Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
9 Months Ended
Sep. 30, 2013
Fair Value Disclosures [Abstract]  
Fair Value Measurements
NOTE 16 – Fair Value Measurements

Under applicable accounting guidance, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value. The Corporation conducts a review of its fair value hierarchy classifications on a quarterly basis. Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable, respectively, in the current marketplace. These transfers are considered to be effective as of the beginning of the quarter in which they occur. For more information regarding the fair value hierarchy and how the Corporation measures fair value, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K. The Corporation accounts for certain financial instruments under the fair value option. For additional information, see Note 17 – Fair Value Option.

Valuation Processes and Techniques

The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of models by personnel who are independent of the front office, and periodic reassessments of models to ensure that they are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are conducted on a daily basis by personnel who are independent of the front office. A price verification group, which is also independent of the front office, utilizes available market information including executed trades, market prices and market-observable valuation model inputs to ensure that fair values are reasonably estimated. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are escalated through a management review process.

While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

During the nine months ended September 30, 2013, there were no changes to the valuation techniques that had, or are expected to have, a material impact on the Corporation's consolidated financial position or results of operations.

Level 1, 2 and 3 Valuation Techniques

Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

Trading Account Assets and Liabilities and Debt Securities

The fair values of trading account assets and liabilities are primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. The fair values of debt securities are generally based on quoted market prices or market prices for similar assets. Liquidity is a significant factor in the determination of the fair values of trading account assets and liabilities and debt securities. Market price quotes may not be readily available for some positions, or positions within a market sector where trading activity has slowed significantly or ceased. Some of these instruments are valued using a discounted cash flow model, which estimates the fair value of the securities using internal credit risk, interest rate and prepayment risk models that incorporate management's best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Principal and interest cash flows are discounted using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value for the specific security. Other instruments are valued using a net asset value approach which considers the value of the underlying securities. Underlying assets are valued using external pricing services, where available, or matrix pricing based on the vintages and ratings. Situations of illiquidity generally are triggered by the market's perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer's financial statements and changes in credit ratings made by one or more rating agencies.

Derivative Assets and Liabilities

The fair values of derivative assets and liabilities traded in the OTC market are determined using quantitative models that utilize multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. When third-party pricing services are used, the methods and assumptions used are reviewed by the Corporation. Estimation risk is greater for derivative asset and liability positions that are either option-based or have longer maturity dates where observable market inputs are less readily available, or are unobservable, in which case, quantitative-based extrapolations of rate, price or index scenarios are used in determining fair values. The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality and other instrument-specific factors, where appropriate. In addition, the Corporation incorporates within its fair value measurements of OTC derivatives a valuation adjustment to reflect the credit risk associated with the net position. Positions are netted by counterparty, and fair value for net long exposures is adjusted for counterparty credit risk while the fair value for net short exposures is adjusted for the Corporation's own credit risk. An estimate of severity of loss is also used in the determination of fair value, primarily based on market data.

Loans and Loan Commitments

The fair values of loans and loan commitments are based on market prices, where available, or discounted cash flow analyses using market-based credit spreads of comparable debt instruments or credit derivatives of the specific borrower or comparable borrowers. Results of discounted cash flow calculations may be adjusted, as appropriate, to reflect other market conditions or the perceived credit risk of the borrower.

Mortgage Servicing Rights

The fair values of MSRs are determined using models that rely on estimates of prepayment rates, the resultant weighted-average lives of the MSRs and the option-adjusted spread (OAS) levels. For more information on MSRs, see Note 19 – Mortgage Servicing Rights.

Loans Held-for-sale

The fair values of LHFS are based on quoted market prices, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation's current origination rates for similar loans adjusted to reflect the inherent credit risk.

Private Equity Investments

Private equity investments consist of direct investments and fund investments which are initially valued at their transaction price. Thereafter, the fair value of direct investments is based on an assessment of each individual investment using methodologies that include publicly-traded comparables derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, entry level multiples and discounted cash flow analyses, and are subject to appropriate discounts for lack of liquidity or marketability. After initial recognition, the fair value of fund investments is based on the Corporation's proportionate interest in the fund's capital as reported by the respective fund managers.

Securities Financing Agreements

The fair values of certain reverse repurchase agreements, repurchase agreements and securities borrowed transactions are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Deposits and Short-term Borrowings

The fair values of deposits and short-term borrowings are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The Corporation considers the impact of its own credit spreads in the valuation of these liabilities. The credit risk is determined by reference to observable credit spreads in the secondary cash market.

Long-term Debt

The Corporation issues structured liabilities that have coupons or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities. The fair values of these structured liabilities are estimated using quantitative models for the combined derivative and debt portions of the notes. These models incorporate observable and, in some instances, unobservable inputs including security prices, interest rate yield curves, option volatility, currency, commodity or equity rates and correlations between these inputs. The Corporation also considers the impact of its own credit spreads in determining the discount rate used to value these liabilities. The credit spread is determined by reference to observable spreads in the secondary bond market.

Asset-backed Secured Financings

The fair values of asset-backed secured financings are based on external broker bids, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation's current origination rates for similar loans adjusted to reflect the inherent credit risk.

Recurring Fair Value

Assets and liabilities carried at fair value on a recurring basis at September 30, 2013 and December 31, 2012, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.

 
September 30, 2013
 
Fair Value Measurements
 
 
 
 
(Dollars in millions)
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Netting
Adjustments (2)
 
Assets/Liabilities
at Fair Value
Assets
 
 
 
 
 
 
 
 
 
Federal funds sold and securities borrowed or purchased under agreements to resell
$

 
$
102,899

 
$

 
$

 
$
102,899

Trading account assets:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
46,478

 
12,772

 

 

 
59,250

Corporate securities, trading loans and other
974

 
29,513

 
3,780

 

 
34,267

Equity securities
31,911

 
16,051

 
338

 

 
48,300

Non-U.S. sovereign debt
32,134

 
11,603

 
388

 

 
44,125

Mortgage trading loans and ABS

 
10,744

 
4,520

 

 
15,264

Total trading account assets
111,497

 
80,683

 
9,026

 

 
201,206

Derivative assets (3)
4,329

 
977,921

 
7,527

 
(936,616
)
 
53,161

AFS debt securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and agency securities
514

 
2,457

 

 

 
2,971

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
169,025

 

 

 
169,025

Agency-collateralized mortgage obligations

 
27,335

 

 

 
27,335

Non-agency residential

 
6,929

 

 

 
6,929

Commercial

 
2,827

 

 

 
2,827

Non-U.S. securities
2,467

 
3,668

 
105

 

 
6,240

Corporate/Agency bonds

 
1,162

 
8

 

