Bank of America Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

9 Months Ended

Sep. 30, 2015

NOTE 14 – 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 and Note 20 – Fair Value Measurements to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K. The Corporation accounts for certain financial instruments under the fair value option. For additional information, see Note 15 – 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, 2015, 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.

Recurring Fair Value

Assets and liabilities carried at fair value on a recurring basis at September 30, 2015 and December 31, 2014, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.



	September 30, 2015
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	62,806	$	—	$	—		$	62,806
Trading account assets:
U.S. government and agency securities ⁽²⁾	36,542		17,447		—		—			53,989
Corporate securities, trading loans and other	490		25,809		2,899		—			29,198
Equity securities	31,354		20,323		410		—			52,087
Non-U.S. sovereign debt	21,580		12,808		384		—			34,772
Mortgage trading loans and ABS	—		7,967		2,005		—			9,972
Total trading account assets	89,966		84,354		5,698		—			180,018
Derivative assets ⁽³⁾	7,403		762,127		6,014		(720,318		)	55,226
AFS debt securities:
U.S. Treasury and agency securities	38,075		2,056		—		—			40,131
Mortgage-backed securities:
Agency	—		208,319		—		—			208,319
Agency-collateralized mortgage obligations	—		12,075		—		—			12,075
Non-agency residential	—		3,393		189		—			3,582
Commercial	—		5,530		—		—			5,530
Non-U.S. securities	2,996		3,376		3		—			6,375
Corporate/Agency bonds	—		234		—		—			234
Other taxable securities	20		9,149		581		—			9,750
Tax-exempt securities	—		11,121		569		—			11,690
Total AFS debt securities	41,091		255,253		1,342		—			297,686
Other debt securities carried at fair value:
Mortgage-backed securities:
Agency	—		7,944		—		—			7,944
Agency-collateralized mortgage obligations	—		7		—		—			7
Non-agency residential	—		3,604		31		—			3,635
Non-U.S. securities	14,393		1,136		—		—			15,529
Other taxable securities	—		277		—		—			277
Total other debt securities carried at fair value	14,393		12,968		31		—			27,392
Loans and leases	—		5,194		1,984		—			7,178
Mortgage servicing rights	—		—		3,043		—			3,043
Loans held-for-sale	—		4,129		559		—			4,688
Other assets ⁽⁴⁾	11,183		1,461		674		—			13,318
Total assets	$	164,036	$	1,188,292	$	19,345	$	(720,318	)	$	651,355
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	1,163	$	—	$	—		$	1,163
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		38,718		196		—			38,914
Trading account liabilities:
U.S. government and agency securities	15,397		153		—		—			15,550
Equity securities	30,112		2,564		—		—			32,676
Non-U.S. sovereign debt	16,762		1,541		—		—			18,303
Corporate securities and other	158		7,527		38		—			7,723
Total trading account liabilities	62,429		11,785		38		—			74,252
Derivative liabilities ⁽³⁾	7,503		752,188		5,617		(719,446		)	45,862
Short-term borrowings	—		1,851		18		—			1,869
Accrued expenses and other liabilities	11,440		1,907		9		—			13,356
Long-term debt	—		27,275		1,910		—			29,185
Total liabilities	$	81,372	$	834,887	$	7,788	$	(719,446	)	$	204,601


⁽¹⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽²⁾	Includes $17.0 billion of government-sponsored enterprise obligations.

⁽³⁾

During the nine months ended September 30, 2015, $6.2 billion of derivative assets and $6.3 billion of derivative liabilities were transferred from Level 1 to Level 2 based on inputs used to measure fair value. Additionally, $5.9 billion of derivative assets and $5.8 billion of derivative liabilities were transferred from Level 2 to Level 1 due to additional information related to certain options. For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.


⁽⁴⁾	During the nine months ended September 30, 2015, approximately $327 million of assets were transferred from Level 2 to Level 1 due to a restriction that was lifted for an equity investment.



