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

3 Months Ended

Mar. 31, 2016

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 2015 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 three months ended March 31, 2016, 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 March 31, 2016 and December 31, 2015, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.



	March 31, 2016
	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	$	—	$	53,379	$	—	$	—		$	53,379
Trading account assets:
U.S. government and agency securities ⁽²⁾	37,321		19,865		—		—			57,186
Corporate securities, trading loans and other	341		24,052		2,954		—			27,347
Equity securities	31,857		21,336		417		—			53,610
Non-U.S. sovereign debt	16,263		14,660		572		—			31,495
Mortgage trading loans and ABS	—		7,735		1,614		—			9,349
Total trading account assets ⁽³⁾	85,782		87,648		5,557		—			178,987
Derivative assets ⁽⁴⁾	6,447		848,297		5,459		(807,948		)	52,255
AFS debt securities:
U.S. Treasury and agency securities	20,669		1,547		—		—			22,216
Mortgage-backed securities:
Agency	—		207,736		—		—			207,736
Agency-collateralized mortgage obligations	—		10,558		—		—			10,558
Non-agency residential	—		2,079		150		—			2,229
Commercial	—		10,233		—		—			10,233
Non-U.S. securities	2,884		3,196		—		—			6,080
Other taxable securities	—		9,741		739		—			10,480
Tax-exempt securities	—		14,026		562		—			14,588
Total AFS debt securities	23,553		259,116		1,451		—			284,120
Other debt securities carried at fair value:
Mortgage-backed securities:
Agency-collateralized mortgage obligations	—		6		—		—			6
Non-agency residential	—		3,294		29		—			3,323
Non-U.S. securities	13,406		1,222		—		—			14,628
Other taxable securities	—		256		—		—			256
Total other debt securities carried at fair value	13,406		4,778		29		—			18,213
Loans and leases ⁽⁵⁾	—		6,515		1,697		—			8,212
Mortgage servicing rights	—		—		2,631		—			2,631
Loans held-for-sale	—		2,643		660		—			3,303
Other assets	11,024		1,894		375		—			13,293
Total assets	$	140,212	$	1,264,270	$	17,859	$	(807,948	)	$	614,393
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	1,038	$	—	$	—		$	1,038
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		24,024		345		—			24,369
Trading account liabilities:
U.S. government and agency securities	15,933		224		—		—			16,157
Equity securities	30,795		4,099		—		—			34,894
Non-U.S. sovereign debt	14,204		1,863		—		—			16,067
Corporate securities and other	153		6,704		28		—			6,885
Total trading account liabilities	61,085		12,890		28		—			74,003
Derivative liabilities ⁽⁴⁾	6,374		838,510		5,774		(809,595		)	41,063
Short-term borrowings	—		1,482		—		—			1,482
Accrued expenses and other liabilities	10,683		2,184		9		—			12,876
Long-term debt	—		29,447		1,814		—			31,261
Total liabilities	$	78,142	$	909,575	$	7,970	$	(809,595	)	$	186,092


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


⁽²⁾	Includes $19.2 billion of GSE obligations.


⁽³⁾	Includes securities with a fair value of $13.6 billion that were segregated in compliance with securities regulations or deposited with clearing organizations. This amount is included in the parenthetical disclosure on the Consolidated Balance Sheet.

⁽⁴⁾

During the three months ended March 31, 2016, $609 million of derivative assets and $744 million of derivative liabilities were transferred from Level 1 to Level 2 and $312 million of derivative assets and $230 million of derivative liabilities were transferred from Level 2 to Level 1 based on the inputs used to measure fair value. For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.


⁽⁵⁾	Includes $765 million from CFEs that were measured using the fair value of the financial liabilities of those entities as the measurement basis.



