Fair Value Measurements |
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 under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The Corporation categorizes its financial instruments into three levels based on the established fair value hierarchy. 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 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 2016 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 so 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 so 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 so 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, 2017, there were no changes to valuation approaches or techniques that had, or are expected to have, a material impact on the Corporation’s consolidated financial position or results of operations.
For information regarding Level 1, 2 and 3 valuation techniques, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.
Recurring Fair Value
Assets and liabilities carried at fair value on a recurring basis at March 31, 2017 and December 31, 2016, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.
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March 31, 2017 |
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Fair Value Measurements |
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(Dollars in millions) |
Level 1 |
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Level 2 |
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Level 3 |
|
Netting Adjustments (1)
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Assets/Liabilities at Fair Value |
Assets |
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|
|
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Federal funds sold and securities borrowed or purchased under agreements to resell |
$ |
— |
|
|
$ |
58,545 |
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|
$ |
— |
|
|
$ |
— |
|
|
$ |
58,545 |
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Trading account assets: |
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|
|
|
|
|
|
|
|
|
|
|
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U.S. Treasury and agency securities (2)
|
40,582 |
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|
1,006 |
|
|
— |
|
|
— |
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|
41,588 |
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Corporate securities, trading loans and other |
219 |
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|
27,691 |
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|
2,029 |
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— |
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29,939 |
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Equity securities |
58,970 |
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|
25,168 |
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|
288 |
|
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— |
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|
84,426 |
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Non-U.S. sovereign debt |
12,430 |
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|
13,023 |
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|
527 |
|
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— |
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|
25,980 |
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Mortgage trading loans, MBS and ABS: |
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|
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U.S. government-sponsored agency guaranteed (2)
|
— |
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18,442 |
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— |
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— |
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|
18,442 |
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Mortgage trading loans, ABS and other MBS |
— |
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|
7,454 |
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|
1,215 |
|
|
— |
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|
8,669 |
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Total trading account assets (3)
|
112,201 |
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|
92,784 |
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|
4,059 |
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— |
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|
209,044 |
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Derivative assets (4)
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8,218 |
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|
521,097 |
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|
4,152 |
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(493,389 |
) |
|
40,078 |
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AFS debt securities: |
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U.S. Treasury and agency securities |
49,013 |
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|
1,545 |
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— |
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— |
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50,558 |
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Mortgage-backed securities: |
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|
|
|
|
|
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Agency |
— |
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|
189,043 |
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— |
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— |
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|
189,043 |
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Agency-collateralized mortgage obligations |
— |
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|
7,877 |
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— |
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— |
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7,877 |
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Non-agency residential |
— |
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1,943 |
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— |
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— |
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1,943 |
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Commercial |
— |
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12,572 |
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— |
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— |
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12,572 |
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Non-U.S. securities |
1,945 |
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|
3,910 |
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|
207 |
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— |
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6,062 |
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Other taxable securities |
— |