 
1,170

Other taxable securities
20

 
9,132

 
4,013

 

 
13,165

Tax-exempt securities

 
4,417

 
817

 

 
5,234

Total AFS debt securities
3,001

 
226,952

 
4,943

 

 
234,896

Other debt securities carried at fair value:
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
18,626

 

 

 
18,626

Agency-collateralized mortgage obligations

 
563

 

 

 
563

Commercial

 
758

 

 

 
758

Non-U.S. securities
9,740

 
1,766

 

 

 
11,506

Total other debt securities carried at fair value
9,740

 
21,713

 

 

 
31,453

Loans and leases

 
7,180

 
3,016

 

 
10,196

Mortgage servicing rights

 

 
5,058

 

 
5,058

Loans held-for-sale

 
7,304

 
913

 

 
8,217

Other assets
14,009

 
2,317

 
1,878

 

 
18,204

Total assets
$
142,576

 
$
1,426,969

 
$
32,361

 
$
(936,616
)
 
$
665,290

Liabilities
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in U.S. offices
$

 
$
1,916

 
$

 
$

 
$
1,916

Federal funds purchased and securities loaned or sold under agreements to repurchase

 
61,917

 

 

 
61,917

Trading account liabilities:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
24,046

 
349

 

 

 
24,395

Equity securities
23,256

 
3,604

 

 

 
26,860

Non-U.S. sovereign debt
22,119

 
1,502

 

 

 
23,621

Corporate securities and other
529

 
7,259

 
49

 

 
7,837

Total trading account liabilities
69,950

 
12,714

 
49

 

 
82,713

Derivative liabilities (3)
5,167

 
962,675

 
6,759

 
(930,033
)
 
44,568

Short-term borrowings

 
2,844

 

 

 
2,844

Accrued expenses and other liabilities
8,627

 
964

 
31

 

 
9,622

Long-term debt

 
45,338

 
2,063

 

 
47,401

Total liabilities
$
83,744

 
$
1,088,368

 
$
8,902

 
$
(930,033
)
 
$
250,981

(1) 
During the nine months ended September 30, 2013, $500 million of other assets were transferred from Level 1 to Level 2 primarily due to a restriction that became effective for a private equity investment.
(2) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(3) 
For further disaggregation of derivative assets and liabilities, see Note 3 – Derivatives.
 
December 31, 2012
 
Fair Value Measurements
 
 
 
 
(Dollars in millions)
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Netting
Adjustments (2)
 
Assets/Liabilities
at Fair Value
Assets
 
 
 
 
 
 
 
 
 
Federal funds sold and securities borrowed or purchased under agreements to resell
$

 
$
98,670

 
$

 
$

 
$
98,670

Trading account assets:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
57,655

 
29,319

 

 

 
86,974

Corporate securities, trading loans and other
1,292

 
32,882

 
3,726

 

 
37,900

Equity securities
28,144

 
14,626

 
545

 

 
43,315

Non-U.S. sovereign debt
29,254

 
13,139

 
353

 

 
42,746

Mortgage trading loans and ABS

 
11,905

 
4,935

 

 
16,840

Total trading account assets
116,345

 
101,871

 
9,559

 

 
227,775

Derivative assets (3)
2,997

 
1,372,398

 
8,073

 
(1,329,971
)
 
53,497

AFS debt securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and agency securities
21,514

 
2,958

 

 

 
24,472

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
188,149

 

 

 
188,149

Agency-collateralized mortgage obligations

 
37,538

 

 

 
37,538

Non-agency residential

 
9,494

 

 

 
9,494

Non-agency commercial

 
3,914

 
10

 

 
3,924

Non-U.S. securities
2,637

 
2,981

 

 

 
5,618

Corporate/Agency bonds

 
1,358

 
92

 

 
1,450

Other taxable securities
20

 
8,180

 
3,928

 

 
12,128

Tax-exempt securities

 
3,072

 
1,061

 

 
4,133

Total AFS debt securities
24,171

 
257,644

 
5,091

 

 
286,906

Other debt securities carried at fair value:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and agency securities
491

 

 

 

 
491

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
13,073

 

 

 
13,073

Agency-collateralized mortgage obligations

 
929

 

 

 
929

Non-U.S. securities
9,151

 
300

 

 

 
9,451

Total other debt securities carried at fair value
9,642

 
14,302

 

 

 
23,944

Loans and leases

 
6,715

 
2,287

 

 
9,002

Mortgage servicing rights

 

 
5,716

 

 
5,716

Loans held-for-sale

 
8,926

 
2,733

 

 
11,659

Other assets
18,535

 
4,826

 
3,129

 

 
26,490

Total assets
$
171,690

 
$
1,865,352

 
$
36,588

 
$
(1,329,971
)
 
$
743,659

Liabilities
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in U.S. offices
$

 
$
2,262

 
$

 
$

 
$
2,262

Federal funds purchased and securities loaned or sold under agreements to repurchase

 
42,639

 

 

 
42,639

Trading account liabilities:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
22,351

 
1,079

 

 

 
23,430

Equity securities
19,852

 
2,640

 

 

 
22,492

Non-U.S. sovereign debt
18,875

 
1,369

 

 

 
20,244

Corporate securities and other
487

 
6,870

 
64

 

 
7,421

Total trading account liabilities
61,565

 
11,958

 
64

 

 
73,587

Derivative liabilities (3)
2,859

 
1,355,309

 
6,605

 
(1,318,757
)
 
46,016

Short-term borrowings

 
4,074

 

 

 
4,074

Accrued expenses and other liabilities
15,457

 
1,122

 
15

 

 
16,594

Long-term debt

 
46,860

 
2,301

 

 
49,161

Total liabilities
$
79,881

 
$
1,464,224

 
$
8,985

 
$
(1,318,757
)
 
$
234,333

(1) 
During 2012, $2.0 billion and $350 million of assets and liabilities were transferred from Level 1 to Level 2, and $785 million and $40 million of assets and liabilities were transferred from Level 2 to Level 1. Of the asset transfers from Level 1 to Level 2, $940 million was due to a restriction that became effective for a private equity investment during 2012, while $535 million of the transfers from Level 2 to Level 1 was due to the lapse of this restriction during 2012. The remaining transfers were the result of additional information associated with certain equities, derivative contracts and private equity investments.
(2) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(3) 
For further disaggregation of derivative assets and liabilities, see Note 3 – Derivatives.
The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2013 and 2012, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.