	December 31, 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	$	—	$	55,143	$	—	$	—		$	55,143
Trading account assets:
U.S. government and agency securities ⁽²⁾	33,034		15,501		—		—			48,535
Corporate securities, trading loans and other	325		22,738		2,838		—			25,901
Equity securities	41,735		20,887		407		—			63,029
Non-U.S. sovereign debt	15,651		12,915		521		—			29,087
Mortgage trading loans and ABS	—		8,107		1,868		—			9,975
Total trading account assets ⁽³⁾	90,745		80,148		5,634		—			176,527
Derivative assets ⁽⁴⁾	5,149		679,458		5,134		(639,751		)	49,990
AFS debt securities:
U.S. Treasury and agency securities	23,374		1,903		—		—			25,277
Mortgage-backed securities:
Agency	—		228,947		—		—			228,947
Agency-collateralized mortgage obligations	—		10,985		—		—			10,985
Non-agency residential	—		3,073		106		—			3,179
Commercial	—		7,165		—		—			7,165
Non-U.S. securities	2,768		2,999		—		—			5,767
Other taxable securities	—		9,688		757		—			10,445
Tax-exempt securities	—		13,439		569		—			14,008
Total AFS debt securities	26,142		278,199		1,432		—			305,773
Other debt securities carried at fair value:
Mortgage-backed securities:
Agency-collateralized mortgage obligations	—		7		—		—			7
Non-agency residential	—		3,460		30		—			3,490
Non-U.S. securities	11,691		1,152		—		—			12,843
Other taxable securities	—		267		—		—			267
Total other debt securities carried at fair value	11,691		4,886		30		—			16,607
Loans and leases	—		5,318		1,620		—			6,938
Mortgage servicing rights	—		—		3,087		—			3,087
Loans held-for-sale	—		4,031		787		—			4,818
Other assets ⁽⁵⁾	11,923		2,023		374		—			14,320
Total assets	$	145,650	$	1,109,206	$	18,098	$	(639,751	)	$	633,203
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	1,116	$	—	$	—		$	1,116
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		24,239		335		—			24,574
Trading account liabilities:
U.S. government and agency securities	14,803		169		—		—			14,972
Equity securities	27,898		2,392		—		—			30,290
Non-U.S. sovereign debt	13,589		1,951		—		—			15,540
Corporate securities and other	193		5,947		21		—			6,161
Total trading account liabilities	56,483		10,459		21		—			66,963
Derivative liabilities ⁽⁴⁾	4,941		671,613		5,575		(643,679		)	38,450
Short-term borrowings	—		1,295		30		—			1,325
Accrued expenses and other liabilities	11,656		2,234		9		—			13,899
Long-term debt	—		28,584		1,513		—			30,097
Total liabilities	$	73,080	$	739,540	$	7,483	$	(643,679	)	$	176,424


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


⁽²⁾	Includes $14.8 billion of GSE obligations.


⁽³⁾	Includes securities with a fair value of $16.4 billion that were segregated in compliance with securities regulations or deposited with clearing organizations. This amount is included in the parenthetical disclosure on the Consolidated Balance Sheet.

⁽⁴⁾

During 2015, $6.6 billion of derivative assets and $6.7 billion of derivative liabilities were transferred from Level 1 to Level 2 based on inputs used to measure fair value. Additionally, $6.4 billion of derivative assets and $6.2 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.


⁽⁵⁾	During 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.

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 months ended March 31, 2016 and 2015, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.



Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended March 31, 2016
										Gross
(Dollars in millions)	Balance January 1 2016			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 March 31 2016
Trading account assets:
Corporate securities, trading loans and other	$	2,838		$	50		$	1		$	227	$	(147	)	$	—		$	(148	)	$	158		$	(25	)	$	2,954
Equity securities	407			60			—			10		(2		)	—			(62		)	4			—			417
Non-U.S. sovereign debt	521			42			49			3		(1		)	—			(42		)	—			—			572
Mortgage trading loans and ABS	1,868			28			(2		)	194		(404		)	—			(73		)	31			(28		)	1,614
Total trading account assets	5,634			180			48			434		(554		)	—			(325		)	193			(53		)	5,557
Net derivative assets ⁽³⁾	(441		)	403			—			89		(175		)	—			12			(116		)	(87		)	(315		)
AFS debt securities:
Non-agency residential MBS	106			—			5			135		(92		)	—			(4		)	—			—			150
Other taxable securities	757			1			(3		)	—		—			—			(16		)	—			—			739
Tax-exempt securities	569			—			(7		)	1		—			—			(1		)	—			—			562
Total AFS debt securities	1,432			1			(5		)	136		(92		)	—			(21		)	—			—			1,451
Other debt securities carried at fair value – Non-agency residential MBS	30			(1		)	—			—		—			—			—			—			—			29
Loans and leases ^{(4, 5)}	1,620			43			—			69		—			25			(35		)	5			(30		)	1,697
Mortgage servicing rights ⁽⁵⁾	3,087			(380		)	—			—		(1		)	136			(211		)	—			—			2,631
Loans held-for-sale ⁽⁴⁾	787			73			27			20		(163		)	—			(34		)	13			(63		)	660
Other assets	374			(25		)	—			34		—			—			(10		)	2			—			375
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁴⁾	(335		)	(3		)	—			—		—			(14		)	7			—			—			(345		)
Trading account liabilities – Corporate securities and other	(21		)	1			—			—		(8		)	—			—			—			—			(28		)
Short-term borrowings ⁽⁴⁾	(30		)	1			—			—		—			—			29			—			—			—
Accrued expenses and other liabilities	(9		)	—			—			—		—			—			—			—			—			(9		)
Long-term debt ⁽⁴⁾	(1,513		)	(91		)	(7		)	9		—			(169		)	56			(186		)	87			(1,814		)