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|
9,240 |
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|
579 |
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— |
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|
9,819 |
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Tax-exempt securities |
— |
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|
16,815 |
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|
520 |
|
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— |
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|
17,335 |
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Total AFS debt securities |
50,958 |
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|
242,945 |
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|
1,306 |
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— |
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|
295,209 |
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Other debt securities carried at fair value: |
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Mortgage-backed securities: |
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Agency-collateralized mortgage obligations |
— |
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5 |
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— |
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— |
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5 |
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Non-agency residential |
— |
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3,058 |
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24 |
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— |
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3,082 |
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Non-U.S. securities |
12,177 |
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|
1,305 |
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— |
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|
— |
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13,482 |
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Other taxable securities |
— |
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|
234 |
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|
— |
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— |
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|
234 |
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Total other debt securities carried at fair value |
12,177 |
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|
4,602 |
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|
24 |
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— |
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16,803 |
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Loans and leases |
— |
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6,826 |
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|
702 |
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— |
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7,528 |
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Mortgage servicing rights |
— |
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— |
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|
2,610 |
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— |
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2,610 |
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Loans held-for-sale |
— |
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|
2,953 |
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|
792 |
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— |
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|
3,745 |
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Customer and other receivables |
— |
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|
250 |
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|
— |
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— |
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|
250 |
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Debt securities in assets of business held for sale |
691 |
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|
— |
|
|
— |
|
|
— |
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|
691 |
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Other assets |
12,971 |
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|
1,437 |
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|
231 |
|
|
— |
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|
14,639 |
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Total assets |
$ |
197,216 |
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|
$ |
931,439 |
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$ |
13,876 |
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$ |
(493,389 |
) |
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$ |
649,142 |
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Liabilities |
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Interest-bearing deposits in U.S. offices |
$ |
— |
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$ |
598 |
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$ |
— |
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$ |
— |
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$ |
598 |
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Federal funds purchased and securities loaned or sold under agreements to repurchase |
— |
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|
36,437 |
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|
226 |
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|
— |
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|
36,663 |
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Trading account liabilities: |
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U.S. Treasury and agency securities |
18,392 |
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|
91 |
|
|
— |
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|
— |
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|
18,483 |
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Equity securities |
30,203 |
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|
3,064 |
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|
— |
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|
— |
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|
33,267 |
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Non-U.S. sovereign debt |
13,547 |
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|
3,723 |
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|
— |
|
|
— |
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|
17,270 |
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Corporate securities and other |
231 |
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|
7,997 |
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|
35 |
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|
— |
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|
8,263 |