Level 3 – Fair Value Measurements (1)
 
Three Months Ended September 30, 2013
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
July 1
2013
Gains
(Losses) in
Earnings
Gains
(Losses) in
OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance September 30
2013
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
2,763

$
133

$

$
2,002

$
(892
)
$
22

$
(205
)
$
187

$
(230
)
$
3,780

Equity securities
464

4


20

(16
)

(100
)
8

(42
)
338

Non-U.S. sovereign debt
401

11


3

(14
)

(10
)

(3
)
388

Mortgage trading loans and ABS
4,685

(7
)

350

(443
)

(74
)
13

(4
)
4,520

Total trading account assets
8,313

141


2,375

(1,365
)
22

(389
)
208

(279
)
9,026

Net derivative assets (2)
1,173

(499
)

126

(102
)

(147
)
116

101

768

AFS debt securities:
 
 
 
 
 
 
 
 
 
 
Non-U.S. securities

5






100


105

Corporate/Agency bonds
8









8

Other taxable securities
4,157

2

(2
)
215



(359
)


4,013

Tax-exempt securities
877

2

1




(63
)


817

Total AFS debt securities
5,042

9

(1
)
215



(422
)
100


4,943

Loans and leases (3, 4)
1,901

(20
)



1,247

(119
)
12

(5
)
3,016

Mortgage servicing rights (4)
5,827

71



(729
)
129

(240
)


5,058

Loans held-for-sale (3)
2,153

40




3

(1,283
)


913

Other assets (5)
1,700

3


1

(35
)

(30
)
239


1,878

Trading account liabilities – Corporate securities and other
(55
)
1


6

(9
)



8

(49
)
Accrued expenses and other liabilities (3)
(230
)
8





189


2

(31
)
Long-term debt (3)
(1,890
)
(62
)

47


(47
)
46

(485
)
328

(2,063
)
(1) 
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
(2) 
Net derivatives include derivative assets of $7.5 billion and derivative liabilities of $6.8 billion.
(3) 
Amounts represent instruments that are accounted for under the fair value option.
(4) 
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.
(5) 
Other assets is primarily comprised of private equity investments.

During the three months ended September 30, 2013, the transfers into Level 3 included $208 million of trading account assets, $116 million of net derivative assets, $100 million of AFS debt securities, $239 million of other assets and $485 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased third-party prices available for certain corporate loans. Transfers into Level 3 for net derivative assets were primarily due to decreased price observability (i.e., market comparables for the referenced instruments) for certain complex interest rate derivative transactions. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability. Transfers into Level 3 for other assets were primarily due to a lack of independent pricing data for certain receivables. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

During the three months ended September 30, 2013, the transfers out of Level 3 included $279 million of trading account assets, $101 million of net derivative assets and $328 million of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and third-party prices available for certain corporate loans and securities. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability (i.e., market comparables for the referenced instruments) for certain options. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.
Level 3 – Fair Value Measurements (1)
 
Three Months Ended September 30, 2012
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
July 1
2012
Gains
(Losses) in
Earnings
Gains
(Losses) in
OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance September 30
2012
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
4,459

$
69

$

$
750

$
(848
)
$

$
(101
)
$
158

$
(314
)
$
4,173

Equity securities
597

15


43

(12
)

(9
)
5

(66
)
573

Non-U.S. sovereign debt
389

7


30

(112
)

(4
)

(7
)
303

Mortgage trading loans and ABS
4,818

111


380

(279
)

(124
)
3

(3
)
4,906

Total trading account assets
10,263

202


1,203

(1,251
)

(238
)
166

(390
)
9,955

Net derivative assets (2)
4,601

(256
)

78

(211
)

(918
)
(350
)
16

2,960

AFS debt securities:
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Non-agency residential
1









1

Non-agency commercial
24






(1
)


23

Corporate/Agency bonds
93









93

Other taxable securities
4,558


28

600



(65
)


5,121

Tax-exempt securities
1,140

7

(7
)

(63
)

(16
)


1,061

Total AFS debt securities
5,816

7

21

600

(63
)

(82
)


6,299

Loans and leases (3, 4)
1,635

69


317

(150
)

(65
)
450

(3
)
2,253

Mortgage servicing rights (4)
5,708

(360
)


(15
)
100

(346
)


5,087

Loans held-for-sale (3)
2,741

86


596

(19
)

(104
)
13


3,313

Other assets (5)
3,136

24


40

(183
)

(39
)


2,978

Trading account liabilities – Corporate securities and other
(143
)
4


17

(45
)



2

(165
)
Short-term borrowings (3)





(232
)



(232
)
Accrued expenses and other liabilities (3)
(2
)




(7
)



(9
)
Long-term debt (3)
(2,388
)
(91
)

70


(115
)
391

(531
)
374

(2,290
)
(1) 
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
(2) 
Net derivatives include derivative assets of $10.0 billion and derivative liabilities of $7.0 billion.
(3) 
Amounts represent instruments that are accounted for under the fair value option.
(4) 
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.
(5) 
Other assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.

During the three months ended September 30, 2012, the transfers into Level 3 included $166 million of trading account assets, $350 million of net derivative assets, $450 million of loans and leases, and $531 million of long-term debt. Transfers into Level 3 for trading account assets primarily related to decreased market liquidity for certain corporate loans. Transfers into Level 3 for net derivative assets primarily related to decreased price observability for certain long-dated equity derivative liabilities due to a lack of independent pricing. Transfers into Level 3 for loans and leases were driven by updated information related to certain commercial loans. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

During the three months ended September 30, 2012, the transfers out of Level 3 included $390 million of trading account assets and $374 million of long-term debt. Transfers out of Level 3 for trading account assets primarily related to increased price observability for certain corporate loans due to improved liquidity in the secondary markets. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.
Level 3 – Fair Value Measurements (1)
 
Nine Months Ended September 30, 2013
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
January 1
2013
Gains
(Losses) in
Earnings
Gains
(Losses) in
OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance September 30
2013
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
3,726

$
256

$

$
3,519

$
(2,817
)
$
22

$
(444
)
$
629

$
(1,111
)
$
3,780

Equity securities
545

54


77

(160
)

(100
)
45

(123
)
338

Non-U.S. sovereign debt
353

56


29

(15
)

(32
)
1

(4
)
388

Mortgage trading loans and ABS
4,935

165


1,981

(1,777
)

(775
)
18

(27
)
4,520

Total trading account assets
9,559

531


5,606

(4,769
)
22

(1,351
)
693

(1,265
)
9,026

Net derivative assets (2)
1,468

186


509

(762
)

(1,190
)
(46
)
603

768

AFS debt securities:
 
 
 
 
 
 
 
 
 
 
Commercial MBS
10






(10
)



Non-U.S. securities

5


1

(1
)


100


105

Corporate/Agency bonds
92


4






(88
)
8

Other taxable securities
3,928

5

10

825



(750
)