⁽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, foreign currency translation adjustments and the impact on structured liabilities of changes in the Corporation's credit spreads. For more information, see Note 1 – Summary of Significant Accounting Principles.


⁽³⁾	Net derivatives include derivative assets of $5.5 billion and derivative liabilities of $5.8 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.

Significant transfers into Level 3, primarily due to decreased price observability, during the three months ended March 31, 2016 included:


•	$193 million of trading account assets


•	$116 million of net derivative assets


•	$186 million of long-term debt. 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.

There were no significant transfers out of Level 3 during the three months ended March 31, 2016.



Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended March 31, 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 March 31 2015
Trading account assets:
Corporate securities, trading loans and other	$	3,270		$	(21	)	$	—		$	139	$	(95	)	$	—		$	(435	)	$	171		$	(269	)	$	2,760
Equity securities	352			3			—			—		(1		)	—			(5		)	9			(18		)	340
Non-U.S. sovereign debt	574			66			(90		)	2		—			—			(44		)	—			—			508
Mortgage trading loans and ABS	2,063			60			—			319		(249		)	—			(83		)	9			(13		)	2,106
Total trading account assets	6,259			108			(90		)	460		(345		)	—			(567		)	189			(300		)	5,714
Net derivative assets ⁽³⁾	(920		)	(44		)	—			56		(176		)	—			25			(46		)	24			(1,081		)
AFS debt securities:
Non-agency residential MBS	279			(19		)	(2		)	21		—			—			(9		)	132			—			402
Non-U.S. securities	10			—			—			—		—			—			(1		)	—			—			9
Other taxable securities	1,667			—			(2		)	—		—			—			(42		)	—			(933		)	690
Tax-exempt securities	599			—			(3		)	—		—			—			(13		)	—			—			583
Total AFS debt securities	2,555			(19		)	(7		)	21		—			—			(65		)	132			(933		)	1,684
Loans and leases ^{(4, 5)}	1,983			15			—			—		(1		)	—			(43		)	6			(6		)	1,954
Mortgage servicing rights ⁽⁵⁾	3,530			(85		)	—			—		—			179			(230		)	—			—			3,394
Loans held-for-sale ⁽⁴⁾	173			(70		)	—			406		(82		)	21			(6		)	138			(37		)	543
Other assets	911			10			—			—		(31		)	—			(9		)	—			(34		)	847
Trading account liabilities – Corporate securities and other	(36		)	1			—			2		(8		)	—			—			—			—			(41		)
Short-term borrowings ⁽⁴⁾	—			5			—			—		—			(21		)	1			(4		)	4			(15		)
Accrued expenses and other liabilities	(10		)	—			—			—		—			—			—			—			—			(10		)
Long-term debt ⁽⁴⁾	(2,362		)	4			—			132		—			(90		)	97			(713		)	126			(2,806		)


⁽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, foreign currency translation adjustments and the impact on structured liabilities of changes in the Corporation's credit spreads. For more information, see Note 1 – Summary of Significant Accounting Principles.


⁽³⁾	Net derivatives include derivative assets of $7.5 billion and derivative liabilities of $8.5 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.

Significant transfers into Level 3, primarily due to decreased price observability, during the three months ended March 31, 2015 included:


•	$189 million of trading account assets


•	$132 million of AFS debt securities


•	$138 million of LHFS


•	$713 million of long-term debt. 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.