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Total trading account liabilities |
62,373 |
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|
14,875 |
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|
35 |
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— |
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|
77,283 |
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Derivative liabilities (4)
|
7,640 |
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|
520,288 |
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|
5,817 |
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(497,317 |
) |
|
36,428 |
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Short-term borrowings |
— |
|
|
1,041 |
|
|
— |
|
|
— |
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|
1,041 |
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Accrued expenses and other liabilities |
14,650 |
|
|
1,586 |
|
|
9 |
|
|
— |
|
|
16,245 |
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Long-term debt |
— |
|
|
27,957 |
|
|
1,660 |
|
|
— |
|
|
29,617 |
|
Total liabilities |
$ |
84,663 |
|
|
$ |
602,782 |
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|
$ |
7,747 |
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|
$ |
(497,317 |
) |
|
$ |
197,875 |
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(1) |
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties. |
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(2) |
Includes $19.2 billion of GSE obligations.
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(3) |
Includes securities with a fair value of $18.1 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.
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(4) |
During the three months ended March 31, 2017, $612 million of derivative assets and $400 million of derivative liabilities were transferred from Level 1 to Level 2 and $111 million of derivative assets and $123 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.
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December 31, 2016 |
|
Fair Value Measurements |
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(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 |
$ |
— |
|
|
$ |
49,750 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
49,750 |
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities (2)
|
34,587 |
|
|
1,927 |
|
|
— |
|
|
— |
|
|
36,514 |
|
Corporate securities, trading loans and other |
171 |
|
|
22,861 |
|
|
2,777 |
|
|
— |
|
|
25,809 |
|
Equity securities |
50,169 |
|
|
21,601 |
|
|
281 |
|
|
— |
|
|
72,051 |
|
Non-U.S. sovereign debt |
9,578 |
|
|
9,940 |
|
|
510 |
|
|
— |
|
|
20,028 |
|
Mortgage trading loans, MBS and ABS: |
|
|
|
|
|
|
|
|
|
U.S. government-sponsored agency guaranteed (2)
|
— |
|
|
15,799 |
|
|
— |
|
|
— |
|
|
15,799 |
|
Mortgage trading loans, ABS and other MBS |
— |
|
|
8,797 |
|
|
1,211 |
|
|
— |
|
|
10,008 |
|
Total trading account assets (3)
|
94,505 |
|
|
80,925 |
|
|
4,779 |
|
|
— |
|
|
180,209 |
|
Derivative assets (4)
|
7,337 |
|
|
619,848 |
|
|
3,931 |
|
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(588,604 |
) |
|
42,512 |
|
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
46,787 |
|
|
1,465 |
|
|
— |
|
|
— |
|
|
48,252 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
— |
|
|
189,486 |
|
|
— |
|
|
— |
|
|
189,486 |
|
Agency-collateralized mortgage obligations |
— |
|
|
8,330 |
|
|
— |
|
|
— |
|
|
8,330 |
|
Non-agency residential |
— |
|
|
2,013 |
|
|
— |
|
|
— |
|
|
2,013 |
|
Commercial |
— |
|
|
12,322 |
|
|
— |
|
|
— |
|
|
12,322 |
|
Non-U.S. securities |
1,934 |
|
|
3,600 |
|
|
229 |
|
|
— |
|
|
5,763 |
|
Other taxable securities |
— |
|
|
10,020 |
|
|
594 |
|
|
— |
|
|
10,614 |
|
Tax-exempt securities |
— |
|
|
16,618 |
|
|
542 |
|
|
— |
|
|
17,160 |
|
Total AFS debt securities |
48,721 |
|
|
243,854 |
|
|
1,365 |
|
|
— |
|
|
293,940 |
|
Other debt securities carried at fair value: |
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|
|
|
|
|
|
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Mortgage-backed securities: |
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|
|
|
|
|
|
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Agency-collateralized mortgage obligations |
— |
|
|
5 |
|
|
— |
|
|
— |
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|
5 |
|
Non-agency residential |
— |
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|
3,114 |
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|
25 |
|
|
— |
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|
3,139 |
|
Non-U.S. securities |
15,109 |
|
|
1,227 |
|
|
— |
|
|
— |
|
|
16,336 |
|
Other taxable securities |
— |
|
|
240 |
|
|
— |
|
|
— |
|
|
240 |
|
Total other debt securities carried at fair value |
15,109 |
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|
4,586 |
|
|
25 |
|
|
— |
|
|
19,720 |
|
Loans and leases |
— |
|
|
6,365 |
|
|
720 |
|
|
— |
|
|
7,085 |
|
Mortgage servicing rights |
— |
|
|
— |
|
|
2,747 |
|
|
— |
|
|
2,747 |
|
Loans held-for-sale |
— |
|
|
3,370 |
|
|
656 |
|
|
— |
|
|
4,026 |
|
Debt securities in assets of business held for sale |
619 |
|
|
— |
|
|
— |
|
|
— |
|
|
619 |
|
Other assets |
11,824 |
|
|
1,739 |
|
|
239 |
|
|
— |
|
|
13,802 |
|
Total assets |
$ |
178,115 |
|
|
$ |
1,010,437 |
|
|
$ |
14,462 |
|
|
$ |
(588,604 |
) |
|
$ |
614,410 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in U.S. offices |
$ |
— |
|
|
$ |
731 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
731 |
|
Federal funds purchased and securities loaned or sold under agreements to repurchase |
— |
|
|
35,407 |
|
|
359 |
|
|
— |
|
|
35,766 |
|
Trading account liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
15,854 |
|
|
197 |
|
|
— |
|
|
— |
|
|
16,051 |
|
Equity securities |
25,884 |
|
|
3,014 |
|
|
— |
|
|
— |
|
|
28,898 |
|
Non-U.S. sovereign debt |
9,409 |
|
|
2,103 |
|
|
— |
|
|
— |
|
|
11,512 |
|
Corporate securities and other |
163 |
|
|
6,380 |
|
|
27 |
|
|
— |
|
|
6,570 |
|
Total trading account liabilities |
51,310 |
|
|
11,694 |
|
|
27 |
|
|
— |
|
|
63,031 |
|
Derivative liabilities (4)
|
7,173 |
|
|
615,896 |
|
|
5,244 |
|
|
(588,833 |
) |
|
39,480 |
|
Short-term borrowings |
— |
|
|
2,024 |
|
|
— |
|
|
— |
|
|
2,024 |
|
Accrued expenses and other liabilities |
12,978 |
|
|
1,643 |
|
|
9 |
|
|
— |
|
|
14,630 |
|
Long-term debt |
— |
|
|
28,523 |
|
|
1,514 |
|
|
— |
|
|
30,037 |
|
Total liabilities |
$ |
71,461 |
|
|
$ |
695,918 |
|
|
$ |
7,153 |
|
|
$ |
(588,833 |
) |
|
$ |
185,699 |
|
|
|
(1) |
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties. |
|
|
(2) |
Includes $17.5 billion of GSE obligations.
|
|
|
(3) |
Includes securities with a fair value of $14.6 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 2016, $2.3 billion of derivative assets and $2.4 billion of derivative liabilities were transferred from Level 1 to Level 2 and $2.0 billion of derivative assets and $1.8 billion 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.
|
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, 2017 and 2016, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.