	December 31, 2014
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	62,182	$	—	$	—		$	62,182
Trading account assets:
U.S. government and agency securities ⁽²⁾	33,470		17,549		—		—			51,019
Corporate securities, trading loans and other	243		31,699		3,270		—			35,212
Equity securities	33,518		22,488		352		—			56,358
Non-U.S. sovereign debt	20,348		15,332		574		—			36,254
Mortgage trading loans and ABS	—		10,879		2,063		—			12,942
Total trading account assets	87,579		97,947		6,259		—			191,785
Derivative assets ⁽³⁾	4,957		972,977		6,851		(932,103		)	52,682
AFS debt securities:
U.S. Treasury and agency securities	67,413		2,182		—		—			69,595
Mortgage-backed securities:
Agency	—		165,039		—		—			165,039
Agency-collateralized mortgage obligations	—		14,248		—		—			14,248
Non-agency residential	—		4,175		279		—			4,454
Commercial	—		4,000		—		—			4,000
Non-U.S. securities	3,191		3,029		10		—			6,230
Corporate/Agency bonds	—		368		—		—			368
Other taxable securities	20		9,104		1,667		—			10,791
Tax-exempt securities	—		8,950		599		—			9,549
Total AFS debt securities	70,624		211,095		2,555		—			284,274
Other debt securities carried at fair value:
U.S. Treasury and agency securities	1,541		—		—		—			1,541
Mortgage-backed securities:
Agency	—		15,704		—		—			15,704
Non-agency residential	—		3,745		—		—			3,745
Non-U.S. securities	13,270		1,862		—		—			15,132
Other taxable securities	—		299		—		—			299
Total other debt securities carried at fair value	14,811		21,610		—		—			36,421
Loans and leases	—		6,698		1,983		—			8,681
Mortgage servicing rights	—		—		3,530		—			3,530
Loans held-for-sale	—		6,628		173		—			6,801
Other assets ⁽⁴⁾	11,581		1,381		911		—			13,873
Total assets	$	189,552	$	1,380,518	$	22,262	$	(932,103	)	$	660,229
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	1,469	$	—	$	—		$	1,469
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		35,357		—		—			35,357
Trading account liabilities:
U.S. government and agency securities	18,514		446		—		—			18,960
Equity securities	24,679		3,670		—		—			28,349
Non-U.S. sovereign debt	16,089		3,625		—		—			19,714
Corporate securities and other	189		6,944		36		—			7,169
Total trading account liabilities	59,471		14,685		36		—			74,192
Derivative liabilities ⁽³⁾	4,493		969,502		7,771		(934,857		)	46,909
Short-term borrowings	—		2,697		—		—			2,697
Accrued expenses and other liabilities	10,795		1,250		10		—			12,055
Long-term debt	—		34,042		2,362		—			36,404
Total liabilities	$	74,759	$	1,059,002	$	10,179	$	(934,857	)	$	209,083


⁽¹⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽²⁾	Includes $17.2 billion of government-sponsored enterprise obligations.


⁽³⁾	For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.

⁽⁴⁾

During 2014, the Corporation reclassified certain assets and liabilities within its fair value hierarchy based on a review of its inputs used to measure fair value. Accordingly, approximately $4.1 billion of assets related to U.S. government and agency securities, non-U.S. government securities and equity derivatives, and $570 million of liabilities related to equity derivatives were transferred from Level 1 to Level 2.

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, 2015 and 2014, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.



Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended September 30, 2015
										Gross
(Dollars in millions)	Balance July 1 2015			Gains (Losses) in Earnings			Gains (Losses) in OCI ⁽²⁾			Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2015
Trading account assets:
Corporate securities, trading loans and other	$	3,326		$	(6	)	$	(11	)	$	553	$	(681	)	$	—		$	(295	)	$	238		$	(225	)	$	2,899
Equity securities	386			(1		)	—			32		—			—			(6		)	2			(3		)	410
Non-U.S. sovereign debt	468			12			(102		)	7		(1		)	—			—			—			—			384
Mortgage trading loans and ABS	2,159			(7		)	—			293		(264		)	—			(157		)	2			(21		)	2,005
Total trading account assets	6,339			(2		)	(113		)	885		(946		)	—			(458		)	242			(249		)	5,698
Net derivative assets ⁽³⁾	(351		)	1,042			(5		)	80		(290		)	—			(115		)	(20		)	56			397
AFS debt securities:
Non-agency residential MBS	234			—			(2		)	41		—			—			(47		)	—			(37		)	189
Non-U.S. securities	9			—			—			—		—			—			(6		)	—			—			3
Other taxable securities	677			—			(2		)	—		—			—			(88		)	—			(6		)	581
Tax-exempt securities	584			—			—			—		—			—			(15		)	—			—			569
Total AFS debt securities	1,504			—			(4		)	41		—			—			(156		)	—			(43		)	1,342
Other debt securities carried at fair value – Non-agency residential MBS	34			(3		)	—			—		—			—			—			—			—			31
Loans and leases ^{(4, 5)}	1,970			17			—			—		(1		)	57			(59		)	7			(7		)	1,984
Mortgage servicing rights ⁽⁵⁾	3,521			(363		)	—			—		(87		)	185			(213		)	—			—			3,043
Loans held-for-sale ⁽⁴⁾	660			—			—			2		(79		)	3			(6		)	7			(28		)	559
Other assets ⁽⁶⁾	756			(42		)	—			3		(11		)	—			(17		)	—			(15		)	674
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁴⁾	(368		)	—			—			—		—			(5		)	208			(32		)	1			(196		)
Trading account liabilities – Corporate securities and other	(57		)	—			—			—		19			—			—			—			—			(38		)
Short-term borrowings ⁽⁴⁾	—			4			—			—		—			(3		)	—			(19		)	—			(18		)
Accrued expenses and other liabilities	(9		)	—			—			—		—			—			—			—			—			(9		)
Long-term debt ⁽⁴⁾	(2,716		)	252			—			139		—			(40		)	59			(264		)	660			(1,910		)


⁽¹⁾	Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.