(5
)
4,013

Tax-exempt securities
1,061

3

15




(94
)

(168
)
817

Total AFS debt securities
5,091

13

29

826

(1
)

(854
)
100

(261
)
4,943

Loans and leases (3, 4)
2,287

80


71


1,252

(665
)
12

(21
)
3,016

Mortgage servicing rights (4)
5,716

1,531



(1,774
)
399

(814
)


5,058

Loans held-for-sale (3)
2,733

20


8

(390
)
3

(1,492
)
34

(3
)
913

Other assets (5)
3,129

(324
)

43

(218
)

(936
)
239

(55
)
1,878

Trading account liabilities – Corporate securities and other
(64
)
7


24

(40
)
(5
)

(9
)
38

(49
)
Accrued expenses and other liabilities (3)
(15
)
30




(751
)
703

(1
)
3

(31
)
Long-term debt (3)
(2,301
)
41


306

(4
)
(149
)
172

(1,017
)
889

(2,063
)
(1) 
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
(2) 
Net derivatives include derivative assets of $7.5 billion and derivative liabilities of $6.8 billion.
(3) 
Amounts represent instruments that are accounted for under the fair value option.
(4) 
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.
(5) 
Other assets is primarily comprised of private equity investments.

During the nine months ended September 30, 2013, the transfers into Level 3 included $693 million of trading account assets, $46 million of net derivative assets, $100 million of AFS debt securities, $239 million of other assets and $1.0 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased third-party prices available for certain corporate loans and securities. Transfers into Level 3 for net derivative assets were primarily due to decreased price observability (i.e., market comparables for the referenced instruments) for certain complex interest rate derivative transactions and updated information related to certain total return swaps. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability. Transfers into Level 3 for other assets were primarily due to a lack of independent pricing data for certain receivables. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

During the nine months ended September 30, 2013, the transfers out of Level 3 included $1.3 billion of trading account assets, $603 million of net derivative assets, $261 million of AFS debt securities and $889 million of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and third-party prices available for certain corporate loans and securities. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability (i.e., market comparables for the referenced instruments) for certain options. Transfers out of Level 3 for AFS debt securities were primarily due to increased market liquidity. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.

Level 3 – Fair Value Measurements (1)
 
Nine Months Ended September 30, 2012
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
January 1
2012
Gains
(Losses) in
Earnings
Gains
(Losses) in
OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance September 30
2012
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other (2)
$
6,880

$
192

$

$
1,995

$
(3,498
)
$

$
(846
)
$
315

$
(865
)
$
4,173

Equity securities
544

24


167

(159
)

27

38

(68
)
573

Non-U.S. sovereign debt
342

5


338

(359
)

(4
)

(19
)
303

Mortgage trading loans and ABS (2)
3,689

194


1,747

(915
)

(386
)
745

(168
)
4,906

Total trading account assets
11,455

415


4,247

(4,931
)

(1,209
)
1,098

(1,120
)
9,955

Net derivative assets (3)
5,866

17


791

(833
)

(2,228
)
(283
)
(370
)
2,960

AFS debt securities:
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Agency
37






(4
)

(33
)

Non-agency residential
860

(69
)
19


(305
)

(2
)

(502
)
1

Non-agency commercial
40




(11
)

(6
)


23

Corporate/Agency bonds
162

(2
)

(2
)


(38
)

(27
)
93

Other taxable securities
4,265

7

51

1,558



(551
)

(209
)
5,121

Tax-exempt securities
2,648

61

18


(132
)

(1,534
)


1,061

Total AFS debt securities
8,012

(3
)
88

1,556

(448
)

(2,135
)

(771
)
6,299

Loans and leases (4, 5)
2,744

284


317

(1,308
)

(229
)
450

(5
)
2,253

Mortgage servicing rights (5)
7,378

(1,297
)


(113
)
268

(1,149
)


5,087

Loans held-for-sale (4)
3,387

265


606

(40
)

(330
)
57

(632
)
3,313

Other assets (6)
4,235

(110
)

89

(950
)

(275
)

(11
)
2,978

Trading account liabilities – Corporate securities and other
(114
)
4


72

(114
)


(65
)
52

(165
)
Short-term borrowings (4)





(232
)



(232
)
Accrued expenses and other liabilities (4)
(14
)
4


5


(7
)


3

(9
)
Long-term debt (4)
(2,943
)
(239
)

188

(33
)
(253
)
1,099

(1,569
)
1,460

(2,290
)

(1) 
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
(2) 
During the nine months ended September 30, 2012, approximately $900 million was reclassified from Trading account assets - Corporate securities, trading loans and other to Trading account assets - Mortgage trading loans and ABS. In the table above, this reclassification is presented as a sale of Trading account assets - Corporate securities, trading loans and other and a purchase of Trading account assets - Mortgage trading loans and ABS.
(3) 
Net derivatives include derivative assets of $10.0 billion and derivative liabilities of $7.0 billion.
(4) 
Amounts represent instruments that are accounted for under the fair value option.
(5) 
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.
(6) 
Other assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.

During the nine months ended September 30, 2012, the transfers into Level 3 included $1.1 billion of trading account assets, $283 million of net derivative assets, $450 million of loans and leases and $1.6 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased market liquidity for certain corporate loans and updated information related to certain CLOs. Transfers into Level 3 for net derivative assets primarily related to decreased price observability for certain long-dated equity derivative liabilities due to a lack of independent pricing. Transfers into Level 3 for loans and leases were driven by updated information related to certain commercial loans. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

During the nine months ended September 30, 2012, the transfers out of Level 3 included $1.1 billion of trading account assets, $370 million of net derivative assets, $771 million of AFS debt securities, $632 million of LHFS and $1.5 billion of long-term debt. Transfers out of Level 3 for trading account assets primarily related to increased market liquidity for certain corporate and commercial real estate loans. Transfers out of Level 3 for net derivative assets primarily related to increased price observability (i.e., market comparables for the referenced instruments) for certain total return swaps and foreign exchange swaps. Transfers out of Level 3 for AFS debt securities primarily related to increased price observability for certain non-agency RMBS and ABS. Transfers out of Level 3 for LHFS primarily related to increased observable inputs, primarily liquid comparables. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.
The following tables summarize gains (losses) due to changes in fair value, including both realized and unrealized gains (losses), recorded in earnings for Level 3 assets and liabilities during the three and nine months ended September 30, 2013 and 2012. These amounts include gains (losses) on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.

Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings
 
Three Months Ended September 30, 2013
(Dollars in millions)
Equity
Investment
Income
(Loss)
 
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other
Income
(Loss)
 
Total
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
133

 
$

 
$

 
$
133

Equity securities

 
4

 

 

 
4

Non-U.S. sovereign debt

 
11

 

 

 
11

Mortgage trading loans and ABS

 
(7
)
 

 

 
(7
)
Total trading account assets

 
141

 

 

 
141

Net derivative assets

 
(727
)
 
228

 

 
(499
)
AFS debt securities:
 
 
 
 
 
 
 
 
 
Non-U.S. securities

 

 

 
5

 
5

Other taxable securities

 

 

 
2

 
2

Tax-exempt securities

 

 

 
2

 
2

Total AFS debt securities

 

 

 
9

 
9

Loans and leases (2)

 

 
(38
)
 
18

 
(20
)
Mortgage servicing rights

 

 
71

 

 
71

Loans held-for-sale (2)

 

 

 
40

 
40

Other assets
16

 

 

 
(13
)
 
3

Trading account liabilities – Corporate securities and other

 
1

 

 

 
1

Accrued expenses and other liabilities (2)

 

 
8

 

 
8

Long-term debt (2)

 
(31
)
 

 
(31
)
 
(62
)
Total
$
16

 
$
(616
)
 
$
269

 
$
23

 
$
(308
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2012
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
69

 
$

 
$

 
$
69

Equity securities

 
15

 

 

 
15

Non-U.S. sovereign debt

 
7

 

 

 
7

Mortgage trading loans and ABS

 
111

 

 

 
111

Total trading account assets

 
202

 

 

 
202

Net derivative assets

 
(1,214
)
 
958

 

 
(256
)
AFS debt securities – Tax-exempt securities

 

 

 
7

 
7

Loans and leases (2)

 

 

 
69

 
69

Mortgage servicing rights

 

 
(360
)
 

 
(360
)
Loans held-for-sale (2)

 

 
10

 
76

 
86

Other assets
39

 

 
(15
)
 

 
24

Trading account liabilities – Corporate securities and other

 
4

 

 

 
4

Long-term debt (2)

 
(45
)
 

 
(46
)
 
(91
)
Total
$
39

 
$
(1,053
)
 
$
593

 
$
106

 
$
(315
)
(1) 
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts represent instruments that are accounted for under the fair value option.
Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings
 
Nine Months Ended September 30, 2013
(Dollars in millions)
Equity
Investment
Income
(Loss)
 
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other
Income
(Loss)
 
Total
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
256

 
$

 
$

 
$
256

Equity securities

 
54

 

 

 
54

Non-U.S. sovereign debt

 
56

 

 

 
56

Mortgage trading loans and ABS

 
165

 

 

 
165

Total trading account assets

 
531

 

 

 
531

Net derivative assets

 
(581
)
 
767

 

 
186

AFS debt securities:
 
 
 
 
 
 
 
 
 
Non-U.S. securities

 

 

 
5

 
5

Other taxable securities

 

 

 
5

 
5

Tax-exempt securities

 

 

 
3

 
3

Total AFS debt securities

 

 

 
13

 
13

Loans and leases (2)

 

 
(38
)
 
118

 
80

Mortgage servicing rights

 

 
1,531

 

 
1,531

Loans held-for-sale (2)

 

 
2

 
18

 
20

Other assets
52

 

 
124

 
(500
)
 
(324
)
Trading account liabilities – Corporate securities and other

 
7

 

 

 
7

Accrued expenses and other liabilities (2)

 

 
30

 

 
30

Long-term debt (2)

 
49

 

 
(8
)
 
41

Total
$
52

 
$
6

 
$
2,416

 
$
(359
)
 
$
2,115

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2012
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
192

 
$

 
$

 
$
192

Equity securities

 
24

 

 

 
24

Non-U.S. sovereign debt

 
5

 

 

 
5

Mortgage trading loans and ABS

 
194

 

 

 
194

Total trading account assets

 
415

 

 

 
415

Net derivative assets

 
(2,358
)
 
2,375

 

 
17

AFS debt securities:
 
 
 
 
 
 
 
 
 
Non-agency residential MBS

 

 

 
(69
)
 
(69
)
Corporate/Agency bonds

 

 

 
(2
)
 
(2
)
Other taxable securities

 

 

 
7

 
7

Tax-exempt securities

 

 

 
61

 
61

Total AFS debt securities

 

 

 
(3
)
 
(3
)
Loans and leases (2)

 

 

 
284

 
284

Mortgage servicing rights

 

 
(1,297
)
 

 
(1,297
)
Loans held-for-sale (2)

 

 
105

 
160

 
265

Other assets
28

 

 
(57
)
 
(81
)
 
(110
)
Trading account liabilities – Corporate securities and other

 
4

 

 

 
4

Accrued expenses and other liabilities (2)

 

 

 
4

 
4

Long-term debt (2)

 
(104
)
 

 
(135
)
 
(239
)
Total
$
28

 
$
(2,043
)
 
$
1,126

 
$
229

 
$
(660
)

(1) 
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts represent instruments that are accounted for under the fair value option.
The following tables summarize changes in unrealized gains (losses) recorded in earnings during the three and nine months ended September 30, 2013 and 2012 for Level 3 assets and liabilities that were still held at September 30, 2013 and 2012. These amounts include changes in fair value on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.

Level 3 – Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date
 
Three Months Ended September 30, 2013
(Dollars in millions)
Equity
Investment
Income
(Loss)
 
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other
Income
(Loss)
 
Total
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
(6
)
 
$

 
$

 
$
(6
)
Equity securities

 
4

 

 

 
4

Non-U.S. sovereign debt

 
5

 

 

 
5

Mortgage trading loans and ABS

 
(55
)
 

 

 
(55
)
Total trading account assets

 
(52
)
 

 

 
(52
)
Net derivative assets

 
(754
)
 
91

 

 
(663
)
Loans and leases (2)

 

 
(35
)
 
27

 
(8
)
Mortgage servicing rights

 

 
(14
)
 

 
(14
)
Loans held-for-sale (2)

 

 

 
35

 
35

Other assets
17

 

 
11

 
(13
)
 
15

Long-term debt (2)

 
(31
)
 

 
(31
)
 
(62
)
Total
$
17

 
$
(837
)
 
$
53

 
$
18

 
$
(749
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2012
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
36

 
$

 
$

 
$
36

Equity securities

 
13

 

 

 
13

Non-U.S. sovereign debt

 
8

 

 

 
8

Mortgage trading loans and ABS

 
89

 

 

 
89

Total trading account assets

 
146

 

 

 
146

Net derivative assets

 
(1,202
)
 
566

 

 
(636
)
Loans and leases (2)

 

 

 
76

 
76

Mortgage servicing rights

 

