer’s credit risk or related collateral. This control is exercised during the risk acceptance phase and throughout the life of the position in the portfolio.
Public debt positions held on the Treasury Desk are subject to the framework for market risk control and limits.

The carrying amounts of the main items related to sovereign risk exposure for the Group are set out below:

Sovereign risk exposure - 31-12-2019 (Millions of euros)
	Group (exc. insurance group						Insurance group ***
Country	Residual maturity	FA at amortised cost	FA held for trading	FA at FV W/ changes in other comprehensive income	FA not designated for trading *	FL held for trading - short positions	Available for sale financial assets	FA held for trading
Spain	Less than 3 months	904	39	97			168
	Between 3 months and 1 year	5.415	50	159		(61)	672	487
	Between 1 and 2 years	4,575	65	2,701		(78)	1,921
	Between 2 and 3 years	4,810	57	5,069	112	(103)	1,765
	Between 3 and 5 years	2,277	48	1,428		(42)	4,303
	Between 5 and 10 years	2,535	98	719		(54)	12,025
	Over 10 years	1,739	8			(10)	29,123
	Total	22,255	365	10,173	112	(348)	49,977	487
Italy	Less than 3 months		1
	Between 1 and 2 years	501	2				206
	Between 2 and 3 years					(3)	30
	Between 3 and 5 years		59	268		(10)	910
	Between 5 and 10 years		16	1,182		(14)	1,001
	Over 10 years		30	1,059		(26)	3,354
	Total	501	108	2,509		(53)	5,501
Portugal	Less than 3 months	5	4
	Between 3 months and 1 year	53		426			26	494
	Between 1 and 2 years	543	1				1
	Between 1 and 2 years	78	1				19
	Between 3 and 5 years	94		135			12
	Between 5 and 10 years	446		29			108	12
	Over 10 years	652
	Total	1,871	6	590			166	506
US	Between 3 and 5 years			923
US	Total			923
Other **	Less than 3 months	101		1
	Between 3 months and 1 year	2					5
	Between 1 and 2 years	41					9
	Between 2 and 3 years	7					1
	Between 3 and 5 years	63					2
	Between 5 and 10 years	180					15
	Over 10 years	78					33
	Total	472		1			65
Total countries		25,099	479	14,196	112	(401)	55,709	993
Of which: Debt securities		17,389	479	14,196	63		55,709	993

FA: Financial assets; FL: Financial liabilities; FV: Fair value.

(*) Compulsorily measured at fair value through profit or loss.

(**) Exposure to the United Kingdom is not significant.

(***) Financial assets designated at fair value through profit or loss are not included, since they mainly include investments linked to life insurance products where the investment risk is borne by the policyholder (Unit-links).

Sovereign risk exposure - 31-12-2018 (Millions of euros)
	Group (exc. insurance group						Insurance group ***
Country	FA at amortised cost	FA held for trading	FA at FV W/ changes in other comprehensive income	FA not designated for trading *	FL held for trading - short positions	Available for sale financial assets	FA held for trading
Spain	22,106	605	14,194	273	(331)	44,262	393
Italy	502	17	1,342		(16)	3,959	2
Portugal	1,093	8	791			17	547
US			880
Other **	380		1			67
Total countries	24,081	630	17,208	273	(347)	48,305	942
Of which: debt securities	17,060	630	17,208	273	(347)	48,305	942

FA: Financial assets; FL: Financial liabilities; FV: Fair value.

(*) Compulsorily measured at fair value through profit or loss.

(**) Exposure to the United Kingdom is not significant.

(***) Financial assets designated at fair value through profit or loss are not included, since they mainly include investments linked to life insurance products where the investment risk is borne by the policyholder (Unit-links).

Sovereign risk exposure - 31-12-2017 (Millions of euros)
	Group (exc. insurance group						Insurance group ***
Country	FA at amortised cost	FA held for trading	FA at FV W/ changes in other comprehensive income	FA not designated for trading *	FL held for trading - short positions	Available for sale financial assets	FA held for trading
Spain	10,725	706	12,381	9,697	(639)	42,112	608
Italy		124	1,397		(31)	3,934
Portugal	1,054	93	3,311		(59)		3
Other *	310		1		(10)	71	341
Total countries	12,089	923	17,090	9,697	(739)	46,117	952

FA: Financial assets.

FL: Financial liabilities.

(**) Exposure to the United Kingdom is not significant.

(***) Financial assets designated at fair value through profit or loss are not included, since they mainly include investments linked to life insurance products where the investment risk is borne by the policyholder (Unit-links).

3.3.4 Information regarding financing for real estate construction and development, home purchasing, and foreclosed assets

The main data regarding financing for real estate development, home purchasing and foreclosed assets are discussed below.

Financing for real estate construction and development

The tables below show financing for real estate developers and developments, including developments carried out by non-developers, business in Spain:

Financing for real estate construction and development 31-12-2019 (Millions of euros)
	Gross amount	Allowances for impairment losses	Carrying amount	Excess over the maximum recoverable value of collateral
Financing for real estate construction and development (including land)	5,766	(208)	5,558	848
Of which: Non-performing	442	(135)	307	148
Memorandum items: Asset write-offs	2.387
Memorandum items: Loans to customers excluding public administrations (business in Spain) (carrying amount)	186.645

Financing for real estate construction and development 31-12-2018 (Millions of euros)
	Gross amount	Allowances for impairment losses	Carrying amount	Excess over the maximum recoverable value of collateral
Financing for real estate construction and development (including land)	6,004	(428)	5,576	897
Of which: Non-performing	862	(347)	516	354
Memorandum items: Asset write-offs	2,784
Memorandum items: Loans to customers excluding public administrations (business in Spain) (carrying amount)	185,670

Financing for real estate construction and development 31-12-2017 (Millions of euros)
	Gross amount	Allowances for impairment losses	Carrying amount	Excess over the maximum recoverable value of collateral
Financing for real estate construction and development (including land)	6,830	(637)	6,193	1,418
Of which: Non-performing	1,481	(549)	931	602
Memorandum items: Asset write-offs	3,816
Memorandum items: Loans to customers excluding public administrations (business in Spain) (carrying amount)	185,257

The tables below show the breakdown of financing for real estate developers and developments, including developments carried out by non-developers (business in Spain), by collateral:

Financing for real estate developers and developments by collateral (Millions of euros)
	Gross amount
	31-12-2019	31-12-2018	31-12-2017
Without mortgage collateral	562	477	814
With mortgage collateral	5,204	5,527	6,016
Buildings and other completed constructions	3,370	3,774	4,336
Homes	2,277	2,556	2,811
Other	1,093	1,218	1,525
Buildings and other constructions under construction	1,370	1,185	931
Homes	1,306	1,056	840
Other	64	129	91
Land	464	568	749
Consolidated urban land	351	346	423
Other land	113	222	326
Total	5,766	6,004	6,830

The following table presents financial guarantees given for real estate construction and development, including the maximum level of exposure to credit risk (i.e. the amount the Group could have to pay if the guarantee is called on).

Financial guarantees (Millons of euros)
	31-12-2019	31-12-2018	31-12-2017
Financial guarantees given related to real estate construction and development	107	93	175
Amount recognised under liabilities		0	55

The table below provides information on guarantees received from real estate development loans by classification of customer insolvency risk:

Guarantees received for real estate development transactions * (Millons of euros)
	31-12-2019	31-12-2018	31-12-2017
Value of collateral	13.362	13.471	14.883
Of which: Guarantees non-performing risks	810	1.383	2.520

(*) The value of the guarantee is the lower amount of the collateral and the loan value, except for non-performing loans, in which it is fair value.

Financing for home purchases

The breakdown of home-purchase loans (business in Spain), as well as the annual financing granted to purchase homes from credit streamlining at the end of these financial years, is as follows:

Loans granted to buyers of foreclosed homes (Millions of euros)
	2019	2018	2017
Financing granted in the year	190	527	344
Average percentage financed	92%	90%	87%

Home purchase loans with mortgage at these dates by the loan-to-value (LTV) ratio, based on the latest available appraisal, are as follows:

Home purchase loans by LTV (*) (Millions of euros)
	31-12-2019		31-12-2018		31-12-2017
	Gross amount	Of which: non-performing	Gross amount	Of which: non-performing	Gross amount	Of which: non-performing
Not real estate mortgage secured	662	11	762	12	767	15
Real estate mortgage secured, by LTV ranges (**)	76,658	2,719	79,917	3,103	82,495	3,530
LTV ≤ 40%	21,717	207	21,374	224	21,111	228
40% < LTV ≤ 60%	28,491	367	30,022	412	31,420	517
60% < LTV ≤ 80%	18,964	543	20,668	595	22,425	800
80% < LTV ≤ 100%	4,002	519	4,348	591	4,462	699
LTV > 100%	3,484	1,083	3,505	1,281	3,077	1,285
Total	77,320	2,730	80,679	3,115	83,262	3,545

(*) Includes financing for home purchases granted by subsidies Unión de Créditos para la Financiación Inmobiliaria, EFC, SAU (Credifimo) and Corporación Hipotecaria Mutual.

(**) LTV calculated according to the latest available appraisals. The ranges for non-performing transactions are updated in accordance with prevailing regulations.

3.3.5Counterparty risk generated by transactions with derivatives, repos, securities lending and deferred settlement transactions

3.3.5.1Monitoring and measurement of counterparty risk

Counterparty risk, being part of credit risk, quantifies the losses derived from the counterparty's potential default before the cash flows are definitively settled. It is calculated for transactions involving derivative instruments, repo agreements, securities lending and deferred settlement.