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|
Level 3 – Fair Value Measurements (1)
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Three Months Ended March 31, 2017 |
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|
Gross |
|
|
|
|
|
(Dollars in millions) |
Balance
January 1
2017
|
Total Realized/Unrealized Gains/(Losses) (2)
|
Gains (Losses) in OCI (3)
|
Purchases |
Sales |
Issuances |
Settlements |
|
Gross Transfers into
Level 3
|
Gross Transfers out of
Level 3
|
Balance March 31 2017 |
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
$ |
2,777 |
|
$ |
84 |
|
$ |
— |
|
$ |
199 |
|
$ |
(480 |
) |
$ |
— |
|
$ |
(127 |
) |
|
$ |
75 |
|
$ |
(499 |
) |
$ |
2,029 |
|
$ |
56 |
|
Equity securities |
281 |
|
12 |
|
— |
|
20 |
|
(17 |
) |
— |
|
(10 |
) |
|
72 |
|
(70 |
) |
288 |
|
8 |
|
Non-U.S. sovereign debt |
510 |
|
19 |
|
10 |
|
— |
|
(9 |
) |
— |
|
(6 |
) |
|
3 |
|
— |
|
527 |
|
19 |
|
Mortgage trading loans, ABS and other MBS |
1,211 |
|
107 |
|
— |
|
339 |
|
(375 |
) |
— |
|
(54 |
) |
|
28 |
|
(41 |
) |
1,215 |
|
74 |
|
Total trading account assets |
4,779 |
|
222 |
|
10 |
|
558 |
|
(881 |
) |
— |
|
(197 |
) |
|
178 |
|
(610 |
) |
4,059 |
|
157 |
|
Net derivative assets (4)
|
(1,313 |
) |
(474 |
) |
— |
|
200 |
|
(247 |
) |
— |
|
170 |
|
|
29 |
|
(30 |
) |
(1,665 |
) |
(489 |
) |
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. securities |
229 |
|
— |
|
3 |
|
20 |
|
— |
|
— |
|
(45 |
) |
|
— |
|
— |
|
207 |
|
— |
|
Other taxable securities |
594 |
|
3 |
|
4 |
|
— |
|
— |
|
— |
|
(22 |
) |
|
— |
|
— |
|
579 |
|
— |
|
Tax-exempt securities |
542 |
|
— |
|
2 |
|
— |
|
(56 |
) |
— |
|
(3 |
) |
|
35 |
|
— |
|
520 |
|
— |
|
Total AFS debt securities |
1,365 |
|
3 |
|
9 |
|
20 |
|
(56 |
) |
— |
|
(70 |
) |
|
35 |
|
— |
|
1,306 |
|
— |
|
Other debt securities carried at fair value – Non-agency residential MBS |
25 |
|
(1 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
— |
|
24 |
|
— |
|
Loans and leases (5, 6)
|
720 |
|
12 |
|
— |
|
— |
|
— |
|
— |
|
(30 |
) |
|
— |
|
— |
|
702 |
|
12 |
|
Mortgage servicing rights (6, 7, 8)
|
2,747 |
|
(27 |
) |
— |
|
— |
|
5 |
|
75 |
|
(190 |
) |
(7) |
— |
|
— |
|
2,610 |
|
(117 |
) |
Loans held-for-sale (5)
|
656 |
|
29 |
|
6 |
|
— |
|
(136 |
) |
— |
|
(60 |
) |
|
315 |
|
(18 |
) |
792 |
|
22 |
|
Other assets |
239 |
|
(6 |
) |
— |
|
— |
|
— |
|
— |
|
(2 |
) |
|
— |
|
— |
|
231 |
|
(6 |
) |
Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
|
(359 |
) |
1 |
|
— |
|
— |
|
— |
|
(2 |
) |
28 |
|
|
— |
|
106 |
|
(226 |
) |
1 |
|
Trading account liabilities – Corporate securities and other |
(27 |
) |
2 |
|
— |
|
— |
|
(10 |
) |
— |
|
— |
|
|
— |
|
— |
|
(35 |
) |
2 |
|
Accrued expenses and other liabilities (5)
|
(9 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
— |
|
(9 |
) |
— |
|
Long-term debt (5)
|
(1,514 |
) |
(83 |
) |
7 |
|
11 |
|
— |
|
(130 |
) |
159 |
|
|
(178 |
) |
68 |
|
(1,660 |
) |
(83 |
) |
|
|
(1) |
Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3. |
|
|
(2) |
Includes gains/losses reported in earnings in the following income statement line items: Trading account assets/liabilities - trading account profits (losses); Net derivative assets - primarily trading account profits (losses) and mortgage banking income (loss); MSRs - primarily mortgage banking income (loss); Long-term debt - primarily trading account profits (losses). For MSRs, the amounts reflect the changes in modeled MSR fair value due to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve, and periodic adjustments to the valuation model to reflect changes in the modeled relationships between inputs and projected cash flows, as well as changes in cash flow assumptions including cost to service. |
|
|
(3) |
Includes gains/losses in OCI related to unrealized gains/losses on AFS debt securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option. For additional information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.