Significant transfers out of Level 3, primarily due to increased price observability unless otherwise noted, during the three months ended March 31, 2015 included:


•	$300 million of trading account assets, primarily the result of increased market liquidity


•	$933 million of AFS debt securities


•	$126 million of long-term debt

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 months ended March 31, 2016 and 2015. These amounts include gains (losses) on financial instruments that are accounted for under the fair value option.



Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings
	Three Months Ended March 31, 2016
(Dollars in millions)	Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other			Total
Trading account assets:
Corporate securities, trading loans and other	$	50		$	—		$	—		$	50
Equity securities	60			—			—			60
Non-U.S. sovereign debt	42			—			—			42
Mortgage trading loans and ABS	28			—			—			28
Total trading account assets	180			—			—			180
Net derivative assets	237			151			15			403
AFS debt securities – Other taxable securities	—			—			1			1
Other debt securities carried at fair value – Non-agency residential MBS	—			—			(1		)	(1		)
Loans and leases ⁽²⁾	8			—			35			43
Mortgage servicing rights	34			(414		)	—			(380		)
Loans held-for-sale ⁽²⁾	10			—			63			73
Other assets	—			(23		)	(2		)	(25		)
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⁾	1			—			—			1
Long-term debt ⁽²⁾	(92		)	—			1			(91		)
Total	$	376		$	(286	)	$	112		$	202

	Three Months Ended March 31, 2015
Trading account assets:
Corporate securities, trading loans and other	$	(21	)	$	—		$	—		$	(21	)
Equity securities	3			—			—			3
Non-U.S. sovereign debt	66			—			—			66
Mortgage trading loans and ABS	60			—			—			60
Total trading account assets	108			—			—			108
Net derivative assets	(351		)	282			25			(44		)
AFS debt securities – Non-agency residential MBS	—			—			(19		)	(19		)
Loans and leases ⁽²⁾	3			—			12			15
Mortgage servicing rights	(15		)	(70		)	—			(85		)
Loans held-for-sale ⁽²⁾	(69		)	—			(1		)	(70		)
Other assets	—			(21		)	31			10
Trading account liabilities – Corporate securities and other	1			—			—			1
Short-term borrowings ⁽²⁾	5			—			—			5
Long-term debt ⁽²⁾	58			—			(54		)	4
Total	$	(260	)	$	191		$	(6	)	$	(75	)


⁽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 months ended March 31, 2016 and 2015 for Level 3 assets and liabilities that were still held at March 31, 2016 and 2015. These amounts include changes in fair value on financial 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
	Three Months Ended March 31, 2016
(Dollars in millions)	Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other			Total
Trading account assets:
Corporate securities, trading loans and other	$	33		$	—		$	—		$	33
Equity securities	7			—			—			7
Non-U.S. sovereign debt	41			—			—			41
Mortgage trading loans and ABS	4			—			—			4
Total trading account assets	85			—			—			85
Net derivative assets	189			53			15			257
Loans and leases ⁽²⁾	8			—			40			48
Mortgage servicing rights	34			(471		)	—			(437		)
Loans held-for-sale ⁽²⁾	(2		)	—			60			58
Other assets	—			(18		)	(4		)	(22		)
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽²⁾	(9		)	—			—			(9		)
Trading account liabilities – Corporate securities and other	1			—			—			1
Long-term debt ⁽²⁾	(93		)	—			—			(93		)
Total	$	213		$	(436	)	$	111		$	(112	)

	Three Months Ended March 31, 2015
Trading account assets:
Corporate securities, trading loans and other	$	(58	)	$	—		$	—		$	(58	)
Equity securities	(2		)	—			—			(2		)
Non-U.S. sovereign debt	63			—			—			63
Mortgage trading loans and ABS	(9		)	—			—			(9		)
Total trading account assets	(6		)	—			—			(6		)
Net derivative assets	(363		)	101			25			(237		)
Loans and leases ⁽²⁾	3			—			26			29
Mortgage servicing rights	(15		)	(173		)	—			(188		)
Loans held-for-sale ⁽²⁾	(64		)	—			(1		)	(65		)
Other assets	—			(16		)	54			38
Trading account liabilities – Corporate securities and other	1			—			—			1
Short-term borrowings ⁽²⁾	5			—			—			5
Long-term debt ⁽²⁾	50			—			(54		)	(4		)
Total	$	(389	)	$	(88	)	$	50		$	(427	)


⁽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 March 31, 2016 and December 31, 2015.