The approval of new transactions involving counterparty risk in CaixaBank is subject to an internal framework that enables rapid decision-making about assuming such risk, for both financial and other counterparties. Accordingly, in its business with financial institutions, the Group has a credit approval system in place, in which the maximum authorised exposure to credit risk with an institutions (including counterparty risk) is determined by a complex calculation, mainly based on the institution's ratings and an analysis of its financial statements. In transactions with other counterparties, including retail customers, derivative transactions relating to asset applications (loan interest rate risk hedging) are approved jointly with the application. All other transactions are approved depending on whether the assigned risk limit is met, or depending on individual analysis. Approval of transactions corresponds to the risk areas responsible for loan analysis and approval.

CaixaBank has put in place a specific internal framework for risk with Central Counterparties (CCPs), specifying how the limits for such entities are determined, and how exposure is calculated to determine the available balance on this limit.

The definition of limits for counterparty risk is complemented by internal concentration limits, mainly for country and large exposure risks.

Counterparty risk relating to derivative transactions is quantitatively associated with the related market risk. Similarly, the equivalent credit exposure for derivatives is understood as the maximum potential loss over the life of an operation that the bank might incur should the counterparty default at any time in the future. This is calculated using Monte Carlo simulation with portfolio effect and offsetting of positions, as applicable, at a 95% confidence interval, based on stochastic models incorporating the volatility of the underlying and all of the characteristics of the operations.

Counterparty risk exposure for repos and securities lending is calculated in CaixaBank as the difference between the market value of the securities/cash granted to the counterparty and the market value of the securities/cash received from the counterparty as collateral, considering the applicable volatility adjustments in each case.

It also considers the mitigating effect of collateral received under Framework Collateral Agreements. In general, the methodology for calculating counterparty risk exposure described above is applied during the acceptance of new operations and in recurrent calculations on subsequent days.

Counterparty risk in the Group for financial counterparties is controlled through an integrated system that provides real-time data on the available exposure limit for any counterparty, product and maturity. For the remaining counterparties, counterparty risk is controlled through corporate applications, which contain both the limits of the lines of derivatives risk (if any) and credit exposure of derivatives and repos.

3.3.5.2Mitigation techniques for counterparty risk

The main risk mitigation policies and techniques employed for counterparty risk with financial entities involve:

ISDA/CMOF contracts

Standardised contracts for global derivative operations with a counterparty. These explicitly provide for the possibility of offsetting the flows of outstanding collections and payments between the parties for all derivatives trading hedged by the contracts.

CSA contracts / CMOF appendix III

Agreements whereby each of the parties undertake to provide collateral (usually a cash deposit) as security for the net counterparty risk position arising from the derivatives traded between them, on the basis of a prior close-out netting agreement included in the clauses of the ISDA/CMOF contracts.

GMRA/ CME/ GMSLA contracts (repo agreements and securities lending)

Agreements whereby the parties undertake to deliver collateral to each other for the net counterparty risk exposure arising from differences between the value of the sum accrued by simultaneous buying and selling of securities and the market value of the securities.

Break-up clauses

Such clauses provide for early termination of the agreement by one of the parties of its own free will, at a certain point in a contract. This mitigates counterparty risk by reducing the effective duration of the operations subject to the clause, or reducing the counterparty’s counterparty risk exposure.

Delivery-versus-payment in securities settlement systems

Systems that eliminate settlement risk with a counterparty, since clearing and settlement occur simultaneously and in an inseparable fashion. One major system is the CLS system for delivery-versus-payment in the case of simultaneous collection and payment flows in different currencies.

Central Counterparties (CCPs)

The use of CCPs in derivatives and repo transactions can mitigate the associated counterparty risk, as these entities act as intermediaries on their own account between the two parties to the transaction, thus absorbing the counterparty risk. The EMIR regulations set forth an obligation to clear certain OTC derivative contracts through these Central Counterparties, as well as to give notification of all transactions conducted.

For non-financial counterparties, the mitigation techniques for counterparty risk involve: ISDA/CMOF contracts, CSA contract/CMOF Appendix III and break-up clauses, pledges of financial guarantees and guarantees issued by counterparties with higher credit quality than the original counterparty in the operation.

Risk is often quantified by marking to market all outstanding transactions (normally on a daily basis). This entails revision and modification, as necessary, of the collateral delivered by the debtor. Meanwhile, the impact on collateral of a hypothetical downgrade to CaixaBank's rating would not be significant, as most of the collateral agreements do not include surcharges related to its rating.

3.3.6Risk associated with the investee portfolio

The risk associated with equity investments (or "investees"), which in terms of regulations is included under credit risk for investments that are not classified in the held-for-trading portfolio, but which is individually included in the Corporate Taxonomy as a component of the Risk of Impairment of Other Assets, entails the possible loss or reduction in the Group's solvency through equity instruments caused by adverse movements in market prices, potential sales or investee insolvency with a medium to long-term horizon.

The way in which each share is methodologically processed for capital consumption will depend on: 1) the accounting classification of the share, for investments classified in the portfolio at fair value with changes in other comprehensive income, the calculation is carried out using the internal VaR model; and 2) the longevity strategy, for investments intended to be held on a long-term basis and, in some cases, there is a long-term link in their management, the most significant risk is credit risk, and, therefore, the PD/LGD approach is used whenever possible. If the requirements for applying the aforementioned methods are not met and/or there is not sufficient information, the simple risk-weight approach is applied in accordance with current regulations. In any case, for certain cases laid down in the regulation, the capital consumption will be subjected to potential deductions from own funds or a fixed weighting of 250%, as is the case for the significant financial investments.

As regards management, controlling and financial analysis of the main investees are performed through specialists exclusively responsible for monitoring changes in economic and financial data and for understanding and issuing alerts in the event of changes in regulations and fluctuations in competition in the countries and sectors in which the investees operate. These financial analysts also liaise with listed investees' investor relations departments and gather the information, including reports by third parties (e.g. investment banks, rating agencies) needed for an overall outlook of possible risks to the value of the shareholdings.

In general, with the most significant shareholdings, both the estimates of and actual data on investees’ contributions to income and shareholders’ equity (where applicable) are updated regularly. In these processes, the outlook for securities markets and analysts’ views (e.g. recommendations, target prices, ratings, etc.) are shared with Senior Management for regular comparison with the market.

3.4.1Overview

The Group identifies market risk as the loss in value of assets or the increase in value of liabilities including in the trading portfolio due to fluctuations in interest rates, exchange rates, credit spread, external factors or prices on the markets where said assets/liabilities are traded.

Market risk encompasses almost all the Group's trading portfolio, as well as the deposits and repos arranged by trading desks for management.

Risk factors are managed according to the return-risk ratio determined by market conditions and expectations, the limits structure and the authorised operating framework.

3.4.2Market risk cycle

3.4.2.1Monitoring and measurement of market risk

On a daily basis, the responsible departments monitor the contracts traded, calculate how changes in the market will affect the positions held (daily marked-to-market results), quantify the market risk taken, monitor compliance with global limits and analyse the ratio of actual return to the risk undertaken. With the results obtained from these activities, they produce a daily report on position, risk quantification and the utilisation of risk thresholds, which is distributed to Senior Management, the officers in charge of its management, Model Validation and Risk and the Internal Audit division.

As a general rule, there are two types of measurements which constitute a common denominator and market standard for the measurement of market risk:

1. Sensitivity

Sensitivity represents risk as the impact a slight change in risk factors has on the value of positions, without providing any assumptions about the probability of such a change.
2. Value-at-risk (VaR)

The benchmark market risk measurement is VaR at 99% with a one-day time horizon for which the RAF defines a limit for trading activities of EUR 20 million (excluding the economic hedging CDS for the CVA, recognised for accounting purposes in the held-for-trading portfolio). Daily VaR is defined as the highest of the following three calculations:
- Parametric VaR with a covariance matrix deriving from a 75-day window of history, giving more weight to recent observations. The parametric VaR technique is based on volatilities and matching fluctuations in the prices and interest and exchange rates of the assets comprising the portfolio.
- Parametric VaR with a covariance matrix arising from historical performance over one year and equal weightings.
- The historical VaR technique, which calculates the impact on the value of the current portfolio of historical changes in risk factors. Daily changes observed over the last year are taken into account, with a confidence interval of 99%. Historical VaR is an extremely useful system for completing the estimates obtained by the parametric VaR technique, since it does not include any assumptions on the statistical behaviour of risk factors. The parametric VaR technique assumes fluctuations that can be modelled using normal statistical distribution. Historical VaR is also an especially suitable technique since it includes non-linear relationships between the risk factors.
Moreover, since a downgrade in the credit rating of asset issuers can also give rise to adverse changes in market prices, quantification of risk is completed with an estimate of the losses arising from changes in the volatility of the credit spread on private fixed-income and credit derivative positions (Spread VaR), which constitutes an estimate of the specific risk attributable to the security issuers. This calculation is made using a historical method while taking into account the potentially lower liquidity of these assets, with a confidence interval of 99%, and assuming absolute weekly variations in the simulation of credit spreads.

Total VaR results from the aggregation of VaR arising from fluctuations in interest rates, exchange rates (and the volatility of both) and from the Spread VaR, which are aggregated on a conservative basis, assuming zero correlation between the two groups of risk factors, and the addition of VaR of the equities portfolio and VaR of the commodities portfolio (currently with no position), assuming in both cases a correlation of one with the other risk factor groups.

The table below shows the average 1-day VaR at 99% attributable to the various risk factors at CaixaBank. The consumption levels are moderate and are concentrated on corporate debt spread, risk in the interest rate curve, which includes the credit spread on sovereign debt, and share price volatility risk. The risk amounts for other factors have less significance.

Maximum exposure to credit risk (Millions of euros)
	Total	Interest rate	Exchange rate	Share price	Inflation	Commodity price	Credit spread	Interest rate volatility	Exchange rate volatility	Share price volatility
Average VaR 2019	1.23	0.37	0.14	0.23	0.25	0.00	0.46	0.07	0.11	0.35

The highest levels, up to a maximum of EUR 2.2 million, were reached in November, due to the punctual increase in the sensitivity of the portfolio from variations in inflation levels.