|
|
|
(4) |
Net derivatives include derivative assets of $4.2 billion and derivative liabilities of $5.8 billion.
|
|
|
(5) |
Amounts represent instruments that are accounted for under the fair value option. |
|
|
(6) |
Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales. |
|
|
(7) |
Settlements represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time. |
|
|
(8) |
MSRs include the $1.9 billion core MSR portfolio held in Consumer Banking, the $208 million non-core MSR portfolio held in All Other and the $481 million non-U.S. MSR portfolio held in Global Markets.
|
Significant transfers into Level 3, primarily due to decreased price observability, during the three months ended March 31, 2017 included $178 million of trading account assets, $315 million of LHFS and $178 million of long-term debt. Transfers occur on a regular basis for 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, during the three months ended March 31, 2017 included $610 million of trading account assets and $106 million of federal funds purchased and securities loaned or sold under agreements to repurchase.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 – Fair Value Measurements (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016 |
|
|
|
|
|
Gross |
|
|
|
|
(Dollars in millions) |
Balance January 1
2016
|
Total Realized/Unrealized Gains/(Losses) (2)
|
Gains (Losses) in OCI (3)
|
Purchases |
Sales |
Issuances |
Settlements |
Gross Transfers into
Level 3
|
Gross Transfers out of
Level 3
|
Balance March 31
2016
|
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
$ |
2,838 |
|
$ |
50 |
|
$ |
1 |
|
$ |
227 |
|
$ |
(147 |
) |
$ |
— |
|
$ |
(148 |
) |
$ |
158 |
|
$ |
(25 |
) |
$ |
2,954 |
|
$ |
33 |
|
Equity securities |
407 |
|
60 |
|
— |
|
10 |
|
(2 |
) |
— |
|
(62 |
) |
4 |
|
— |
|
417 |
|
7 |
|
Non-U.S. sovereign debt |
521 |
|
42 |
|
49 |
|
3 |
|
(1 |
) |
— |
|
(42 |
) |
— |
|
— |
|
572 |
|
41 |
|
Mortgage trading loans, ABS and other MBS |
1,868 |
|
28 |
|
(2 |
) |
194 |
|
(404 |
) |
— |
|
(73 |
) |
31 |
|
(28 |
) |
1,614 |
|
4 |
|
Total trading account assets |
5,634 |
|
180 |
|
48 |
|
434 |
|
(554 |
) |
— |
|
(325 |
) |
193 |
|
(53 |
) |
5,557 |
|
85 |
|
Net derivative assets (4)
|
(441 |
) |
403 |
|
— |
|
89 |
|
(175 |
) |
— |
|
12 |
|
(116 |
) |
(87 |
) |
(315 |
) |
257 |
|
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 (5, 6)
|
1,620 |
|
43 |
|
— |
|
69 |
|
— |
|
25 |
|
(35 |
) |
5 |
|
(30 |
) |
1,697 |
|
48 |
|
Mortgage servicing rights (6, 7, 8)
|
3,087 |
|
(380 |
) |
— |
|
— |
|
(1 |
) |
136 |
|
(211 |
) |
— |
|
— |
|
2,631 |
|
(437 |
) |
Loans held-for-sale (5)
|
787 |
|
73 |
|
27 |
|
20 |
|
(163 |
) |
— |
|
(34 |
) |
13 |
|
(63 |
) |
660 |
|
58 |
|
Other assets |
374 |
|
(25 |
) |
— |
|
34 |
|
— |
|
— |
|
(10 |
) |
2 |
|
— |
|
375 |
|
(22 |
) |
Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
|
(335 |
) |
(3 |
) |
— |
|
— |
|
— |
|
(14 |
) |
7 |
|
— |
|
— |
|
(345 |
) |
(9 |
) |
Trading account liabilities – Corporate securities and other |
(21 |
) |
1 |
|
— |
|
— |
|
(8 |
) |
— |
|
— |
|
— |
|
— |
|
(28 |
) |
1 |
|
Short-term borrowings (5)
|
(30 |
) |
1 |
|
— |
|
— |
|
— |
|
— |
|
29 |
|
— |
|
— |
|
— |
|
— |
|
Accrued expenses and other liabilities (5)
|
(9 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(9 |
) |
— |
|
Long-term debt (5)
|
(1,513 |
) |
(91 |
) |
(7 |
) |
9 |
|
— |
|
(169 |
) |
56 |
|
(186 |
) |
87 |
|
(1,814 |
) |
(93 |
) |
|
|
(1) |
Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3. |
|
|
(2) |