⁽²⁾	Includes unrealized gains (losses) on AFS debt securities and foreign currency translation adjustments.


⁽³⁾	Net derivatives include derivative assets of $6.0 billion and derivative liabilities of $5.6 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 certain long-term fixed-rate margin loans that are accounted for under the fair value option and certain private equity investments.

During the three months ended September 30, 2015, the transfers into Level 3 included $242 million of trading account assets and $264 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased availability of third-party prices for certain corporate debt securities. 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, 2015, the transfers out of Level 3 included $249 million of trading account assets and $660 million of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and price observability for certain corporate debt securities. 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, 2014
										Gross
(Dollars in millions)	Balance July 1 2014			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 2014
Trading account assets:
U.S. government and agency securities	$	—		$	—		$	—		$	87	$	—		$	—		$	—		$	—		$	—		$	87
Corporate securities, trading loans and other	2,772			50			—			451		(252		)	—			(191		)	532			(323		)	3,039
Equity securities	356			2			—			49		(31		)	—			(15		)	56			(60		)	357
Non-U.S. sovereign debt	640			(28		)	—			21		(28		)	—			(11		)	—			—			594
Mortgage trading loans and ABS	4,311			21			—			384		(270		)	—			(63		)	25			(2,518		)	1,890
Total trading account assets	8,079			45			—			992		(581		)	—			(280		)	613			(2,901		)	5,967
Net derivative assets ⁽²⁾	(1,035		)	261			—			339		(372		)	—			115			(138		)	78			(752		)
AFS debt securities:
Non-agency residential MBS	—			(1		)	—			11		—			—			—			—			—			10
Non-U.S securities	—			—			(11		)	228		—			—			(27		)	—			—			190
Corporate/Agency bonds	—			—			—			—		—			—			—			93			—			93
Other taxable securities	3,266			1			—			—		—			—			(257		)	—			(954		)	2,056
Tax-exempt securities	735			5			(3		)	—		(16		)	—			(142		)	35			—			614
Total AFS debt securities	4,001			5			(14		)	239		(16		)	—			(426		)	128			(954		)	2,963
Loans and leases ^{(3, 4)}	3,018			12			—			—		—			10			(757		)	7			(248		)	2,042
Mortgage servicing rights ⁽⁴⁾	4,368			(95		)	—			—		(1		)	203			(232		)	—			—			4,243
Loans held-for-sale ⁽³⁾	110			(14		)	—			29		(11		)	—			(1		)	67			(7		)	173
Other assets ⁽⁵⁾	972			15			—			—		(39		)	—			(7		)	3			(13		)	931
Trading account liabilities – Corporate securities and other	(27		)	—			—			1		—			—			—			—			—			(26		)
Accrued expenses and other liabilities	(8		)	—			—			—		—			—			—			—			—			(8		)
Long-term debt ⁽³⁾	(2,416		)	123			—			50		—			(445		)	168			(379		)	550			(2,349		)


⁽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 $6.9 billion and derivative liabilities of $7.7 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 certain long-term fixed-rate margin loans that are accounted for under the fair value option and certain private equity investments.