 
(552
)
 

 
(552
)
Loans held-for-sale (2)

 

 
15

 
68

 
83

Other assets
115

 

 
(14
)
 
4

 
105

Accrued expenses and other liabilities (2)

 

 

 
(2
)
 
(2
)
Long-term debt (2)

 
(46
)
 

 
(46
)
 
(92
)
Total
$
115

 
$
(1,102
)
 
$
15

 
$
100

 
$
(872
)
(1) 
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts represent instruments that are accounted for under the fair value option.
Level 3 – Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date
 
Nine Months Ended September 30, 2013
(Dollars in millions)
Equity
Investment
Income
(Loss)
 
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other
Income
(Loss)
 
Total
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
48

 
$

 
$

 
$
48

Equity securities

 
26

 

 

 
26

Non-U.S. sovereign debt

 
70

 

 

 
70

Mortgage trading loans and ABS

 
5

 

 

 
5

Total trading account assets

 
149

 

 

 
149

Net derivative assets

 
(853
)
 
92

 

 
(761
)
Loans and leases (2)

 

 
(35
)
 
133

 
98

Mortgage servicing rights

 

 
1,276

 

 
1,276

Loans held-for-sale (2)

 

 
6

 
25

 
31

Other assets
23

 

 
159

 
(51
)
 
131

Long-term debt (2)

 
6

 

 
(9
)
 
(3
)
Total
$
23

 
$
(698
)
 
$
1,498

 
$
98

 
$
921

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2012
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
95

 
$

 
$

 
$
95

Equity securities

 
24

 

 

 
24

Non-U.S. sovereign debt

 
16

 

 

 
16

Mortgage trading loans and ABS

 
119

 

 

 
119

Total trading account assets

 
254

 

 

 
254

Net derivative assets

 
(2,526
)
 
627

 

 
(1,899
)
Loans and leases (2)

 

 

 
172

 
172

Mortgage servicing rights

 

 
(1,804
)
 

 
(1,804
)
Loans held-for-sale (2)

 

 
65

 
127

 
192

Other assets
90

 

 
(54
)
 
(95
)
 
(59
)
Trading account liabilities – Corporate securities and other

 
3

 

 

 
3

Long-term debt (2)

 
(105
)
 

 
(134
)
 
(239
)
Total
$
90

 
$
(2,374
)
 
$
(1,166
)
 
$
70

 
$
(3,380
)

(1) 
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts represent instruments that are accounted for under the fair value option.
The following tables present information about significant unobservable inputs related to the Corporation's material categories of Level 3 financial assets and liabilities at September 30, 2013 and December 31, 2012.

Quantitative Information about Level 3 Fair Value Measurements at September 30, 2013
 
(Dollars in millions)
 
 
Inputs
Financial Instrument
Fair Value
Valuation Technique
Significant Unobservable
Inputs
Ranges of Inputs
Weighted Average
Loans and Securities (1)
 
 
 
 
 
Instruments backed by residential real estate assets
$
3,331

Discounted cash flow, Market comparables
Yield
2% to 25%
7
 %
Trading account assets – Mortgage trading loans and ABS
356

Prepayment speed
0% to 35% CPR
9
 %
Loans and leases
2,366

Default rate
0% to 20% CDR
7
 %
Loans held-for-sale
609

Loss severity
0% to 85%
37
 %
Commercial loans, debt securities and other
$
11,973

Discounted cash flow, Market comparables
Yield
0% to 45%
3
 %
Trading account assets – Corporate securities, trading loans and other
3,686

Enterprise value/EBITDA multiple
0x to 19x
6
 x
Trading account assets – Mortgage trading loans and ABS
4,164

Prepayment speed
5% to 40%
20
 %
AFS debt securities – Other taxable securities
3,169

Default rate
1% to 5%
4
 %
Loans and leases
650

Loss severity
25% to 40%
35
 %
Loans held-for-sale
304

 
 
 
Auction rate securities
$
1,755

Discounted cash flow, Market comparables
Projected tender price/Re-financing level
50% to 100%
95
 %
Trading account assets – Corporate securities, trading loans and other
94

 
 
AFS debt securities – Other taxable securities
844

 
 
 
AFS debt securities – Tax-exempt securities
817

 
 
 
Structured liabilities
 
 
 
 
 
Long-term debt
$
(2,063
)
Industry standard derivative pricing (2)
Equity correlation
18% to 98%
66
 %
 
 
Long-dated volatilities
4% to 69%
25
 %
 
 
 
 
 
Net derivatives assets
 
 
 
 
 
Credit derivatives
$
1,300

Discounted cash flow, Stochastic recovery correlation model
Yield
4% to 25%
16
 %
 
 
Credit spreads
29 bps to 183 bps
170 bps

 
 
Upfront points
0 points to 100 points
63 points

 
 
Spread to index
-1,731 bps to 1,681 bps
207 bps

 
 
Credit correlation
21% to 73%
45
 %
 
 
Prepayment speed
3% to 40% CPR
14
 %
 
 
Default rate
1% to 5% CDR
3
 %
 
 
Loss severity
20% to 42%
35
 %
Equity derivatives
$
(918
)
Industry standard derivative pricing (2)
Equity correlation
18% to 98%
66
%
 
 
Long-dated volatilities
4% to 69%
25
%
 
 
 
 
 
Commodity derivatives
$
11

Discounted cash flow, Industry standard derivative pricing (2)
Natural gas forward price
$3/MMBtu to $12/MMBtu
$7/MMBtu

 
 
Correlation
47% to 94%
81
 %
 
 
Volatilities
9% to 84%
29
 %
Interest rate derivatives
$
375

Industry standard derivative pricing (3)
Correlation (IR/IR)
24% to 99%
61
 %
 
 
Correlation (FX/IR)
-65% to 50%
-2
 %
 
 
Long-dated inflation volatilities
0% to 2%
1
 %
Total net derivative assets
$
768

 
 
 
 

(1) 
The categories are aggregated based upon product type which differs from financial statement classification. The following is a reconciliation to the line items in the table on page 237: Trading account assets – Corporate securities, trading loans and other of $3.8 billion, Trading account assets – Mortgage trading loans and ABS of $4.5 billion, AFS debt securities – Other taxable securities of $4.0 billion, AFS debt securities – Tax-exempt securities of $817 million, Loans and leases of $3.0 billion and LHFS of $913 million.
(2) 
Includes models such as Monte Carlo simulation and Black-Scholes.
(3) 
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
EBITDA = Earnings before interest, taxes, depreciation and amortization
MMBtu = Million British thermal units
IR = Interest Rate
FX = Foreign Exchange
Quantitative Information about Level 3 Fair Value Measurements for Loans, Securities and Structured Liabilities at December 31, 2012
 