Includes gains/losses reported in earnings in the following income statement line items: Trading account assets/liabilities - trading account profits (losses); Net derivative assets - primarily trading account profits (losses) and mortgage banking income (loss); MSRs - primarily mortgage banking income (loss); Long-term debt - primarily trading account profits (losses). For MSRs, the amounts reflect the changes in modeled MSR fair value due principally to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve. |
|
|
(3) |
Includes gains/losses in OCI related to unrealized gains/losses on AFS debt securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option. For additional information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.
|
|
|
(4) |
Net derivatives include derivative assets of $5.5 billion and derivative liabilities of $5.8 billion.
|
|
|
(5) |
Amounts represent instruments that are accounted for under the fair value option. |
|
|
(6) |
Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales. |
|
|
(7) |
Settlements represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time. |
|
|
(8) |
MSRs include the $1.8 billion core MSR portfolio held in Consumer Banking, the $343 million non-core MSR portfolio held in All Other and the $479 million non-U.S. MSR portfolio held in Global Markets.
|
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 and $186 million of long-term debt. Transfers occur on a regular basis for 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.
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, 2017 and December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements at March 31, 2017 |
|
|
|
|
|
|
(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 |
$ |
1,035 |
|
Discounted cash flow, Market comparables |
Yield |
0% to 35% |
|
7 |
% |
Trading account assets – Mortgage trading loans, ABS and other MBS |
320 |
|
Prepayment speed |
0% to 21% CPR |
|
12 |
% |
Loans and leases |
702 |
|
Default rate |
0% to 3% CDR |
|
2 |
% |
Loans held-for-sale |
13 |
|
Loss severity |
0% to 54% |
|
19 |
% |
Instruments backed by commercial real estate assets |
$ |
364 |
|
Discounted cash flow, Market comparables |
Yield |
0% to 25% |
|
5 |
% |
Trading account assets – Corporate securities, trading loans and other |
319 |
|
Price |
$0 to $100 |
|
$65 |
Trading account assets – Mortgage trading loans, ABS and other MBS |
45 |
|
|
|
|
Commercial loans, debt securities and other |
$ |
3,836 |
|
Discounted cash flow, Market comparables |
Yield |
0% to 29% |
|
16 |
% |
Trading account assets – Corporate securities, trading loans and other |
1,680 |
|
Prepayment speed |
10% to 20% |
|
11 |
% |
Trading account assets – Non-U.S. sovereign debt |
527 |
|
Default rate |
3% to 4% |
|
4 |
% |
Trading account assets – Mortgage trading loans, ABS and other MBS |
850 |
|
Loss severity |
0% to 40% |
|
30 |
% |
Loans held-for-sale |
779 |
|
Duration |
0 to 4 years |
|
2 years |
|
|
Price |
$0 to $292 |
|
$72 |
Auction rate securities |
$ |
1,129 |
|
Discounted cash flow, Market comparables |
Price |
$10 to $100 |
|
$94 |
Trading account assets – Corporate securities, trading loans and other |
30 |
|
|
|
|
AFS debt securities – Other taxable securities |
579 |
|
|
|
|
AFS debt securities – Tax-exempt securities |
520 |
|
|
|
|
MSRs |
$ |
2,610 |
|
Discounted cash flow |
Weighted-average life, fixed rate (4)
|
0 to 15 years |
|
6 years |
|
|
|
Weighted-average life, variable rate (4)
|
0 to 10 years |
|
3 years |
|
|
|
Option Adjusted Spread, fixed rate |
9% to 14% |
|
10 |
% |
|
|
Option Adjusted Spread, variable rate |
9% to 15% |
|
12 |
% |
Structured liabilities |
|
|
|
|
|
Long-term debt |
$ |