During the three months ended September 30, 2014, the transfers into Level 3 included $613 million of trading account assets, $138 million of net derivative assets, $128 million of AFS debt securities and $379 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased availability of third-party prices for certain corporate loans and securities. Transfers into Level 3 for net derivative assets were primarily due to decreased price observability related to equity derivatives. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability related to municipal auction rate securities. 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, 2014, the transfers out of Level 3 included $2.9 billion of trading account assets, $954 million of AFS debt securities, $248 million of loans and leases and $550 million of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and price observability on certain CLOs. Transfers out of Level 3 for AFS debt securities were primarily due to increased price observability on certain CLOs. Transfers out of Level 3 for loans and leases were primarily due to increased price observability. 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, 2015
										Gross
(Dollars in millions)	Balance January 1 2015			Gains (Losses) in Earnings			Gains (Losses) in OCI ⁽²⁾			Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2015
Trading account assets:
Corporate securities, trading loans and other	$	3,270		$	28		$	(11	)	$	1,030	$	(1,119	)	$	—		$	(944	)	$	1,221		$	(576	)	$	2,899
Equity securities	352			13			—			48		(3		)	—			(11		)	33			(22		)	410
Non-U.S. sovereign debt	574			94			(180		)	34		(1		)	—			(110		)	—			(27		)	384
Mortgage trading loans and ABS	2,063			154			—			1,102		(891		)	—			(401		)	12			(34		)	2,005
Total trading account assets	6,259			289			(191		)	2,214		(2,014		)	—			(1,466		)	1,266			(659		)	5,698
Net derivative assets ⁽³⁾	(920		)	1,608			(5		)	193		(683		)	—			106			(80		)	178			397
AFS debt securities:
Non-agency residential MBS	279			(12		)	5			103		—			—			(281		)	132			(37		)	189
Non-U.S. securities	10			—			—			—		—			—			(7		)	—			—			3
Other taxable securities	1,667			—			(2		)	6		—			—			(151		)	—			(939		)	581
Tax-exempt securities	599			—			(1		)	—		—			—			(29		)	—			—			569
Total AFS debt securities	2,555			(12		)	2			109		—			—			(468		)	132			(976		)	1,342
Other debt securities carried at fair value – Non-agency residential MBS	—			(2		)	—			33		—			—			—			—			—			31
Loans and leases ^{(4, 5)}	1,983			22			—			—		(3		)	57			(179		)	125			(21		)	1,984
Mortgage servicing rights ⁽⁵⁾	3,530			10			—			—		(399		)	568			(666		)	—			—			3,043
Loans held-for-sale ⁽⁴⁾	173			(48		)	—			493		(174		)	36			(12		)	184			(93		)	559
Other assets ⁽⁶⁾	911			(46		)	—			12		(129		)	—			(32		)	8			(50		)	674
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁴⁾	—			(14		)	—			—		—			(33		)	208			(358		)	1			(196		)
Trading account liabilities – Corporate securities and other	(36		)	3			—			33		(38		)	—			—			—			—			(38		)
Short-term borrowings ⁽⁴⁾	—			9			—			—		—			(24		)	1			(23		)	19			(18		)
Accrued expenses and other liabilities	(10		)	1			—			—		—			—			—			—			—			(9		)
Long-term debt ⁽⁴⁾	(2,362		)	322			—			316		—			(179		)	219			(1,380		)	1,154			(1,910		)


⁽¹⁾	Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.


⁽²⁾	Includes unrealized gains (losses) on AFS debt securities and foreign currency translation adjustments.


⁽³⁾	Net derivatives include derivative assets of $6.0 billion and derivative liabilities of $5.6 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 certain long-term fixed-rate margin loans that are accounted for under the fair value option and certain private equity investments.

During the nine months ended September 30, 2015, the transfers into Level 3 included $1.3 billion of trading account assets, $132 million of AFS debt securities, $125 million of loans and leases, $184 million of LHFS, $358 million of federal funds purchased and securities loaned or sold under agreements to repurchase and $1.4 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased availability of third-party prices for certain corporate debt securities. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability on certain CLOs. Transfers into Level 3 for loans and leases were primarily due to decreased price observability. Transfers into Level 3 for LHFS were primarily due to decreased price observability due to a decline in trading activity. Transfers into Level 3 for federal funds purchased and securities loaned or sold under agreements to repurchase were due to decreased price availability for certain structured secured financing agreements. 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, 2015, the transfers out of Level 3 included $659 million of trading account assets, $178 million of net derivative assets, $976 million of AFS debt securities and $1.2 billion of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and price observability for certain corporate debt securities. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability related to certain equity derivatives. Transfers out of Level 3 for AFS debt securities were primarily due to increased price observability for certain corporate debt securities. 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, 2014
										Gross
(Dollars in millions)	Balance January 1 2014			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 2014
Trading account assets:
U.S. government and agency securities	$	—		$	—		$	—		$	87	$	—		$	—		$	—		$	—		$	—		$	87
Corporate securities, trading loans and other	3,559			213			—			1,129		(693		)	—			(700		)	929			(1,398		)	3,039
Equity securities	386			14			—			95		(64		)	—			(15		)	72			(131		)	357
Non-U.S. sovereign debt	468			59			—			120		(34		)	—			(17		)	—			(2		)	594
Mortgage trading loans and ABS	4,631			222			—			1,203		(1,084		)	—			(524		)	25			(2,583		)	1,890
Total trading account assets	9,044			508			—			2,634		(1,875		)	—			(1,256		)	1,026			(4,114		)	5,967
Net derivative assets ⁽²⁾	(224		)	98			—			653		(1,429		)	—			(131		)	(97		)	378			(752		)
AFS debt securities:
Non-agency residential MBS	—			(1		)	—			11		—			—			—			—			—			10
Non-U.S. securities	107			—			(11		)	228		—			—			(134		)	—			—			190
Corporate/Agency bonds	—			—			—			—		—			—			—			93			—			93
Other taxable securities	3,847			9			(5		)	133		—			—			(974		)	—			(954		)	2,056
Tax-exempt securities	806			8			1			—		(16		)	—			(221		)	36			—			614
Total AFS debt securities	4,760			16			(15		)	372		(16		)	—			(1,329		)	129			(954		)	2,963
Loans and leases ^{(3, 4)}	3,057			71			—			—		(3		)	699			(1,538		)	20			(264		)	2,042
Mortgage servicing rights ⁽⁴⁾	5,042			(634		)	—			—		(47		)	581			(699		)	—			—			4,243
Loans held-for-sale ⁽³⁾	929			57			—			53		(725		)	—			(213		)	81			(9		)	173
Other assets ⁽⁵⁾	1,669			(71		)	—			—		(420		)	—			(237		)	3			(13		)	931
Trading account liabilities – Corporate securities and other	(35		)	1			—			13		(7		)	—			—			—			2			(26		)
Accrued expenses and other liabilities	(10		)	1			—			—		—			—			—			—			1			(8		)
Long-term debt ⁽³⁾	(1,990		)	4			—			153		—			(496		)	404			(1,199		)	775			(2,349		)