At BPI, the standard measurement for market risk is 10-day parametric VaR at 99%. In 2019, the average 1-day VaR and maximum 1-day VaR at 99% for BPI trading activities was EUR 0.06 million and EUR 0.16 million, respectively.

Additional measures to VaR

As an analysis measurement, the Group completes the VaR measurements with the following risk metrics, updated weekly:

Stressed VaR indicates the maximum loss on adverse movements in market prices based on a stressed historical period of one year, with a 99% confidence level and a daily time horizon (subsequently extrapolated to the regulatory horizon of 10 market days, multiplying by the root of 10). The stressed VaR calculation is leveraged by the same methodology and infrastructure as the historical VaR, with the only significant difference being the historical window selected.
The incremental default and migration risk reflects the risk related to changes in credit ratings or breach of positions in fixed-income instruments and credit derivatives in the trading portfolio, with a confidence level of 99.9%, a one-year time horizon, and a quarterly liquidity horizon, which is justified by the high liquidity of portfolio issuances. The estimate is made using Monte Carlo simulation of possible future states of external rating of the issuer and the issuance, based on transition matrices published by the main ratings agencies, where dependence between credit quality variations between the different issuers is modelled using Student’s t-distribution.

The maximum, minimum and average values of these measurements in this year, as well as their value at the close of the period of reference, are shown in the following table.

Summary of risk measurements (Millions of euros)
	Maximum	Minimum	Average	Last
1-day VaR	2.2	0.7	1.2	1.2
1-day Stressed VaR	10.5	2.7	5.5	5.2
Incremental risk	28.2	5.5	15.0	12.7

Capital requirements for market risk are determined using internal models as the sum of the 3 previous measurements, with a time horizon of 10 market days. It is displayed below:

Capital requirements (Millions of euros)
	Last value	60 day average	Exceeded	Multipler	Capital
10-day VaR	3.9	4.9	0	3	14.7
10-day Stressed VaR	16.4	16.6	0	3	49.9
Incremental risk	12.7	14.8	-	-	14.8
Total (*)					79.3

(*) Charges for VaR and stressed VaR are identical and correspond to the maximum between the last value and the arithmetic mean of the last 60 values, multiplied by a factor depending on the number of times the actual daily result was less than the estimated daily VaR. Similarly, capital for Incremental Risk is the maximum of the last value and the arithmetic mean of the preceding 12 weeks.

Backtesting

To confirm the suitability of the estimates of the internal model, daily results are compared against the losses estimated under the VaR technique, which is what is referred to as backtesting. The risk estimate model is checked in two ways:

Through net or hypothetical backtesting, which relates the portion of the daily marked-to-market result of open positions at the close of the previous session to estimated VaR over a one-day time horizon, calculated on the basis of the open positions at the close of the previous session. This backtesting is the most appropriate means of performing a self-assessment of the methodology.
Gross (or actual) backtesting, which compares the total result obtained during the day (including intraday transactions) to VaR for a time horizon of one day, calculated on the basis of the open positions at the close of the previous session. This provides an assessment of the importance of intraday transactions in generating profit and estimating the risk.

The daily result used in both backtesting exercises does not include mark-ups, reserves, fees or commissions.

During the year, there were no excesses in the gross and net backtesting exercises:

Distribution of the profit/(loss) of trading activities in 2019 (Frequency in number of days. Millions of euros)

Distribution of the daily net profit/(loss) vs daily VaR (Millions of euros)

Distribution of the daily gross profit/(loss) vs daily VaR (Millions of euros)

Stress test

Lastly, two stress testing techniques are used on the value of the trading positions to calculate the possible losses on the portfolio in situations of extreme stress:

Systematic stress: this technique calculates the change in value of the portfolio in the event of a specific series of extreme changes in the main risk factors. It considers parallel interest rate shifts (rising and falling); changes at various points of the slope of the interest rate curve (steepening and flattening); variation of the spread between the instruments subject to credit risk and government debt securities (bond-swap spread); shifts in the EUR/USD curve differential; higher and lower volatility of interest rates; variation of the euro with respect to the USD, JPY and GBP; variation in exchange rate volatility, share prices; and higher and lower volatility of shares and commodities.
Historical scenarios: this technique addresses the potential impact of actual past situations on the value of the positions held.
Reverse stress test: a technique that assumes a high-vulnerability scenario given the portfolio's composition and determines what variations in the risk factors lead to this situation.

Based on the set of measures described above, the management of market risk on trading positions in markets is in accordance with the methodological and monitoring guidelines.

3.4.2.2Mitigation of market risk

As part of the required monitoring and control of the market risks taken, there is a structure of overall VaR limits complemented by the definition sublimits, stressed VaR and incremental default and migration risk, Stress Test and Stop Loss results and sensitivities for the various management units that could assume market risk.

The risk factors are managed using economic hedges on the basis of the return/risk ratio determined by market conditions and expectations, always within the assigned limits.

Beyond the trading portfolio, fair-value hedge accounting is used, which eliminates potential accounting mismatches between the balance sheet and statement of profit or loss caused by the different treatment of hedged instruments and their hedges at market values. In the area of market risk, limits for each hedge are established and monitored, in this case expressed as ratios between total risk and the risk of the hedged items.

3.5.1Overview

In a regulatory context, operational risk is defined as the possibility of incurring losses due to the failure or unsuitability of processes, people, internal systems and external events. Given the heterogeneity of the nature of operational events, CaixaBank does not record operational risk as a single element in the Corporate Risk Taxonomy, but rather it has included the following risks of an operational nature: Legal/Regulatory, Conduct, Technology, Reliability of financial information and Other operational risks. For each of these risks in the Taxonomy, the Group upholds the corresponding specific management frameworks, without prejudice to the additional existence of a comprehensive operational risk management framework.

The purpose of this comprehensive framework is to improve the quality of business management, supplying relevant information to allow decisions to be made that ensure the organisation's long-term continuity, the optimisation of processes and the quality of both internal and external customer service. To achieve this, various lines of work have been established:

To adopt measures to sustainably mitigate and reduce operational losses.
To ensure the organisation's long-term continuity.
To promote the establishment of systems for the ongoing improvement of the operating process and of the control structure.
To exploit operational risk management synergies.
To promote an operational risk management culture.
To comply with the current regulatory framework and requirements for the applicability of the management and calculation models chosen.

3.5.2Operational risk cycle

Although the standardised method is used to calculate regulatory capital, the Group's operational risk measurement and management is based on policies, processes, tools and methodologies that are risk-sensitive, in line with market best practices.

Operational risks are structured into four categories or hierarchical tiers, from the most generic to the most specific and detailed:

Tier 1 and 2: of the regulations. Tier 1 comprises 7 subcategories (Internal Fraud, External Fraud, Employment practices and security in workplace, Customers, products and business practices, Damages to physical assets, business interruptions and system faults, Execution and Delivery and process management) and Tier 2 comprises 20 subcategories.
Tier 3: Internal Group level based on identification of the risks detailed.
Tier 4: Individual risks, obtained after assignment of a Tier 3 risk to a process or activity.

Operational risk is measured with the following aspects:

Qualitative measurement

Operational risks are subjected to self-assessments on an annual basis, which make it possible to: i) obtain greater knowledge of the operational risk profile and the new critical risk; and ii) maintain a standardised update process for the taxonomy of operational risks, which is the foundation upon which this risk's management is defined.

A series of expert workshops and meetings are also held to generate hypothetical extreme operational loss scenarios. The purpose is for these scenarios to be used to detect areas of improvement in the management and to supplement the available external and internal historical data on operational losses.

Quantitative measurement

The internal operational loss database is one of the key aspects for managing operational risk (and the future calculation of the capital for operational risk). With this aim in mind, the technological environment of the operational risk system provides all the functionality required and is fully integrated into the bank’s transactional and information systems.

An evento operacional is the implementation of an identified operational risk, an event that causes an operational loss. It is the concept around which the entire data model revolves in the Internal Database. Loss events are defined as each individual economic impact related to an operational loss or recovery.

Gross losses by type of risk are broken down as follows:

Distribution of gross loss by category of Operational Risk (Percentage)

The internal historical data on operational losses is supplemented by external data. For this reason, the Group is registered with the ORX (Operational Riskdata eXchange) consortium, which anonymously exchanges operational loss information from banks on a worldwide level, and allows geographical subgrouping, among other functions, to manage risks (news service, working groups, methodological initiatives on operational risk). ORX requires its members to classify operational loss data using a series of parameters, both regulatory and proprietary. As a result, all of the parameters required by ORX are reported in events in the database.

Additionally, measurement using Operational Risk indicators (KRIs) is a quantitative/qualitative methodology that: i) enables us to anticipate the development of operational risks, taking a forward-looking approach to their management and ii) provide information on development of the operational risk profile and the reasons for this. A KRI is a metric that detects and anticipates changes in said risk; its monitoring and management is integrated in the operational risk corporate management tool. KRIs are not by nature a direct result of risk exposure. They are metrics that can be used to identify and actively manage operational risk.

3.5.3Mitigation of operational risk

With the aim of mitigating the operational risk, the following have been defined: action plans that entail appointing a centre to be in charge, setting out the actions to be undertaken to mitigate the risk covered by the plan, the percentage or degree of progress, which is updated regularly, and the final commitment date. This allows mitigation through i) decreasing the frequency at which the events occur, as well as their impact; ii) holding a solid structure of sustained control in policies, methodologies, processes and systems and iii) integrating – into the everyday management of the Group – the information provided by operational risk management levers.

In addition, the corporate insurance programme for dealing with operational risk is designed to cover certain risks, and it is updated annually. Risk transfer depends on risk exposure, tolerance and appetite at any given time.