(1,660 |
) |
Discounted cash flow, Market comparables, Industry standard derivative pricing (2)
|
Equity correlation |
8% to 100% |
|
68 |
% |
|
|
Long-dated equity volatilities |
4% to 69% |
|
24 |
% |
|
|
Yield |
5% to 27% |
|
18 |
% |
|
|
Price |
$12 to $90 |
|
$79 |
|
|
Duration |
0 to 4 years |
|
3 years |
Net derivative assets |
|
|
|
|
|
Credit derivatives |
$ |
88 |
|
Discounted cash flow, Stochastic recovery correlation model |
Yield |
0% to 24% |
|
8 |
% |
|
|
Upfront points |
0 points to 100 points |
|
72 points |
|
|
|
Credit spreads |
51 bps to 668 bps |
|
493 bps |
|
|
|
Credit correlation |
26% to 87% |
|
48 |
% |
|
|
Prepayment speed |
10% to 20% CPR |
|
17 |
% |
|
|
Default rate |
1% to 4% CDR |
|
3 |
% |
|
|
Loss severity |
35 |
% |
n/a |
|
Equity derivatives |
$ |
(2,050 |
) |
Industry standard derivative pricing (2)
|
Equity correlation |
8% to 100% |
|
68 |
% |
|
|
Long-dated equity volatilities |
4% to 69% |
|
24 |
% |
Commodity derivatives |
$ |
5 |
|
Discounted cash flow, Industry standard derivative pricing (2)
|
Natural gas forward price |
$2/MMBtu to $6/MMBtu |
|
$3/MMBtu |
|
|
|
Correlation |
76% to 95% |
|
90 |
% |
|
|
Volatilities |
24% to 112% |
|
40 |
% |
Interest rate derivatives |
$ |
292 |
|
Industry standard derivative pricing (3)
|
Correlation (IR/IR) |
15% to 99% |
|
59 |
% |
|
|
Correlation (FX/IR) |
0% to 40% |
|
1 |
% |
|
|
Illiquid IR and long-dated inflation rates |
-13% to 30% |
|
3 |
% |
|
|
Long-dated inflation volatilities |
0% to 2% |
|
1 |
% |
Total net derivative assets |
$ |
(1,665 |
) |
|
|
|
|
|
|
(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 112: Trading account assets – Corporate securities, trading loans and other of $2.0 billion, Trading account assets – Non-U.S. sovereign debt of $527 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.2 billion, AFS debt securities – Other taxable securities of $579 million, AFS debt securities – Tax-exempt securities of $520 million, Loans and leases of $702 million and LHFS of $792 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. |
|
|
(4) |
The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions. |
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, 2016 |
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(Dollars in millions) |
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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 |
$ |
1,066 |
|
Discounted cash flow, Market comparables |
Yield |
0% to 50% |
|
7 |
% |
Trading account assets – Mortgage trading loans, ABS and other MBS |
337 |
|
Prepayment speed |
0% to 27% CPR |
|
14 |
% |
Loans and leases |
718 |
|
Default rate |
0% to 3% CDR |
|
2 |
% |
Loans held-for-sale |
11 |
|
Loss severity |
0% to 54% |
|
18 |
% |
Instruments backed by commercial real estate assets |
$ |
317 |
|
Discounted cash flow, Market comparables |
Yield |
0% to 39% |
|
11 |
% |
Trading account assets – Corporate securities, trading loans and other |
178 |
|
Price |
$0 to $100 |
|
$65 |
Trading account assets – Mortgage trading loans, ABS and other MBS |
53 |
|
|
|
|
Loans held-for-sale |
86 |
|
|
|
|
Commercial loans, debt securities and other |
$ |
4,486 |
|
Discounted cash flow, Market comparables |
Yield |
1% to 37% |
|
14 |
% |
Trading account assets – Corporate securities, trading loans and other |
2,565 |
|
Prepayment speed |
5% to 20% |
|
19 |
% |
Trading account assets – Non-U.S. sovereign debt |
510 |
|
Default rate |
3% to 4% |
|
4 |
% |
Trading account assets – Mortgage trading loans, ABS and other MBS |
821 |
|
Loss severity |
0% to 50% |
|
19 |
% |