⁽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 $6.9 billion and derivative liabilities of $7.7 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 certain long-term fixed-rate margin loans that are accounted for under the fair value option and certain private equity investments.

During the nine months ended September 30, 2014, the transfers into Level 3 included $1.0 billion of trading account assets, $129 million of AFS debt securities and $1.2 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased availability of third-party prices for certain corporate loans and securities. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability related to municipal auction rate securities. 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, 2014, the transfers out of Level 3 included $4.1 billion of trading account assets, $378 million of net derivative assets, $954 million of AFS debt securities, $264 million of loans and leases and $775 million of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and price observability on certain CLOs. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability for certain equity derivatives. Transfers out of Level 3 for AFS debt securities were primarily due to increased price observability on certain CLOs. Transfers out of Level 3 for loans and leases were primarily due to increased price observability. 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, 2015 and 2014. 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, 2015
(Dollars in millions)	Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other			Total
Trading account assets:
Corporate securities, trading loans and other	$	(6	)	$	—		$	—		$	(6	)
Equity securities	(1		)	—			—			(1		)
Non-U.S. sovereign debt	12			—			—			12
Mortgage trading loans and ABS	(7		)	—			—			(7		)
Total trading account assets	(2		)	—			—			(2		)
Net derivative assets	837			184			21			1,042
Other debt securities carried at fair value – Non-agency residential MBS	—			—			(3		)	(3		)
Loans and leases ⁽²⁾	1			—			16			17
Mortgage servicing rights	13			(376		)	—			(363		)
Loans held-for-sale ⁽²⁾	(4		)	—			4			—
Other assets	—			(32		)	(10		)	(42		)
Short-term borrowings ⁽²⁾	4			—			—			4
Long-term debt ⁽²⁾	251			—			1			252
Total	$	1,100		$	(224	)	$	29		$	905

	Three Months Ended September 30, 2014
Trading account assets:
Corporate securities, trading loans and other	$	50		$	—		$	—		$	50
Equity securities	2			—			—			2
Non-U.S. sovereign debt	(28		)	—			—			(28		)
Mortgage trading loans and ABS	21			—			—			21
Total trading account assets	45			—			—			45
Net derivative assets	72			169			20			261
AFS debt securities:
Non-agency residential MBS	—			—			(1		)	(1		)
Other taxable securities	—			—			1			1
Tax-exempt securities	—			—			5			5
Total AFS debt securities	—			—			5			5
Loans and leases ⁽²⁾	—			—			12			12
Mortgage servicing rights	(9		)	(86		)	—			(95		)
Loans held-for-sale ⁽²⁾	(2		)	—			(12		)	(14		)
Other assets	—			16			(1		)	15
Long-term debt ⁽²⁾	96			—			27			123
Total	$	202		$	99		$	51		$	352


⁽¹⁾	Mortgage banking income (loss) 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, 2015
(Dollars in millions)	Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other			Total
Trading account assets:
Corporate securities, trading loans and other	$	28		$	—		$	—		$	28
Equity securities	13			—			—			13
Non-U.S. sovereign debt	94			—			—			94
Mortgage trading loans and ABS	154			—			—			154
Total trading account assets	289			—			—			289
Net derivative assets	902			662			44			1,608
AFS debt securities – Non-agency residential MBS	—			—			(12		)	(12		)
Other debt securities carried at fair value – Non-agency residential MBS	—			—			(2		)	(2		)
Loans and leases ⁽²⁾	(5		)	—			27			22
Mortgage servicing rights	2			8			—			10
Loans held-for-sale ⁽²⁾	(58		)	—			10			(48		)
Other assets	—			(56		)	10			(46		)
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽²⁾	(14		)	—			—			(14		)
Trading account liabilities – Corporate securities and other	3			—			—			3
Short-term borrowings ⁽²⁾	9			—			—			9
Accrued expenses and other liabilities	—			—			1			1
Long-term debt ⁽²⁾	350			—			(28		)	322
Total	$	1,478		$	614		$	50		$	2,142