Legal and regulatory risk is defined as the potential loss or decrease in the profitability of the Group as a result of changes in the legislation, of the incorrect implementation of this legislation in the Group's processes, of the inappropriate interpretation of the same in various operations, of the incorrect management of court or administrative injunctions, or of the claims or complaints received.

It is managed according to certain operational principles, with a view to ensure that the appetite and risk tolerance limits defined in the Group's Risk Appetite Framework are respected.

In this regard, the entity constantly monitors and tracks regulatory changes, in pursuit of better legal security and legitimate interests. Here we highlight the main regulatory initiatives and consultation processes that the entity has participated in, given their relevance:

European Commission review of various Directives, specifically: i) the Consumer Credit Directive (CCD), ii) the Directive on Distance marketing of financial services: consumer protection, iii) the Directive and Regulations on capital requirements (CRD5 and CRR2), iv) the Bank Recovery and Resolution Directive (BRRD2), v) the Benchmarks Regulation (BMR), vi) the Markets in Financial Instruments Directive (MiFID 2) and the Insurance Distribution Directive (IDD) for the integration of sustainability factors and risks. The entity has also monitored the finalisation of Basel III agreements and their implementation, and the advances of a legislative framework used to drive sustainable finance within the European Union.

Within Spain, public consultations were carried out regarding the modification of the circular on the advertising of banking products and services, and the modification of the Order on Banking Transparency with respect to the obligation to report open-end credit associated with payment instruments, as well as the transposition of the Directive to promote the long-term involvement of shareholders.

The EBA Guidelines on security and technology (ICT) risk management are notable as regards technological hazards.

In terms of taxation, the bank addressed the consultation regarding the tax measures of the General State Budgets and the amendment to the General Tax Act, transposing the EU DAC 6 directive into Spanish law.

These activities are coordinated in the Regulation Committee, the body responsible for defining the Group's strategic stance in financial-regulation-related matters, driving the representation of the Entity's interests and coordinating the regular assessment of the regulatory initiatives and proposals that may affect the Group.

On the other hand, the Entity seeks to ensure the suitable implementation of standards. Thus, the following are noteworthy:

Property Credit Contract Regulatory Act (Ley reguladora de los contratos de crédito inmobiliario – LCI) 5/2019, of 15 March.
Royal Decree-Law 19/2018, of 23 November, concerning payment services and other urgent financial measures (PSD2).
Royal Decree-Law 19/2017, of 24 November, on basic payment accounts, payment account relocation and comparability of fees (PAD).

Along the same lines, the Legal Advisory service coordinates a set of committees (Transparency Committee, Privacy Committee), the purpose of which is the monitoring – in each of the bank's initiatives – of its adaptation to consumer protection and privacy standards.

In order to ensure the correct interpretation of the standards, in addition to work on the study of jurisprudence, and decisions of the statutory authorities, in order to adjust the bank's activity to such criteria, it also enquires as to when it is necessary for the relevant administrative authorities. For example:

In matters relating to tax, the Group has presented various binding tax enquiries for the ratification of interpretative criteria on Personal Income Tax deductibility of the fee for the administration and custody of shares in investment funds that meet certain requirements, determining the tax basis for VAT of the non-independent advisory service and simplified advice on funds, and VAT treatment of brokering in relation to certain financial services.
In matters relating to data protection, it has presented various enquiries to the Spanish Data Protection Agency on the status of Data Controller for the provision of financial services and the need to view Robinson Lists in the case of processing based on legitimate interest.

With regard to judicial processes, and taking into account the existing litigiousness, the Group has policies, criteria, analysis and monitoring procedures for these disputes. These enable the Entity to manage the defence of each of them individually, and to identify and update the provisions necessary to cover a hypothetical outflow of economic resources, provided their occurrence is considered probable as a result of unfavourable rulings and administrative penalties against the Group, in or out of court (i.e. customer complaints) administrative sanctions, brought against the Group in the civil, criminal, tax, administrative and labour jurisdictions.

Insofar as operational risk is concerned, according to the regulatory definition, conduct risk is defined as the Group's risk arising from the application of conduct criteria that run contrary to the interests of its customers and stakeholders, or acts or omissions that are not compliant with the legal or regulatory framework, or with internal codes and rules, or with codes of conduct and ethical and good practice standards. The objective of the Group is: i) to minimise the probability of this risk occurring and ii) if it does, to detect, report and address the weaknesses promptly.

The management of conduct risk is not limited to any specific area, but rather the entire Group. All employees must ensure compliance with prevailing regulations, applying procedures that capture regulations in their activity.

In order to manage conduct risk, the bank encourages the awareness-raising and promotion of the values and principles set out in the Code of Business Conduct and Ethics, and its members and other employees and Senior Management must ensure that they are compliant as a core criterion guiding their day-to-day activities. Therefore, as the first line of defence, the areas whose business is subject to conduct risk implement and manage first-level indicators and controls to detect potential sources of risk and act effectively to mitigate them.

Also within the framework of the regulatory operational risk, technology risk is defined as the risk of losses due to hardware or software inadequacies or failures in technical infrastructure, due to cyberattacks or other circumstances, which could compromise the availability, integrity, accessibility and security of the infrastructures and data. The risk is broken down into 5 categories that affect ICT (Information and Communications Technology): i) availability; ii) information security; iii) operation and management of change; iv) data integrity; and v) governance and strategy.

Its current measurement is included in a monthly-monitored RAF indicator, calculated using individual indicators linked to the governance of information technologies, information security and technological contingencies. Regular reviews are carried out by sampling, which check the quality of the information and validate the methodology used in creating the indicators reviewed.

The governance frameworks available address this measurement, and have been designed according to leading international standards, applied in the areas of:

IT governance:

Designed and developed under the ISO 38500 standard.

Information security:

Designed and developed under the ISO 27001 standard.

Information Technology contingency:

Designed and developed under the ISO 27031 standard.

Specifically, business continuity refers to the capability of an organisation to continue delivery of products or services at acceptable predefined levels following a disruptive incident. Its management consists of identifying potential threats to the organisation and their impact on operations. It provides a framework for building organisational resilience with the capability for an effective response that safeguards the interests of its key stakeholders, reputation, brand, and value-creating activities.

Within this scope, CaixaBank has adopted and maintained a Business Continuity Management System (BCMS) based on the international ISO 22301 standard and certified by the British Standards Institution (BSI), with number BCMS 570347. Similarly, CaixaBank has been designated a critical infrastructure operator by virtue of the provisions of Act 8/2011 and is under the supervision of the National Centre for the Protection of Critical Infrastructures dependent on the State Secretary of Home Office Security.

Furthermore, CaixaBank holds a general emergency plan and various internal regulations on security measures, which include priority aspects such as: i) cybersecurity strategy; ii) the fight against customer fraud and internal fraud; iii) data protection; iv) security governance and disclosure; and v) supplier security.

Within the Risk Taxonomy, this means losses or damages caused by errors or faults in processes, due to external events, or actions of third parties outside the Group, whether accidentally or intentionally. It includes, among others, risk factors related to outsourcing, the use of quantitative models (model risk), the custody of securities or external fraud.

All of the Group's areas and companies are responsible for the set of other operational risks that arise within their respective remits. This implies identifying, assessing, managing, controlling and reporting the operational risks of their activity and helping the Group's Operational Risk Division to implement the management model.

The Corporate Policy on the management of outsourcing and its risks was approved in 2019, which covers the latest regulatory requirements with regard to these operations and provides significant support to the corporate governance of risks in outsourcing processes.

Financial information reliability risk is defined in the Corporate Risk Taxonomy as the risk of potential damage or loss, whether financial or other, stemming from possible deficiencies in the accuracy, integrity and approach to compiling the data needed to evaluate the financial position and assets of the Group. It is part of the set of regulatory operational risks.

The Group has Corporate Policies approved by the Board of Directors that establish the risk management and control framework, including:

the Corporate policy on disclosure and verification of financial information, that establishes the framework of control on the Group's relevant financial information disclosed to market.
the Corporate policy of Internal Control over Financial Reporting, that establishes the framework of governance, design, implementation and correct operation of the ICFR.
the Corporate Policy on Information Governance and Data Quality, that regulates data governance and filing of reports.

This risk is mainly managed by assessing whether the group's financial information complies with the following principles:

The transactions, facts and other events presented in the financial information in fact exist and were recorded at the right time (existence and occurrence).
The information includes all transactions, facts and other events in which the Group is the affected party (completeness).
The transactions, facts and other events are recorded and valued in accordance with applicable standards (valuation).
The transactions, facts and other events are classified, presented and disclosed in the financial information in accordance with applicable standards (presentation, disclosure and comparability).
The financial information shows, at the corresponding date, the entity’s rights and obligations through the corresponding assets and liabilities, in accordance with applicable standards (rights and obligations).

In order to manage and monitor the risk, the Group has implemented an internal control structure based on the aforementioned 3 lines of defence model:

The activities of 1st line of defence in the accounting closing process – a key pillar for preparing the financial information – include, among others, i) defining accounting criteria to apply in the Group as well as the processing of the unique corporate operations and transactions; ii) reviewing the reasonableness of the judgments and estimates as well as of the rest of the changes in accounting figures; iii) monitoring the implementation of new accounting circuits and standards as well as analysing the differences between estimated and actual impacts; iv) working on and controlling the applications and other manual processes; and v) coordinating the Group's companies to prepare the consolidated accounting closings.
The activities of 2nd line of defence include, among others, i) the monitoring and management of the Internal Control over Financial Reporting (ICFR); ii) advising on and/or defining criteria for the identification, monitoring, implementation and assessment of internal control over financial reporting; iii) reviewing compliance with the policies and iv) identifying and monitoring the internal control weaknesses identified.
The activities of 3rd line of defence include, among others, reviewing the reliability and integrity of financial reporting, including the effectiveness of the ICFR.