(Dollars in millions)
 
 
Inputs
Financial Instrument
Fair Value
Valuation Technique
Significant Unobservable
Inputs
Ranges of Inputs
Weighted Average
Loans and Securities (1)
 
 
 
 
 
Instruments backed by residential real estate assets
$
4,478

Discounted cash flow, Market comparables
Yield
2% to 25%
6
%
Trading account assets – Mortgage trading loans and ABS
459

Prepayment speed
1% to 30% CPR
10
%
Loans and leases
1,286

Default rate
0% to 44% CDR
6
%
Loans held-for-sale
2,733

Loss severity
6% to 85%
43
%
Instruments backed by commercial real estate assets
$
1,910

Discounted cash flow
Yield
5%
n/a

Other assets
1,910

Loss severity
51% to 100%
88
%
Commercial loans, debt securities and other
$
10,778

Discounted cash flow, Market comparables
Yield
0% to 25%
4
%
Trading account assets – Corporate securities, trading loans and other
2,289

Enterprise value/EBITDA multiple
2x to 11x
5x

Trading account assets – Mortgage trading loans and ABS
4,476

Prepayment speed
5% to 30%
20
%
AFS debt securities – Other taxable securities
3,012

Default rate
1% to 5%
4
%
Loans and leases
1,001

Loss severity
25% to 40%
35
%
Auction rate securities
$
3,414

Discounted cash flow, Market comparables
Discount rate
4% to 5%
4
%
Trading account assets – Corporate securities, trading loans and other
1,437

Projected tender price/Re-financing level
50% to 100%
92
%
AFS debt securities – Other taxable securities
916

 
 
AFS debt securities – Tax-exempt securities
1,061

 
 
 
Structured liabilities
 
 
 
 
 
Long-term debt (2)
$
(2,301
)
Industry standard derivative pricing (3)
Equity correlation
30% to 97%
n/m

 
 
Long-dated volatilities
20% to 70%
n/m

 
 
 
 
 


Quantitative Information about Level 3 Fair Value Measurements for Net Derivative Assets at December 31, 2012
(Dollars in millions)
 
 
Inputs
Financial Instrument
Fair Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of Inputs
Net derivatives assets
 
 
 
 
Credit derivatives
$
2,327

Discounted cash flow, Stochastic recovery correlation model
Yield
2% to 25%
 
 
Credit spreads
58 bps to 615 bps
 
 
Upfront points
25 points to 99 points
 
 
Spread to index
-2,080 bps to 1,972 bps
 
 
Credit correlation
19% to 75%
 
 
Prepayment speed
3% to 30% CPR
 
 
Default rate
0% to 8% CDR
 
 
Loss severity
25% to 42%
Equity derivatives
$
(1,295
)
Industry standard derivative pricing (3)
Equity correlation
30% to 97%
 
 
Long-dated volatilities
20% to 70%
 
 
 
 
Commodity derivatives
$
(5
)
Discounted cash flow
Natural gas forward price
$3/MMBtu to $12/MMBtu
Interest rate derivatives
$
441

Industry standard derivative pricing (4)
Correlation (IR/IR)
15% to 99%
 
 
Correlation (FX/IR)
-65% to 50%
 
 
Long-dated inflation rates
2% to 3%
 
 
Long-dated inflation volatilities
0% to 1%
 
 
Long-dated volatilities (FX)
5% to 36%
 
 
Long-dated swap rates
8% to 10%
Total net derivative assets
$
1,468

 
 
 
(1) 
The categories are aggregated based upon product type which differs from financial statement classification. The following is a reconciliation to the line items in the table on page 238: Trading account assets – Corporate securities, trading loans and other of $3.7 billion, Trading account assets – Mortgage trading loans and ABS of $4.9 billion, AFS debt securities – Other taxable securities of $3.9 billion, AFS debt securities – Tax-exempt securities of $1.1 billion, Loans and leases of $2.3 billion, LHFS of $2.7 billion and Other assets of $1.9 billion.
(2) 
For more information on the ranges of inputs for equity correlation and long-dated volatilities, see the qualitative equity derivatives discussion on page 245.
(3) 
Includes models such as Monte Carlo simulation and Black-Scholes.
(4) 
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
n/a = not applicable
n/m = not meaningful
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
EBITDA = Earnings before interest, taxes, depreciation and amortization
MMBtu = Million British thermal units
IR = Interest Rate
FX = Foreign Exchange
In the tables above, instruments backed by residential and commercial real estate assets include RMBS, CMBS, whole loans, mortgage CDOs and net monoline exposure. Commercial loans, debt securities and other includes corporate CLOs and CDOs, commercial loans and bonds, and securities backed by non-real estate assets. Structured liabilities primarily include equity-linked notes that are accounted for under the fair value option.

In addition to the instruments in the tables above, the Corporation held $934 million and $1.2 billion of instruments at September 30, 2013 and December 31, 2012 consisting primarily of certain direct private equity investments and private equity funds that were classified as Level 3 and reported within other assets. Valuations of direct private equity investments are based on the most recent company financial information. Inputs generally include market and acquisition comparables, entry level multiples, as well as other variables. The Corporation selects a valuation methodology (e.g., market comparables) for each investment and, in certain instances, multiple inputs are weighted to derive the most representative value. Discounts are applied as appropriate to consider the lack of liquidity and marketability versus publicly-traded companies. For private equity funds, fair value is determined using the net asset value as provided by the individual fund's general partner.

For more information on the inputs and techniques used in the valuation of MSRs, see Note 19 – Mortgage Servicing Rights.

The Corporation uses multiple market approaches in valuing certain of its Level 3 financial instruments. For example, market comparables and discounted cash flows are used together. For a given product, such as corporate debt securities, market comparables may be used to estimate some of the unobservable inputs and then these inputs are incorporated into a discounted cash flow model. Therefore, the balances disclosed encompass both of these techniques.

The level of aggregation and diversity within the products disclosed in the tables results in certain ranges of inputs being wide and unevenly distributed across asset and liability categories. At December 31, 2012, weighted averages were disclosed for all loans and securities. At September 30, 2013, weighted averages are disclosed for all loans, securities, structured liabilities and net derivative assets.