Quantitative Information about Level 3 Fair Value Measurements at March 31, 2016
(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	$	2,080		Discounted cash flow, Market comparables	Yield	0% to 25%	6	%
Trading account assets – Mortgage trading loans and ABS	411				Prepayment speed	0% to 44% CPR	15	%
Loans and leases	1,588				Default rate	0% to 10% CDR	4	%
Loans held-for-sale	81				Loss severity	0% to 90%	42	%
Instruments backed by commercial real estate assets	$	502		Discounted cash flow, Market comparables	Yield	0% to 25%	10	%
Trading account assets – Mortgage trading loans and ABS	145				Price	$0 to $106	$81
Loans held-for-sale	357
Commercial loans, debt securities and other	$	4,730		Discounted cash flow, Market comparables	Yield	0% to 37%	15	%
Trading account assets – Corporate securities, trading loans and other	2,641				Prepayment speed	5% to 20%	15	%
Trading account assets – Non-U.S. sovereign debt	572				Default rate	2% to 5%	4	%
Trading account assets – Mortgage trading loans and ABS	1,058				Loss severity	25% to 50%	38	%
AFS debt securities – Other taxable securities	128				Duration	1 to 5 years	3 years
Loans and leases	109				Price	$0 to $305	$66
Loans held-for-sale	222
Auction rate securities	$	1,486		Discounted cash flow, Market comparables	Price	$10 to $100	$94
Trading account assets – Corporate securities, trading loans and other	313
AFS debt securities – Other taxable securities	611
AFS debt securities – Tax-exempt securities	562
Structured liabilities
Long-term debt	$	(1,814	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	12% to 98%	69	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 105%	27	%
Net derivative assets
Credit derivatives	$	(67	)	Discounted cash flow, Stochastic recovery correlation model	Yield	7% to 25%	17	%
					Upfront points	1 to 100 points	65 points
					Credit spreads	13 bps to 996 bps	326 bps
					Credit correlation	23% to 97%	37	%
					Prepayment speed	10% to 20% CPR	19	%
					Default rate	1% to 4% CDR	3	%
					Loss severity	35% to 40%	35	%
Equity derivatives	$	(741	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	12% to 98%	69	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 105%	27	%
Commodity derivatives	$	4		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$1/MMBtu to $6/MMBtu	$4/MMBtu
					Correlation	66% to 93%	84	%
					Volatilities	19% to 125%	46	%
Interest rate derivatives	$	489		Industry standard derivative pricing⁽³⁾	Correlation (IR/IR)	15% to 99%	60	%
					Correlation (FX/IR)	-2% to 40%	33	%
					Long-dated inflation rates	0% to 7%	3	%
					Long-dated inflation volatilities	0% to 2%	1	%
Total net derivative assets	$	(315	)

⁽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 181: Trading account assets – Corporate securities, trading loans and other of $3.0 billion, Trading account assets – Non-U.S. sovereign debt of $572 million, Trading account assets – Mortgage trading loans and ABS of $1.6 billion, AFS debt securities – Other taxable securities of $739 million, AFS debt securities – Tax-exempt securities of $562 million, Loans and leases of $1.7 billion and LHFS of $660 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