3.11.1 Structural interest rate risk

Risk defined as the negative impact on the economic value of balance sheet items or on financial income due to changes in the temporary structure of interest rates and their impact on asset and liability instruments and those off the Group's balance sheet not recognised in the trading book.

The management of this risk by the Group seeks to i) ) optimise the net interest margin and ii) maintain the economic value of the balance sheet, while at all times taking into account the metrics and thresholds of the risk appetite framework in terms of volatility of the financial margin and value sensitivity.

This risk is analysed considering a broad set of market-type scenarios, including the potential impact of all possible sources of interest rate risk in the banking book, i.e. repricing risk, curve risk, basis risk and optionality risk. Optionality risk considers automatic optionality related to the behaviour of interest rates and the optionality of customer behaviour, which is not only dependent on interest rates.

The Group applies best practices in the market and the recommendations of regulators in measuring interest rate risk, using various measurement techniques that make it possible to analyse the Group's positioning and its risk situation. These notably include:

Static gap:

It shows the contractual distribution of maturities and interest rate reviews for applicable balance sheet and/or off-balance aggregates at a particular date. GAP analysis is based on comparing the values of the assets and liabilities reviewed or that mature in a particular period.

Sensitivity of net interest income:

It shows the impact on the net income caused by changes in the interest rate curve as a result of the review of balance sheet transactions This sensitivity is determined by comparing a net interest income simulation in the event of various interest rate scenarios (immediate parallel and progressive movements of different intensities, as well as changes in slope). The most likely scenario, which is obtained using the implicit market rates, including the business trend and hedge management forecasts, is compared with other scenarios of rising or falling interest rates and parallel and non-parallel movements in the slope of the curve. The difference between these stressed net interest income figures compared to the baseline scenario give us a measure of the sensitivity, or volatility, of net interest income.

Balance sheet economic value:

it is calculated as the sum of i) the fair value of net interest-rate sensitive assets and liabilities on the balance sheet; ii) the fair value of off-balance sheet products (derivatives); and iii) the net carrying amounts of non-interest-rate sensitive asset and liability items.

Economic value sensitivity:

The economic value of sensitive balances on and off the balance sheet is reassessed under the various stress scenarios considered by the Group. The difference between this value and the economic value calculated at current market rates gives us a numeric representation of the sensitivity of economic value to the various scenarios employed.

Balance sheet VaR:

Defined as the maximum economic value that could be lost from the balance sheet in a certain period of time, applying market prices and volatilities as well as correlation effects using a specific confidence level and time horizon..

The sensitivities of net interest income and economic value are measurements that complement each other and provide an overview of the interest rate risk in the banking book, which focuses more on the short and medium term, in the case of net interest income, and on the medium and long term in the case of equity.

The tables below show – using a static gap – the breakdown of maturities and interest rate maturities and revaluations of sensitive items on the Group's balance sheet, at the close of the financial year:

Matrix of maturities and revaluations of the balance sheet sensitive to interest rates (Millions of euros)
	1 year	2 years	3 years	4 years	5 years	> 5 years	Total
Assets
Interbank and Central Banks	15,808	0	1,104	80	0	45	17,037
Loans and advances to customers	166,695	16,621	5,559	4,949	3,215	18,960	215,999
Fixed income portfolio	6,845	7,932	8,625	1,132	1,512	4,979	31,025
Total assets	189,348	24,553	15,288	6,161	4,727	23,984	264,061
Liabilities
Interbank and Central Banks	20,293	684	239	73	34	247	21,570
Customer deposits	105,879	22,884	15,435	10,109	8,111	56,511	218,929
Issuances	6,532	2,641	2,416	6,050	5,497	13,227	36,363
Total liabilities	132,704	26,209	18,090	16,232	13,642	69,985	276,862
Assets less liabilities	56,644	(1,656)	(2,802)	(10,071)	(8,915)	(46,001)	(12,801)
Hedges	(22,324)	6,365	2,998	4,077	3,201	5,711	28
Total difference	34,320	4,709	196	(5,994)	(5,714)	(40,290)	(12,773)

Below is the sensitivity of the net interest income and economic value to sensitive balance sheet assets and liabilities for a scenario of rising and falling interest rates of 100 basis points:

Interest rate sensitivity (incremental % with respect to the market baseline scenario / implicit rates)
	+100 BP	-100 BP (3)
Net interest income (1)	6.8%	-3.0%
Economic value of equity for sensitive balance sheet aggregates (2)	6.1%	-5.3%

(1) Sensitivity of the 1-year NII of sensitive balance sheet aggregates.

(2) Sensitivity of economic value for sensitive balance sheet aggregates on Tier 1.

(3) In the case of falling-rate scenarios the applied internal methodology enables the interest rates to be negative. At the current level of rates, this methodology enables the falling shock to reach approximately -1%. For example, if the interest rates of the EONIA curve are -0.40% the interest rate levels that this curve could reach, in the shock of -100 basis points, is -1.40%.

With regard to measurement tools and systems, relevant information is obtained at the transaction level of the sensitive balance sheet transactions from each computer application used to manage the various products. This information is used to produce databases with a certain amount of aggregation in order to speed up the calculations without impairing the quality or reliability of the information or results.

The assets and liabilities management application is parameterised in order to include the financial specifics of the products on the balance sheet, using behavioural customer models based on historical information (pre-payment models). The sensitivity to interest rates – conditioned by the speed with which market rates are transposed and the expected terms to maturity – have been analysed for items without a contractual maturity date (demand accounts) on the basis of past experience of customer behaviour, including the possibility that the customer may withdraw the funds invested in this type of product. For other products, in order to define the assumptions for early termination, internal models are used which include behavioural variables of customers, products, seasonality and interest rate fluctuations.

The projection tool is also fed with growth data budgeted in the financial plan (volumes, products and margins) and information on the various market scenarios (interest and exchange rate curves), in order to perform a reasonable estimate of the risks associated with the net interest income and economic value of sensitive balance sheet aggregates.

To mitigate the interest rate risk in the banking book, the Group actively manages risk by arranging additional hedging transactions on financial markets to supplement the natural hedges generated on its own balance sheet as a result of the complementarity between the sensitivity to fluctuations in interest rates on deposits and on lending transactions arranged with customers or other counterparties.

The interest rate risk in the banking book assumed by the Group is substantially below levels considered significant under current regulations.

3.11.2 Exchange rate risk in the banking book

Exchange rate risk in the banking book corresponds to the potential risk in the assets affected by adverse movements in exchange rates.

The Group has foreign currency assets and liabilities in its balance sheet as a result of its commercial activity and its shares in foreign currencies, in addition to the foreign currency assets and liabilities deriving from the Group’s measures to mitigate exchange rate risk.

The equivalent euro value of all foreign currency assets and liabilities in the Group's balance sheet is as follows:

Foreign currency positions (Millons of euros)
	31-12-2019	31-12-2018	31-12-2017
Cash and cash balances at central banks and other demand deposits	419	524	512
Financial assets held for trading	2,314	1,852	1,124
Financial assets with changes in other comprehensive income	1,352	1,458	101
Financial assets at amortised cost	11,206	8,573	7,762
Equity Investments	108	94	668
Other assets	1,060	1,612	72
Total foreign currency assets	16,459	14,113	10,239
Financial liabilities at amortised cost	8,878	7,899	8,113
Deposits	7,857	7,009	7,249
Central banks	1,385	1,402	2,389
Credit institutions	1,469	1,269	1,034
Customers	5,003	4,338	3,826
Debt securities issued	945	847	807
Other financial liabilities	76	43	57
Other liabilities	2,489	1,919	(193)
Total foreign currency liabilities	11,367	9,818	7,920

The Group hedges its foreign currency risk by arranging cash transactions of financial derivatives, which mitigate the risk of asset and liability positions on the balance sheet. However, the nominal amount of these instruments is not reflected directly on the balance sheet but rather as memorandum items for financial derivatives. This risk is managed by seeking to minimise the level of exchange rate risk assumed in commercial activity, which explains why the Group's exposure to this market risk is low.

The remaining minor foreign currency positions in the banking book and of the treasury activity are chiefly held with credit institutions in major currencies. The methods for quantifying these positions, which are the same, are applied alongside the risk measurements used for the treasury activity as a whole.

The currency detail of the main balance sheet headings is as follows:

Breakdown of the main balance sheet items by currencye - 31-12-2019 (Millons of euros)
	Cash *	FA held for trading	FA with changes in OCI	FA at amortised cost	FL at amortised cost	Other liabilities
USD	183	1,512	933	7,494	7,864	1,613
JPY	19	1	0	483	9	1
GBP	45	870	4	1,474	378	899
PLN (Polish Zloty)	31	0	0	748	15	3
CHF	24	0	0	261	1	2
Other	117	(69)	415	746	611	(29)
Total	419	2,314	1,352	11,206	8,878	2,489

FA: Financial assets; FL: Financial liabilities.

(*) Cash and cash balances at central banks and other demand deposits.

Breakdown of the main balance sheet items by currencye - 31-12-2018 (Millons of euros)
	Cash *	FA held for trading	FA with changes in OCI	FA at amortised cost	FL at amortised cost	Other liabilities
USD	213	1,794	931	5,950	7,028	1,806
JPY	16	1	0	563	9	1
GBP	51	155	4	930	393	137
PLN (Polish Zloty)	85	0	0	442	12	2
CHF	28	0	0	235	0	2
Other	131	(98)	523	453	457	(29)
Total	524	1,852	1,458	8,573	7,899	1,919

FA: Financial assets; FL: Financial liabilities.

(*) Cash and cash balances at central banks and other demand deposits.