For credit derivatives, the range of credit spreads represented positions with varying levels of default risk to the underlying instruments. The lower end of the credit spread range typically represented shorter-dated instruments and those with better perceived credit risk. The higher end of the range represented longer-dated instruments and those referencing debt issuances that were more likely to be impaired or nonperforming. At December 31, 2012, the majority of inputs were concentrated in the lower end of the range. Similarly, the spread to index could vary significantly based on the risk of the instrument. The spread will be positive for instruments that have a higher risk of default than the index (which is based on a weighted average of its components) and negative for instruments that have a lower risk of default than the index. At December 31, 2012, inputs were distributed evenly throughout the range for spread to index. In addition, for yield and credit correlation, the majority of the inputs were concentrated in the center of the range. Inputs were concentrated in the middle to lower end of the range for upfront points. The range for loss severity reflected exposures that were concentrated in the middle to upper end of the range while the ranges for prepayment speed and default rates reflected exposures that were concentrated in the lower end of the range.

For equity derivatives at December 31, 2012, including those embedded in long-term debt, the range for equity correlation represented exposure primarily concentrated toward the upper end of the range. The range for long-dated volatilities represented exposure primarily concentrated toward the lower end of the range.

For interest rate derivatives, the diversity in the portfolio was reflected in wide ranges of inputs because the variety of currencies and tenors of the transactions required the use of numerous foreign exchange and interest rate curves. Since foreign exchange and interest rate correlations were measured between curves and across the various tenors on the same curve, the range of potential values could include both negative and positive values. For the correlation (IR/IR) range, the exposure represented the valuation of interest rate correlations on less liquid pairings and was concentrated at the upper end of the range at December 31, 2012. For the correlation (FX/IR) range, the exposure was the sensitivity to a broad mix of interest rate and foreign exchange correlations and was distributed evenly throughout the range at December 31, 2012. For long-dated inflation rates and volatilities as well as long-dated volatilities (FX), the inputs were concentrated in the middle of the range.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

For instruments backed by residential real estate assets, commercial real estate assets, and commercial loans, debt securities and other, a significant increase in market yields, default rates or loss severities would result in a significantly lower fair value for long positions. Short positions would be impacted in a directionally opposite way. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

For closed-end auction rate securities (ARS), a significant increase in discount rates would result in a significantly lower fair value. For student loan and municipal ARS, a significant increase in projected tender price/refinancing levels would result in a significantly higher fair value.

Structured Liabilities and Derivatives

For credit derivatives, a significant increase in market yield, including spreads to indices, upfront points (i.e., a single upfront payment made by a protection buyer at inception), credit spreads, default rates or loss severities would result in a significantly lower fair value for protection sellers and higher fair value for protection buyers. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

Structured credit derivatives, which include tranched portfolio CDS and derivatives with derivative product company (DPC) and monoline counterparties, are impacted by credit correlation, including default and wrong-way correlation. Default correlation is a parameter that describes the degree of dependence among credit default rates within a credit portfolio that underlies a credit derivative instrument. The sensitivity of this input on the fair value varies depending on the level of subordination of the tranche. For senior tranches that are net purchases of protection, a significant increase in default correlation would result in a significantly higher fair value. Net short protection positions would be impacted in a directionally opposite way. Wrong-way correlation is a parameter that describes the probability that as exposure to a counterparty increases, the credit quality of the counterparty decreases. A significantly higher degree of wrong-way correlation between a DPC counterparty and underlying derivative exposure would result in a significantly lower fair value.

For equity derivatives, equity-linked long-term debt (structured liabilities) and interest rate derivatives, a significant change in long-dated rates and volatilities and correlation inputs (e.g., the degree of correlation between an equity security and an index, between two different interest rates, or between interest rates and foreign exchange rates) would result in a significant impact to the fair value; however, the magnitude and direction of the impact depends on whether the Corporation is long or short the exposure.
Nonrecurring Fair Value

The Corporation holds certain assets that are measured at fair value, but only in certain situations (e.g., impairment) and these measurements are referred to herein as nonrecurring. These assets primarily include LHFS, certain loans and leases, and foreclosed properties. The amounts below represent only balances measured at fair value during the three and nine months ended September 30, 2013 and 2012, and still held as of the reporting date.

Assets Measured at Fair Value on a Nonrecurring Basis
 
 
 
September 30, 2013
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
(Dollars in millions)
Level 2
 
Level 3
 
Gains (Losses)
Assets
 
 
 
 
 
 
 
Loans held-for-sale
$
4,266

 
$
274

 
$
1

 
$
(66
)
Loans and leases (1)
23

 
5,114

 
(281
)
 
(985
)
Foreclosed properties (2)
17

 
1,293

 
21

 
23

Other assets
78

 
10

 
(7
)
 
(15
)
 
 
 
 
 
 
 
 
 
September 30, 2012
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
Assets
 
 
 
 
 
 
 
Loans held-for-sale
$
3,551

 
$
1,006

 
$

 
$
(6
)
Loans and leases (1)
16

 
8,576

 
(1,548
)
 
(3,422
)
Foreclosed properties (2)
64

 
1,436

 
(20
)
 
(68
)
Other assets
32

 
111

 
(11
)
 
(13
)
(1) 
Losses represent charge-offs on real estate-secured loans.
(2) 
Amounts are included in other assets on the Consolidated Balance Sheet and represent the fair value of, and related losses on foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.

The table below presents information about significant unobservable inputs related to the Corporation's nonrecurring Level 3 financial assets and liabilities at September 30, 2013 and December 31, 2012.

Quantitative Information about Nonrecurring Level 3 Fair Value Measurements at September 30, 2013
 
(Dollars in millions)
 
 
Inputs
Financial Instrument
Fair Value
Valuation Technique
Significant Unobservable
Inputs
Ranges of Inputs
Weighted Average
Instruments backed by residential real estate assets
$
5,114

Market comparables
OREO discount
0% to 19%
9
%
Loans and leases
5,114

Cost to sell
8%
n/a


Quantitative Information about Nonrecurring Level 3 Fair Value Measurements at December 31, 2012
 
Instruments backed by residential real estate assets
$
9,932

Discounted cash flow, Market comparables
Yield
3% to 5%
3
%
Loans held-for-sale
748

Prepayment speed
3% to 30%
15
%
Loans and leases
9,184

Default rate
0% to 55%
7
%
 
 
Loss severity
6% to 66%
48
%
 
 
OREO discount
0% to 28%
15
%
 
 
Cost to sell
8%
n/a

Instruments backed by commercial real estate assets
$
388

Discounted cash flow
Yield
4% to 13%
6
%
Loans held-for-sale
388

Loss severity
24% to 88%
53
%

n/a = not applicable

Instruments backed by residential real estate assets represent residential mortgages where the loan has been written down to the fair value of the underlying collateral or, in the case of LHFS, are carried at the lower of cost or fair value.

In addition to the instruments disclosed in the table above, the Corporation holds foreclosed residential properties where the fair value is based on unadjusted third-party appraisals or broker price opinions. Appraisals are conducted every 90 days. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.