	Nine Months Ended September 30, 2014
Trading account assets:
Corporate securities, trading loans and other	$	213		$	—		$	—		$	213
Equity securities	14			—			—			14
Non-U.S. sovereign debt	59			—			—			59
Mortgage trading loans and ABS	222			—			—			222
Total trading account assets	508			—			—			508
Net derivative assets	(523		)	567			54			98
AFS debt securities:
Non-agency residential MBS	—			—			(1		)	(1		)
Other taxable securities	—			—			9			9
Tax-exempt securities	—			—			8			8
Total AFS debt securities	—			—			16			16
Loans and leases ⁽²⁾	—			—			71			71
Mortgage servicing rights	3			(637		)	—			(634		)
Loans held-for-sale ⁽²⁾	(2		)	—			59			57
Other assets	—			(49		)	(22		)	(71		)
Trading account liabilities – Corporate securities and other	1			—			—			1
Accrued expenses and other liabilities	—			—			1			1
Long-term debt ⁽²⁾	32			—			(28		)	4
Total	$	19		$	(119	)	$	151		$	51


⁽¹⁾	Mortgage banking income (loss) 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, 2015 and 2014 for Level 3 assets and liabilities that were still held at September 30, 2015 and 2014. 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, 2015
(Dollars in millions)	Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other			Total
Trading account assets:
Corporate securities, trading loans and other	$	(34	)	$	—		$	—		$	(34	)
Equity securities	(1		)	—			—			(1		)
Non-U.S. sovereign debt	12			—			—			12
Mortgage trading loans and ABS	(34		)	—			—			(34		)
Total trading account assets	(57		)	—			—			(57		)
Net derivative assets	735			58			21			814
Loans and leases ⁽²⁾	1			—			26			27
Mortgage servicing rights	13			(413		)	—			(400		)
Other assets	—			(26		)	(12		)	(38		)
Trading account liabilities – Corporate securities and other	1			—			—			1
Short-term borrowings ⁽²⁾	4			—			—			4
Long-term debt ⁽²⁾	250			—			—			250
Total	$	947		$	(381	)	$	35		$	601

	Three Months Ended September 30, 2014
Trading account assets:
Corporate securities, trading loans and other	$	14		$	—		$	—		$	14
Equity securities	12			—			—			12
Non-U.S. sovereign debt	(28		)	—			—			(28		)
Mortgage trading loans and ABS	(14		)	—			—			(14		)
Total trading account assets	(16		)	—			—			(16		)
Net derivative assets	36			59			20			115
Loans and leases ⁽²⁾	—			—			10			10
Mortgage servicing rights	(9		)	(195		)	—			(204		)
Loans held-for-sale ⁽²⁾	(2		)	—			1			(1		)
Other assets	—			22			1			23
Long-term debt ⁽²⁾	96			—			27			123
Total	$	105		$	(114	)	$	59		$	50


⁽¹⁾	Mortgage banking income (loss) 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, 2015
(Dollars in millions)	Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other			Total
Trading account assets:
Corporate securities, trading loans and other	$	(102	)	$	—		$	—		$	(102	)
Equity securities	7			—			—			7
Non-U.S. sovereign debt	81			—			—			81
Mortgage trading loans and ABS	(28		)	—			—			(28		)
Total trading account assets	(42		)	—			—			(42		)
Net derivative assets	1,037			59			44			1,140
Loans and leases ⁽²⁾	—			—			50			50
Mortgage servicing rights	2			(213		)	—			(211		)
Loans held-for-sale ⁽²⁾	(1		)	—			(30		)	(31		)
Other assets	—			(38		)	(8		)	(46		)
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽²⁾	(3		)	—			—			(3		)
Trading account liabilities – Corporate securities and other	1			—			—			1
Short-term borrowings ⁽²⁾	4			—			—			4
Accrued expenses and other liabilities	—			—			1			1
Long-term debt ⁽²⁾	308			—			1			309
Total	$	1,306		$	(192	)	$	58		$	1,172

	Nine Months Ended September 30, 2014
Trading account assets:
Corporate securities, trading loans and other	$	165		$	—		$	—		$	165
Equity securities	17			—			—			17
Non-U.S. sovereign debt	74			—			—			74
Mortgage trading loans and ABS	130			—			—			130
Total trading account assets	386			—			—			386
Net derivative assets	(464		)	61			54			(349		)
Loans and leases ⁽²⁾	—			—			69			69
Mortgage servicing rights	3			(1,071		)	—			(1,068		)
Loans held-for-sale ⁽²⁾	9			—			9			18
Other assets	—			(28		)	36			8
Trading account liabilities – Corporate securities and other	1			—			—			1
Long-term debt ⁽²⁾	30			—			(36		)	(6		)
Total	$	(35	)	$	(1,038	)	$	132		$	(941	)


⁽¹⁾	Mortgage banking income (loss) 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, 2015 and December 31, 2014.