Breakdown of the main balance sheet items by currencye - 31-12-2017 (Millons of euros)
	Cash *	FA held for trading	FA with changes in OCI	FA at amortised cost	FL at amortised cost	Other liabilities
USD	257	1,157	96	5,331	7,458	(131)
JPY	12	1	0	606	2	0
GBP	48	13	4	823	332	(26)
PLN (Polish Zloty)	54	0	0	316	10	7
CHF	37	31	0	255	0	42
Other	104	(78)	1	431	311	(85)
Total	512	1,124	101	7,762	8,113	(193)

FA: Financial assets; FL: Financial liabilities.

(*) Cash and cash balances at central banks and other demand deposits.

Given the reduced exposure to exchange rate risk and considering the existing hedges, the sensitivity of the balance sheet's economic value is not significant.

3.12.1 Overview

Liquidity and funding risk refers to insufficient liquid assets or limited access to market financing to meet contractual maturities of liabilities, regulatory requirements, or the investment needs of the Group.

The Group manages this risk to maintain sufficient levels so that it can comfortably meet all its payment obligations and to prevent its investment activities from being affected by a lack of lendable funds, at all times within the risk appetite framework. The strategic principles that are followed to meet this objective are:

A decentralised liquidity management system across two units (the CaixaBank subgroup and the BPI subgroup), which includes a segregation of duties to ensure optimal management, control and monitoring of risks.
Maintaining an efficient level of liquid funds in order to meet obligations assumed, fund business plans and comply with regulatory requirements.
Actively manage liquidity; this entails continuous monitoring of liquid assets and the balance sheet structure.
Sustainability and stability, these being principles of the funding source strategy, which is based on i) the customer deposit-based funding structure and ii) capital market funding, complementing the funding structure.

The liquidity risk strategy and appetite for liquidity and funding risk involves:

Identifying significant liquidity risks for the Group;
Formulating the strategic principles the Group must observe in managing each of these risks;
Defining significant metrics for each risk;
Setting appetite, tolerance, limit and – as the case may be – recovery thresholds within the RAF;
Setting up management and control procedures for each of the risks, including mechanisms for internal and external systematic monitoring;
Defining a stress testing framework and a Liquidity Contingency Plan to ensure that liquidity risk is managed accordingly in situations of moderate and serious crisis;
And a Recovery Planning framework, in which scenarios and measures are devised for stress conditions.

In particular, the Group holds specific strategies with regard to: i) management of intraday liquidity risk; ii) management of the short-term liquidity; iii) management of sources of financing/concentrations; iv) management of liquid assets; and v) management of collateralised assets. Similarly, the Group has procedures to minimise liquidity risks in stress conditions through i) the early detection of the circumstances through which it can be generated; ii) minimising negative impacts; and iii) sound management to overcome a potential crisis situation.

3.12.2 Mitigation techniques for liquidity risk

On the basis of the principles mentioned in the previous section, a Contingency Plan has been drawn up defining an action plan for each of the established crisis scenarios. This sets out measures to be taken on the commercial, institutional and disclosure level to deal with this kind of situation, including the possibility of using the liquidity reserves or extraordinary sources of finance. In the event of a situation of stress, the liquid asset buffer will be managed with the objective of minimising liquidity risk.

The measures in place for liquidity risk management and anticipatory measures feature:

Authority from the Annual General Meeting to issue securities.
Availability of several facilities open with i) the ICO, under credit facilities – mediation, ii) the EIB and iii) the Council of Europe Development Bank (CEB). In addition, there are financing instruments with the ECB for which a number of guarantees have been posted to ensure that liquidity can be obtained immediately:

Available in ECB facility (Millons of euros)
	31-12-2019	31-12-2018	31-12-2017
Value of guarantees delivered as collateral	51,455	53,652	50,149
CaixaBank	46,001	46,698	43,484
BPI	5,454	6,954	6,665
Drawn down	(12,934)	(28,183)	(28,820)
TLTRO II – CaixaBank	(3,409)	(26,819)	(26,819)
TLTRO III – CaixaBank	(8,145)
TLTRO II – BPI	(500)	(1,364)	(2,001)
TLTRO III – BPI	(880)
Accrued interest	49	279
Accrued interest - CaixaBank	44	268
Accrued interest - BPI	6	11
Total available balance in ECB facility	38,571	25,748	21,329

Maintaining issuance programmes aimed at expediting formalisation of securities issuances in the market

Debt issuance capacity - 31-12-2019 (Millons of euros)
	Total issuance capacity	Total issued
CaixaBank promissory notes programme (CNMV 10-07-2019) (1)	1,000	0
CaixaBank fixed-income programme (CNMV 10-07-2019)	15,000	0
Structured retail fixed-income programme (CNMV 14-06-2018) CaixaBank Notas Minoristas (2)	0	999
CaixaBank EMTN ("Euro Medium Term Note") programme (Ireland 26-04-2019)	15,000	11,632
BPI EMTN ("Euro Medium Term Note") programme (Luxembourg 28-06-2019)	7,000	583
CaixaBank ECP ("Euro Commercial Paper") programme (Ireland 18-12-2019) (3)	3,000	703
BPI mortgage covered bonds programme (CMVM Portugal 19-02-2019)	9,000	7,300
BPI public sector covered bonds programme (CMVM Portugal 19-03-2019)	2,000	600

(1) Programme extendible to EUR 3,000 million.

(2) The brochure matured on 14 June 2019 and it has not been renewed.

(3) Programme extendible to EUR 5,000 million.

Capacity to issue backed bonds (mortgage covered and public sector covered bonds, etc.)

Covered bond issuance capacity - 31-12-2019 (Millons of euros)
	Capacidad de emisión	Total emitido
Mortgage covered bonds	2,633	49,859
Public sector covered bonds	1,094	5,000

To facilitate access to short-term markets, CaixaBank currently maintains the following:
- Interbank facilities with a significant number of (domestic and foreign) banks, as well as central banks.
- Repo facilities with a number of domestic and foreign counterparties.
- Access to central counterparty clearing houses for repo business (LCH SA – Paris, Meffclear – Madrid and EUREX – Frankfurt).
The Contingency Plan and Recovery Plan contain a wide range of measures that allow for liquidity to be generated in diverse crisis situations. These include potential issuances of secured and unsecured debt, use of the repo market, and so on. For all these, viability is assessed under different crisis scenarios and descriptions are provided of the steps necessary for their execution and the expected period of execution.

3.12.3 Liquidity situation

The following table presents a breakdown of the Group's liquid assets based on the criteria established for determining high-quality liquid assets to calculate the LCR (HQLA) and assets available in facility not considered HQLAs:

Liquid assets (Millons of euros)
	31-12-2019		31-12-2018		31-12-2017
	Market value	Applicable weighted amount	Market value	Applicable weighted amount	Market value	Applicable weighted amount
Level 1 assets	53,098	53,021	54,841	54,771	51,773	51,773
Level 2A assets	42	36	51	43	333	283
Level 2B assets	3,670	1,960	4,308	2,279	2,858	1,554
Total high quality liquid assets (HQLAS) (1)	56,810	55,017	59,200	57,093	54,964	53,610
Asets available in facility not considered HQLAs		34,410		22,437		19,165
Total liquid assets		89,427		79,530		72,775

(1) Assets under the calculation of the LCR (Liquidity Coverage Ratio). It corresponds to high-quality liquid assets available to meet liquidity needs for a 30 calendar day stress scenario.

The Group's liquidity and funding ratios are set out below:

LCR and NSFR (Millons of euros)
	31-12-2019	31-12-2018	31-12-2017
High-quality liquid assets - HQLAs (numerator)	55,017	57,093	53,610
Total net cash outflows (denominator)	30,700	28,602	26,571
Cash outflows	36,630	33,819	31,634
Cash inflows	5,931	5,217	5,063
LCR (Liquidity Coverage Ratio) (%) (1)	179%	200%	202%
NSFR (Net Stable Funding Ratio) (%) (2)	129%	117%	112%

(1) LCR: The aim of this regulatory ratio is to maintain an adequate level of high-quality asset availability to meet liquidity needs within a time horizon of 30 days under a stress scenario that involves a combined crisis of the financial system and of the name. According to Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to the liquidity coverage requirement for credit institutions. The established regulatory limit for the LCR is 100%.

(2) NSFR - Regulatory balance sheet structure ratio that measures the ratios between the amount of available stable funding (ASF) and the amount of required stable funding (RSF). Available stable funding is defined as the proportion of own funds and customer funds that are expected to be stable in the time horizon of one year. The amount of stable funding required by an institution is defined in accordance with its liquidity and the residual maturities of its assets and its balance sheet positions. Calculation at 31-12-2019 applying the regulatory criteria established as per Regulation (EU) 2019/876 of the European Parliament and of the Council, of 20 May 2019, to enter into force as of June 2021. The aforementioned calculations follow the criteria laid down by Basel. The regulatory limit established for the NSFR is 100% from June 2021.

Key credit ratings are displayed below:

Caixabank credit rating
	Long-term debt	Short-term debt	Outlook	Review date	Mortgage covered bonds
Moody's Investors Service	Baa1	P-2	Stable	17-05-2019	Aa1
Standard & Poor's Global Ratings	BBB+	A-2	Stable	31-05-2019	AA
Fitch Ratings	BBB+	F2	Stable	27-09-2019
DBRS Ratings Limited	A	R-1(low)	Stable	29-03-2019	AAA

In the event of a downgrade of the current credit rating, additional collateral must be delivered to certain counterparties, or there are early redemption clauses. The breakdown of the impact on liquidity deriving from 1, 2 and 3-notch downgrading is shown below:

Sensivility of liquidity to variations in the credit rating (Millons of euros)
	1-Notch downgrade	2-Notch downgrade	3-Notch downgrade
Trading in derivatives (CSA agreements) (*)	0	2	5
Trading in derivatives (CSA agreements) (*)	0	1,274	1,274

(*) The balances presented are accumulated for each rating reduction.