Quantitative Information about Level 3 Fair Value Measurements at December 31, 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	$	2,017		Discounted cash flow, Market comparables	Yield	0% to 25%	6	%
Trading account assets – Mortgage trading loans and ABS	400				Prepayment speed	0% to 27% CPR	11	%
Loans and leases	1,520				Default rate	0% to 10% CDR	4	%
Loans held-for-sale	97				Loss severity	0% to 90%	40	%
Instruments backed by commercial real estate assets	$	852		Discounted cash flow, Market comparables	Yield	0% to 25%	8	%
Trading account assets – Mortgage trading loans and ABS	162				Price	$0 to $100	$73
Loans held-for-sale	690
Commercial loans, debt securities and other	$	4,558		Discounted cash flow, Market comparables	Yield	0% to 37%	13	%
Trading account assets – Corporate securities, trading loans and other	2,503				Prepayment speed	5% to 20%	16	%
Trading account assets – Non-U.S. sovereign debt	521				Default rate	2% to 5%	4	%
Trading account assets – Mortgage trading loans and ABS	1,306				Loss severity	25% to 50%	37	%
AFS debt securities – Other taxable securities	128				Duration	0 to 5 years	3 years
Loans and leases	100				Price	$0 to $258	$64
Auction rate securities	$	1,533		Discounted cash flow, Market comparables	Price	$10 to $100	$94
Trading account assets – Corporate securities, trading loans and other	335
AFS debt securities – Other taxable securities	629
AFS debt securities – Tax-exempt securities	569
Structured liabilities
Long-term debt	$	(1,513	)	Industry standard derivative pricing ^{(2, 3)}	Equity correlation	25% to 100%	67	%
				Industry standard derivative pricing ^{(2, 3)}	Long-dated equity volatilities	4% to 101%	28	%
Net derivative assets
Credit derivatives	$	(75	)	Discounted cash flow, Stochastic recovery correlation model	Yield	6% to 25%	16	%
					Upfront points	0 to 100 points	60 points
					Credit spreads	0 bps to 447 bps	111 bps
					Credit correlation	31% to 99%	38	%
					Prepayment speed	10% to 20% CPR	19	%
					Default rate	1% to 4% CDR	3	%
					Loss severity	35% to 40%	35	%
Equity derivatives	$	(1,037	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	25% to 100%	67	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 101%	28	%
Commodity derivatives	$	169		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$1/MMBtu to $6/MMBtu	$4/MMBtu
					Propane forward price	$0/Gallon to $1/Gallon	$1/Gallon
					Correlation	66% to 93%	84	%
					Volatilities	18% to 125%	39	%
Interest rate derivatives	$	502		Industry standard derivative pricing ⁽³⁾	Correlation (IR/IR)	17% to 99%	48	%
					Correlation (FX/IR)	-15% to 40%	-9	%
					Long-dated inflation rates	0% to 7%	3	%
					Long-dated inflation volatilities	0% to 2%	1	%
Total net derivative assets	$	(441	)

⁽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 182: Trading account assets – Corporate securities, trading loans and other of $2.8 billion, Trading account assets – Non-U.S. sovereign debt of $521 million, Trading account assets – Mortgage trading loans and ABS of $1.9 billion, AFS debt securities – Other taxable securities of $757 million, AFS debt securities – Tax-exempt securities of $569 million, Loans and leases of $1.6 billion and LHFS of $787 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

In the tables above, instruments backed by residential and commercial real estate assets include RMBS, commercial MBS, 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.

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.

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, commercial 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 instruments backed by commercial real estate assets and 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, 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 and 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 months ended March 31, 2016 and 2015.



Assets Measured at Fair Value on a Nonrecurring Basis
	March 31, 2016				Three Months Ended March 31, 2016
(Dollars in millions)	Level 2		Level 3		Gains (Losses)
Assets
Loans held-for-sale	$	775	$	29	$	(21	)
Loans and leases ⁽¹⁾	—		758		(182		)
Foreclosed properties ^{(2, 3)}	—		82		(20		)
Other assets	36		—		(18		)

	March 31, 2015				Three Months Ended March 31, 2015
Assets
Loans held-for-sale	$	565	$	22	$	(33	)
Loans and leases ⁽¹⁾	5		1,391		(418		)
Foreclosed properties ^{(2, 3)}	—		400		(15		)
Other assets	200		—		(1		)


⁽¹⁾	Includes $42 million of losses on loans that were written down to a collateral value of zero during the three months ended March 31, 2016 compared to losses of $98 million for the same period in 2015.


⁽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 $1.4 billion and $1.2 billion of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) as of March 31, 2016 and 2015.

The table below presents information about significant unobservable inputs related to the Corporation's nonrecurring Level 3 financial assets and liabilities at March 31, 2016 and December 31, 2015. 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.



Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
	March 31, 2016
(Dollars in millions)				Inputs
Financial Instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Loans and leases backed by residential real estate assets	$	758	Market comparables	OREO discount	7% to 55%	21	%
			Market comparables	Cost to sell	8% to 45%	10	%



	December 31, 2015
Loans and leases backed by residential real estate assets	$	2,739	Market comparables	OREO discount	7% to 55%	20	%
			Market comparables	Cost to sell	8% to 45%	10	%

- 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