Quantitative Information about Level 3 Fair Value Measurements at September 30, 2015
(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	$	2,349		Discounted cash flow, Market comparables	Yield	0% to 25%	6	%
Trading account assets – Mortgage trading loans and ABS	453				Prepayment speed	0% to 27% CPR	11	%
Loans and leases	1,337				Default rate	0% to 10% CDR	4	%
Loans held-for-sale	559				Loss severity	0% to 90%	41	%
Commercial loans, debt securities and other	$	5,204		Discounted cash flow, Market comparables	Yield	0% to 29%	4	%
Trading account assets – Corporate securities, trading loans and other	2,493				Prepayment speed	5% to 30%	16	%
Trading account assets – Non-U.S. sovereign debt	384				Default rate	1% to 5%	4	%
Trading account assets – Mortgage trading loans and ABS	1,552				Loss severity	25% to 50%	37	%
AFS debt securities – Other taxable securities	128				Duration	0 to 5 years	3 years
Loans and leases	647				Price	$0 to $275	$69
Auction rate securities	$	1,428		Discounted cash flow, Market comparables	Price	$10 to $102	$94
Trading account assets – Corporate securities, trading loans and other	406
AFS debt securities – Other taxable securities	453
AFS debt securities – Tax-exempt securities	569
Structured liabilities
Long-term debt	$	(1,910	)	Industry standard derivative pricing ^{(2, 3)}	Equity correlation	24% to 98%	65	%
				Industry standard derivative pricing ^{(2, 3)}	Long-dated equity volatilities	4% to 103%	28	%
Net derivative assets
Credit derivatives	$	453		Discounted cash flow, Stochastic recovery correlation model	Yield	0% to 26%	17	%
					Upfront points	0 to 101 points	75
					Credit spreads	0 bps to 530 bps	127 bps
					Credit correlation	30% to 99%	40	%
					Prepayment speed	10% to 20% CPR	19	%
					Default rate	1% to 4% CDR	3	%
					Loss severity	20% to 35%	35	%
Equity derivatives	$	(831	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	24% to 98%	65	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 103%	28	%
Commodity derivatives	$	161		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$2/MMBtu to $7/MMBtu	$4/MMBtu
					Propane forward price	$0.4/Gallon to $0.6/Gallon	$0.5/Gallon
					Correlation	66% to 93%	86	%
					Volatilities	18% to 78%	34	%
Interest rate derivatives	$	614		Industry standard derivative pricing⁽³⁾	Correlation (IR/IR)	22% to 99%	47	%
					Correlation (FX/IR)	-25% to 40%	-7	%
					Long-dated inflation rates	0% to 7%	2	%
					Long-dated inflation volatilities	0% to 2%	1	%
Total net derivative assets	$	397

⁽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 209: Trading account assets – Corporate securities, trading loans and other of $2.9 billion, Trading account assets – Non-U.S. sovereign debt of $384 million, Trading account assets – Mortgage trading loans and ABS of $2.0 billion, AFS debt securities – Other taxable securities of $581 million, AFS debt securities – Tax-exempt securities of $569 million, Loans and leases of $2.0 billion and LHFS of $559 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