3.12.4 Asset encumbrance – assets received and delivered under guarantee

Assets securing certain financing transactions and unencumbered assets are as follows:

Activos que garantizan operaciones de financiación y activos libres de carga (Millons of euros)
	31-12-2019		31-12-2018		31-12-2017
	Carrying amount of committed assets	Carrying amount of non-cimmitted assets	Carrying amount of committed assets	Carrying amount of non-cimmitted assets	Carrying amount of committed assets	Carrying amount of non-cimmitted assets
Equity instruments	0	3,063	0	4,144	0	3,288
Debt securities (1)	5,248	28,887	8,314	27,969	11,071	20,157
Of which: covered bonds	2	9	5	4	17	5
Of which: asset-backed securities	0	92	0	0	0	0
Of which: issued by public administrations	4,584	24,161	7,222	24,564	10,207	17,643
Of which: issued by financial corporations	417	1,396	906	1,272	847	1,121
Of which: issued by non-financial corporations	245	3,228	181	2,129	0	1,388
Loan portfolio (2)	49,146	191,368	69,543	173,810	81,208	160,678
Other assets (3)	5,071	45,574	4,580	47,292	3,588	55,028
Total	59,464	268,892	82,437	253,215	95,867	239,151

(1) Mainly corresponds to assets provided in repurchase agreements and ECB financing transactions.

(2) Mainly corresponds to assets pledged for securitisation bonds, mortgage covered bonds and public sector covered bonds.

(3) Mainly corresponds to cash delivered as collateral on derivative transactions.

The following table presents the assets received under guarantee, segregating those unencumbered from those that may be pledged to raise finance:

Assets securing financing operations and unencumbered assets (Millons of euros)
	31-12-2019		31-12-2018		31-12-2017
	FV of commited assets	FV of non commited assets	FV of commited assets	FV of non commited assets	FV of commited assets	FV of non commited assets
Collateral received (1)	1,790	15,841	2,097	13,323	3,397	17,228
Equity instruments	0	0	0	0	0	0
Debt securities	1,780	14,737	2,085	11,977	3,387	15,631
Other guarantees received	10	1,103	12	1,346	10	1,597
Own debt securities other than covered bonds or own asset-backed securities (2)	0	12	0	251	0	858
Issued and unpledged covered bonds and own asset-backed securities (3)	0	53,787	0	42,821	0	34,161
Total	1,790	69,640	2,097	56,395	3,397	52,247

(1) Mainly corresponds to assets received in reverse repurchase agreements, securities lending transactions, and cash operations received as a guarantee of derivatives operations.

(2) Senior debt treasury shares.

3) Corresponds to treasury shares issued in the form of securitisations and covered bonds (mortgage / public sector).

FV: Fair value.

The asset encumbrance ratio is as follows:

Asset encumbrance ratio (Millons of euros)
	31-12-2019	31-12-2018	31-12-2017
Encumbered assets and collateral received (numerator)	61,255	84,534	99,263
Debt securities	7,027	10,399	14,457
Loans and receivables	49,156	69,555	81,218
Other assets	5,071	4,580	3,588
Total assets + Total assets received (denominator)	345,988	351,071	355,643
Equity instruments	3,063	4,144	3,288
Debt securities	50,652	50,345	50,246
Loan portfolio	240,524	243,364	241,896
Other assets	51,748	53,218	60,214
Asset encumbrance ratio	17.70%	24.08%	27.91%

During 2019, the asset encumbrance ratio has improved with respect to the 2018 ratio, down by 6.37 percentage points, due to reduced use of TLTRO II and the repo market, and a lower balance of secured issuances placed on the market.

Secured liabilities and the assets securing them are as follows:

Secured liabilities (Millons of euros)
	31-12-2019		31-12-2018		31-12-2017
	Liabilities hedged, contingent liabilities or securities ceded	Assets, guarantees received and treasurey instruments issued *	Liabilities hedged, contingent liabilities or securities ceded	Assets, guarantees received and treasurey instruments issued *	Liabilities hedged, contingent liabilities or securities ceded	Assets, guarantees received and treasurey instruments issued *
Financial liabilities	49,543	57,063	69,819	81,472	82,021	95,664
Derivatives	5,653	5,945	5,197	5,592	4,314	4,594
Deposits	26,281	30,322	45,517	51,321	57,152	64,275
Issuances	17,609	20,796	19,105	24,559	20,555	26,795
Other sources of charges	3,861	4,191	2,697	3,062	3,183	3,599
Total	53,404	61,255	72,516	84,534	85,205	99,263

(*) Excluding encumbered covered bonds and asset-backed securities.

3.12.5 Residual maturity periods

The breakdown, by contractual term to maturity of the balances of certain items on the balance sheets, in a scenario of normal market conditions, is as follows:

Residual maturity periods 31-12-2019 (Millons of euros)
	Demand deposits	< 1 month	1-3 months	3-12 months	1-5 years	> 5 years	Total
Caixabank Group (Ex insurance business)
Cash and cash balances at central banks and other demand deposits *	14,947						14,947
Financial assets held for trading – Derivatives		46	58	126	972	4,992	6,194
Financial assets held for trading – Debt securities		40	21	74	371	213	719
Financial assets compulsorily measured at fair value through profit or loss	167			1		115	283
Financial assets designated at fair value through profit or loss	1						1
Financial assets at fair value through equity	1,729	34	547	676	11,139	3,568	17,693
Financial assets at amortised cost	3,866	14,011	10,824	20,242	52,014	143,745	244,702
Loans and advances	3,866	13,569	10,527	15,788	42,940	140,624	227,314
Debt securities		442	297	4,454	9,074	3,121	17,388
Derivatives - Hedge accounting	28	1	11	69	770	1,254	2,133
Total assets	20,738	14,132	11,461	21,188	65,266	153,887	286,672
Financial liabilities held for trading – Derivatives	6	16	36	40	257	1,512	1,867
Financial liabilities at amortised cost	198,952	7,985	5,939	21,467	31,285	15,125	280,753
Deposits	191,588	7,727	5,617	19,733	15,356	1,170	241,191
Central banks		150	894	3,859	9,516		14,419
Credit institutions	2,268	2,555	103	55	95	617	5,693
Customers	189,320	5,022	4,620	15,819	5,745	553	221,079
Debt securities issued	609	24	140	1,527	15,574	13,511	31,385
Other financial liabilities	6,755	234	182	207	355	444	8,177
Derivatives - Hedge accounting				9	215	290	514
Total liabilities	198,958	8,001	5,975	21,516	31,757	16,927	283,134
Of which are wholesale issues net of treasury shares and multi-issuers			229	1,151	13,939	17,397	32,716
Assets less liabilities	(178,220)	6,131	5,486	(328)	33.509	136.960	3.538

Residual maturity periods 31-12-2019 (Millons of euros)
	Demand deposits	< 1 month	1-3 months	3-12 months	1-5 years	> 5 years	Total
Insurance business
Financial assets under the insurance business - Debt securities		156	235	785	9,423	48,163	58,762
Liabilities under insurance contracts	20,702	430	890	4,021	14,589	52,733	72,663

The transaction maturities are projected according to their contractual and residual maturity, irrespective of any assumption that the assets and/or liabilities will be renewed. In order to assess the negative gap in the short term, the following aspects must be considered:

The Group has high and stable retail financing with probable renewal.
Additional guarantees are available at the European Central Bank, and there is the capacity to generate new deposits through asset securitisation and the issuance of mortgage- and/or public sector-covered bonds.

The calculation does not consider growth assumptions, and consequently disregards internal strategies for raising net liquidity, which are especially important in the retail market. The monetisation of available liquid assets is also not included.

As regards issuances, the Group’s policies take into account a balanced distribution of maturities, preventing concentrations and diversifying financing instruments. In addition, its reliance on wholesale markets is limited.

Reputational risk is the possibility that the Group's competitive edge could be blunted by loss of trust by some of its stakeholders, based on their assessment of actions or omissions, whether real or purported, by the Bank, its Senior Management or Governance Bodies, or because of related unconsolidated financial institutions going bankrupt (step-in risk).

Some areas of risk identified by CaixaBank in which such confidence could be impaired are, among others, those related to the design and commercialization of products, to systems and information security, to the need to promote ESG aspects (Environmental, Social and Good Governance) in the business, including due to its increasing relevance the risks related to climate change; the development of talent, conciliation, diversity and occupational health.

The risk is monitored using internal and external selected reputational indicators from various sources of stakeholder expectations and perception analysis. The measurement indicators are weighted according to their strategic importance and are grouped in a balanced reputation scorecard that enables a Global Reputation Index (GRI) to be obtained. This metric enables the positioning to be monitored quarterly by sector and time, and the tolerated ranges and metrics to be set in the RAF.

The main instrument that enables formal monitoring of reputational risk management is the Reputational Risk taxonomy. This enables the risks to be identified and organised into a hierarchy according to their criticality, and also enables monitoring indicators to be set up for each risk (KRI) and coverage and mitigation policies to be established.

A number of policies that cover different scopes of the Group impact on the control and mitigation of reputational risk. In addition, there are specific procedures and activities by the areas most directly implicated in managing the main reputational risks, which enable the implementation of the risk to be prevented and/or mitigated.

Similarly, the Internal Reputational Risk Management Polices also include developing in-house training to mitigate the appearance and effects of reputational risks, establishing protocols to deal with those affected by the Bank's actions, or defining crisis and/or contingency plans to be activated if the various risks arise.

3.14.1 General description

The European regulatory framework of reference for insurance companies, known as Solvency II, is transposed into to the Spanish legal system through Act 20/2015 and Royal Decree 1060/2015, which are known, respectively, as LOSSEAR and ROSSEAR. This framework is supplemented by the technical standards approved by the European Commission (ITS), which are directly applicable, and guidelines published by EIOPA, which have been adopted by the Directorate General for Insurance and Pension Funds (DGSFP) as their own.

In addition to other risks, the insurance business is exposed actuarial risk, defined as the risk of loss or adverse change to the value of commitments contracted through insurance or pension contracts with customers or employees, as a result of the deviation between the estimate for actuarial variables used in setting the rates and reserves versus their actual evolution.

For credit and liquidity risk incurred in the insurance business, the Group has management frameworks that establish credit quality and diversification levels (see the risk structure of the insurance business in these fields, presented in a segmented way in Notes 3.3 and 3.12).

Similarly, in relation to interest rate risk, the Group – through its insurance company VidaCaixa – manages insurance contract commitments and the affected assets jointly using financial immunisation techniques envisaged in the provisions of the DGSFP.

3.14.2 Actuarial risk cycle

3.14.2.1 Actuarial risk monitoring and measurement

Actuarial risk management, established in policies approved by the risk management bodies, seeks the long-term stability of the actuarial factors that affect the technical evolution of marketed insurance products. The actuarial risk factors notably feature mortality and longevity risk in the field of life insurance, and the accident rate ratio in the fields of insurance policies other than life insurance.

Thus, for each line of business, the policy of underwriting and provision of reserves – which is updated at least annually – identifies various parameters for risk approval, measurement, rate-setting and, lastly, to calculate and set aside reserves covering underwritten policies. General operating procedures are also in place for underwriting and the provision of reserves.

Systems for measuring actuarial risk, from which the sufficiency of the technical reserves are quantified and assessed policy-by-policy, are integrated into the management of the insurance business. In this sense, production operations, irrespective of the channel, are recorded in the systems using the various contracting, benefits management and provision calculation applications (e.g. TAV for individual and ACO or Avanti for group insurance). Investment management software is used to manage and control the investments backing the company’s insurance activity. All of the applications are accounted for automatically in the accounting support software.

There is a series of applications that perform management support tasks within these integrated and automated systems. It is worth noting applications for data processing that are used for preparation of reporting information and risk management. In addition, there is a solvency and risk datamart, which serves as a support tool for compliance with all the requirements of the Solvency II Directive.

3.14.2.2 Mitigation of actuarial risk

One of the Group's elements used to mitigate the assumed actuarial risk consists of transferring part of the risk to other companies, through reinsurance contracts. To do so, the Group – and specifically its insurance company – has a policy which is updated at least annually, which identifies the extent to which risk is passed on, taking into account the risk profile of direct insurance contracts, and the type, suitability and effectiveness of the various reinsurance agreements.

By doing so, an insurance company can reduce risk, stabilise solvency levels, use available capital more efficiently and expand its underwriting capacity. However, regardless of the reinsurance taken out, the insurance company is contractually liable for the settlement of all claims with policyholders.

Through the insurance company VidaCaixa, the Group establishes the following via its reinsurance policy:

The disclosure of the reinsurance types.
The risk management and reporting process.
The criteria in order to select reinsurance companies.
Disclosure of the types of reinsurance to be contracted and aggregate exposure by type of business.

In this respect, through the insurance company VidaCaixa, the Group has established limits on the net risk retained per business line, by risk or event (or a combination of both factors). These limits are set in accordance with the desired risk profile and reinsurance cost.

Business risk refers to obtaining results lower than market expectations or the Group's targets which prevent the Group from reaching a profitability level that is higher than the cost of capital.

The profitability objectives, backed by financial planning and monitoring process, are set out in the Group's Strategic Plan, over three years, and are specified annually in the Group's budget and in the Business network challenges.

CaixaBank's business risk management system is based on 4 foresights of management:

Group vision: the overall aggregated return at the level of the CaixaBank Group.
Business/Region vision: the return from businesses/territories.
- Financial-Accounting vision: the return from different corporate businesses.
- Commercial-Management vision: the return from the management of the CaixaBank commercial network.
Pricing vision: the return from setting prices for CaixaBank products and services.
Project vision: the return from relevant Group projects.

Risk of impairment of other asserts is defined as the risk of a reduction in the carrying amount of shareholdings and in non-financial assets of the Group, specifically:

Investee risk:

Positions in the Group’s investee portfolio, except those over which it exercises control. These positions may originate in explicit management decisions to take a position or from the integration of other entities, or they may result from the restructuring or execution of guarantees within what was initially a credit transaction (see Note 3.3.6).

Tangible assets:

This mainly comprises real estate assets, both from own use and foreclosed assets available for sale and rental. A majority of these foreclosed assets are owned by the Group’s real estate subsidiary, BuildingCenter, S.A.U. In terms of appraisal of the foreclosed assets, prevailing regulations are fulfilled.

Intangible assets:

Mainly includes goodwill generated in business combination processes, assigned to one of the Group's cash-generating units, the software, as well as to other intangible assets with a defined useful life.

Tax assets:

Mainly deferred tax assets generated by the time differences between the balance sheet entry criteria for accounting and tax results, as well as tax credits through deductions and tax loss carryforwards generated both in the Group and in integration processes (including those that come from the integrated company itself, as well as those generated in Purchase Price Allocation exercises).

For risk management, the fulfilment of the policies is reviewed, as well as the ongoing monitoring of the various metrics, risk limits and the effective execution of the controls set out. In addition, impairment and recoverability tests and reviews are carried out, using generally accepted methodologies.

The risk of own funds and capital adequacy responds to the potential restriction of the CaixaBank Group's to adapt its volume of own funds to regulatory requirements or a change to its risk profile.

The Group has set an objective of maintaining a medium-low risk profile and a comfortable level of capital to strengthen its position. Capital adequacy to cover eventual unexpected losses is measured from two different perspectives and using different methodologies: regulatory capital and economic capital.

The regulatory capital of financial institutions is regulated by the CRR and Directive 2013/36/EU of the European Parliament and of the Council, which implemented the Basel III regulatory framework (BIS III) in the European Union. Regulatory capital is the metric i) required by regulators and ii) used by analysts and investors to compare financial institutions. Similarly, following the transposition to European legislation in 2013, the Basel Committee and other relevant bodies published a series of additional rules and documents containing new specifications for the calculation of capital. This means that procedures are constantly being updated, and therefore the Group continuously adapts its processes and systems to ensure the calculation of capital consumption and deductions from own funds are fully aligned with the new established requirements.

Furthermore, the economic capital forms the basis of the internal estimate of own fund requirements, which acts as a supplement to the regulatory view of capital adequacy and corresponds to the metrics used for i) the self-assessment of capital, subject to presentation and review in the Group's corresponding bodies; ii) updating the Economic Capital Ratio, as a monitoring and control tool; and iii) calculating the Risk Adjusted Return (RAR) and the Pricing. In contrast with regulatory capital, economic capital is an internal estimate which is adjusted according to the Group's level of tolerance to risk, volume, and type of business activity. Hence, economic capital is a supplement which is used to better offset the risk assumed by the Group and it includes risks that have not been factored in at all or only partially, by the regulatory measures.

In addition to the risks referred to in Pillar 1 (credit, market and operational risk), it includes others also included in the Risk Taxonomy, (e.g. structural rates, liquidity and funding, business and actuarial risk, etc.).

The Group has a Corporate Policy for Own Funds and Capital Adequacy Risk, the purpose of which is lay down the principles on which capital objectives are determined in the CaixaBank Group, as well as to lay down a common set of guidelines in relation to the monitoring, control and management of capital that allow this risk to be mitigated, among other aspects.

These capital objectives are public and are currently specified in the 2019-2021 Strategic Plan, placing the CET1 ratio around 12%, constituting an additional buffer of 1 percentage point as a prudential cushion within the Plan's horizon to face future regulatory changes.

1 Macroeconomic environment

Global economy

Eurozone

Spain

Portugal

2 Regulatory changes

3 Strategic events

Uncertainties in relation to the geopolitical and macroeconomic environment

Persistence of an environment of low interest rates

New competitors with the possibility to disrupt

Cybersecurity

Risks related to climate change

Pressure from the legal, regulatory or supervisory environment.

3.2.1Governance and organisation

General Shareholder's Meeting

Board of Directors (BoD)

Executive Commitee

Risk Committee

Audit and Control Committee (ACC)

Appointments Committee

Remuneration Committee

Innovation, Technology and Digital Transformation Committee

Management Committee

Permanet Lending Committee

Global Risk Committee

3.2.2Strategic risk management system

Risk Assessment

Corporate Risk Taxonomy

Business model risks

Business

Eligible own funds/Capital adequacy

Liquidity and funding

Risks affecting financial activity

Credit

Impairment of other assets

Market

Structural rates

Actuarial

Reputation and Operational risks

Legal/Regulatory

Conducto

Technological

Other operational risks

Reliability of financial information

Reputational

Risk Appetite Framework

Risk planning

3.2.3Risk Culture

1 General risk management principles

2 Training

Risk culture and training:

3 Communication

4 Performance assessment and remuneration

3.2.4Internal Control Framework

First line of defence

Second line of defence

Corporate Risk Management Function & Planning (CRMF)

Model Validation and Risk (MVR)

Internal Financial Control (IFC)

As regards Compliance (C)

Third line of defence

3.3.1Overview

3.3.2Credit risk cycle

3.3.2.1Approval and granting

Amount

Guarantee

General Risk Policy:

Term:

Corporate Risk:

Project Finance:

Business Risk:

Real Estate Risk:

Tourism and Agri-food Risk:

Individual Risk Approval:

Institutional Banking:

Sovereign, Country and Financial Institution risk:

3.3.2.2Mitigation of the risk

3.3.2.3Monitoring and measurement of credit risk

1 Borrower monitoring processes

Scope