MMBtu = Million British thermal units

IR = Interest Rate

FX = Foreign Exchange

n/a = not applicable



Quantitative Information about Level 3 Fair Value Measurements at December 31, 2014
(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	$	2,030		Discounted cash flow, Market comparables	Yield	0% to 25%		6	%
Trading account assets – Mortgage trading loans and ABS	483				Prepayment speed	0% to 35% CPR		14	%
Loans and leases	1,374				Default rate	2% to 15% CDR		7	%
Loans held-for-sale	173				Loss severity	26% to 100%		34	%
Commercial loans, debt securities and other	$	7,203		Discounted cash flow, Market comparables	Yield	0% to 40%		9	%
Trading account assets – Corporate securities, trading loans and other	3,224				Enterprise value/EBITDA multiple	0x to 30x		6x
Trading account assets – Non-U.S. sovereign debt	574				Prepayment speed	1% to 30%		12	%
Trading account assets – Mortgage trading loans and ABS	1,580				Default rate	1% to 5%		4	%
AFS debt securities – Other taxable securities	1,216				Loss severity	25% to 40%		38	%
Loans and leases	609				Duration	0 to 5 years		3 years
					Price	$0 to $107		$76
Auction rate securities	$	1,096		Discounted cash flow, Market comparables	Price	$60 to $100		$95
Trading account assets – Corporate securities, trading loans and other	46
AFS debt securities – Other taxable securities	451
AFS debt securities – Tax-exempt securities	599
Structured liabilities
Long-term debt	$	(2,362	)	Industry standard derivative pricing ^{(2, 3)}	Equity correlation	20% to 98%		65	%
					Long-dated equity volatilities	6% to 69%		24	%
					Long-dated volatilities (IR)	0% to 2%		1	%
Net derivative assets
Credit derivatives	$	22		Discounted cash flow, Stochastic recovery correlation model	Yield	0% to 25%		14	%
					Upfront points	0 to 100 points		65 points
					Spread to index	25 bps to 450 bps		119 bps
					Credit correlation	24% to 99%		51	%
					Prepayment speed	3% to 20% CPR		11	%
					Default rate	4% CDR		n/a
					Loss severity	35	%	n/a
Equity derivatives	$	(1,560	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	20% to 98%		65	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	6% to 69%		24	%
Commodity derivatives	$	141		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$2/MMBtu to $7/MMBtu		$5/MMBtu
					Correlation	82% to 93%		90	%
					Volatilities	16% to 98%		35	%
Interest rate derivatives	$	477		Industry standard derivative pricing ⁽³⁾	Correlation (IR/IR)	11% to 99%		55	%
					Correlation (FX/IR)	-48% to 40%		-5	%
					Long-dated inflation rates	0% to 3%		1	%
					Long-dated inflation volatilities	0% to 2%		1	%
Total net derivative assets	$	(920	)

⁽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 210: Trading account assets – Corporate securities, trading loans and other of $3.3 billion, Trading account assets – Non-U.S. sovereign debt of $574 million, Trading account assets – Mortgage trading loans and ABS of $2.1 billion, AFS debt securities – Other taxable securities of $1.7 billion, AFS debt securities – Tax-exempt securities of $599 million, Loans and leases of $2.0 billion and LHFS of $173 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

n/a = not applicable

In the tables above, instruments backed by residential real estate assets include RMBS, whole loans and mortgage CDOs. Commercial loans, debt securities and other include 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 instruments 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.

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 result in certain ranges of inputs being wide and unevenly distributed across asset and liability categories. At September 30, 2015 and December 31, 2014, weighted averages are disclosed for all loans, securities, structured liabilities and net derivative assets.

For more information on the inputs and techniques used in the valuation of MSRs, see Note 17 – Mortgage Servicing Rights.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

For instruments backed by residential real estate assets and commercial loans, debt securities and other, a significant increase in market yields, default rates, loss severities or duration 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 auction rate securities, a significant increase in price 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, commodity derivatives, interest rate derivatives and structured liabilities, a significant change in long-dated rates, volatilities and correlation inputs (e.g., the degree of correlation between an equity security and an index, between two different commodities, 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. The amounts below represent assets still held as of the reporting date for which a nonrecurring fair value adjustment was recorded during the three and nine months ended September 30, 2015 and 2014.



Assets Measured at Fair Value on a Nonrecurring Basis
	September 30, 2015				Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
(Dollars in millions)	Level 2		Level 3		Gains (Losses)
Assets
Loans held-for-sale	$	10	$	34	$	—		$	(7	)
Loans and leases ⁽¹⁾	23		2,363		(225		)	(798		)
Foreclosed properties ^{(2, 3)}	—		149		(36		)	(58		)
Other assets	39		—		(4		)	(8		)

	September 30, 2014				Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014
Assets
Loans held-for-sale	$	197	$	32	$	(17	)	$	(6	)
Loans and leases ⁽¹⁾	9		4,298		(286		)	(671		)
Foreclosed properties ^{(2, 3)}	—		210		(21		)	(34		)
Other assets	24		—		(1		)	(2		)


⁽¹⁾	Includes $72 million and $146 million of losses on loans that were written down to a collateral value of zero during the three and nine months ended September 30, 2015 compared to losses of $71 million and $233 million for the same periods in 2014.


⁽²⁾	Amounts are included in other assets on the Consolidated Balance Sheet and represent the carrying value of foreclosed properties that were written down subsequent to their initial classification as foreclosed properties. Losses on foreclosed properties include losses taken during the first 90 days after transfer of a loan to foreclosed properties.


⁽³⁾	Excludes $1.3 billion and $1.1 billion of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) as of September 30, 2015 and 2014.

The table below presents information about significant unobservable inputs related to the Corporation's nonrecurring Level 3 financial assets and liabilities at September 30, 2015 and December 31, 2014.



Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
	September 30, 2015
(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	$	2,363	Market comparables	OREO discount	14% to 26%	18	%
Loans and leases	2,363		Market comparables	Cost to sell	6% to 29%	7	%



	December 31, 2014
Instruments backed by residential real estate assets	$	4,636	Market comparables	OREO discount	0% to 28%	8	%
Loans and leases	4,636		Market comparables	Cost to sell	7% to 14%	8	%

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. 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 generally 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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details