AFS debt securities – Other taxable securities |
29 |
|
Price |
$0 to $292 |
|
$68 |
Loans and leases |
2 |
|
Duration |
0 to 5 years |
|
3 years |
Loans held-for-sale |
559 |
|
|
Enterprise value/EBITDA multiple |
34x |
|
n/a |
Auction rate securities |
$ |
1,141 |
|
Discounted cash flow, Market comparables |
Price |
$10 to $100 |
|
$94 |
Trading account assets – Corporate securities, trading loans and other |
34 |
|
|
|
AFS debt securities – Other taxable securities |
565 |
|
|
|
|
AFS debt securities – Tax-exempt securities |
542 |
|
|
|
|
MSRs |
$ |
2,747 |
|
Discounted cash flow |
Weighted-average life, fixed rate (4)
|
0 to 15 years |
|
6 years |
|
|
|
Weighted-average life, variable rate (4)
|
0 to 14 years |
|
4 years |
|
|
|
Option Adjusted Spread, fixed rate |
9% to 14% |
|
10 |
% |
|
|
Option Adjusted Spread, variable rate |
9% to 15% |
|
12 |
% |
Structured liabilities |
|
|
|
|
|
Long-term debt |
$ |
(1,514 |
) |
Discounted cash flow, Market comparables Industry standard derivative pricing (2)
|
Equity correlation |
13% to 100% |
|
68 |
% |
|
|
Long-dated equity volatilities |
4% to 76% |
|
26 |
% |
|
|
Yield |
6% to 37% |
|
20 |
% |
|
|
Price |
$12 to $87 |
|
$73 |
|
|
Duration |
0 to 5 years |
|
3 years |
|
Net derivative assets |
|
|
|
|
|
Credit derivatives |
$ |
(129 |
) |
Discounted cash flow, Stochastic recovery correlation model |
Yield |
0% to 24% |
|
13 |
% |
|
|
Upfront points |
0 to 100 points |
|
72 points |
|
|
|
Credit spreads |
17 bps to 814 bps |
|
248 bps |
|
|
|
Credit correlation |
21% to 80% |
|
44 |
% |
|
|
Prepayment speed |
10% to 20% CPR |
|
18 |
% |
|
|
Default rate |
1% to 4% CDR |
|
3 |
% |
|
|
Loss severity |
35 |
% |
n/a |
|
Equity derivatives |
$ |
(1,690 |
) |
Industry standard derivative pricing (2)
|
Equity correlation |
13% to 100% |
|
68 |
% |
|
|
Long-dated equity volatilities |
4% to 76% |
|
26 |
% |
Commodity derivatives |
$ |
6 |
|
Discounted cash flow, Industry standard derivative pricing (2)
|
Natural gas forward price |
$2/MMBtu to $6/MMBtu |
$4/MMBtu |
|
|
Correlation |
66% to 95% |
|
85 |
% |
|
|
Volatilities |
23% to 96% |
|
36 |
% |
|
|
|
|
|
Interest rate derivatives |
$ |
500 |
|
Industry standard derivative pricing (3)
|
Correlation (IR/IR) |
15% to 99% |
|
56 |
% |
|
|
Correlation (FX/IR) |
0% to 40% |
|
2 |
% |
|
|
Illiquid IR and long-dated inflation rates |
-12% to 35% |
|
5 |
% |
|
|
Long-dated inflation volatilities |
0% to 2% |
|
1 |
% |
Total net derivative assets |
$ |
(1,313 |
) |
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|
(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 113: Trading account assets – Corporate securities, trading loans and other of $2.8 billion, Trading account assets – Non-U.S. sovereign debt of $510 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.2 billion, AFS debt securities – Other taxable securities of $594 million, AFS debt securities – Tax-exempt securities of $542 million, Loans and leases of $720 million and LHFS of $656 million.
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(2) |
Includes models such as Monte Carlo simulation and Black-Scholes. |
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(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. |
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(4) |
The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions. |
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 previous tables, 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.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Loans and Securities
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. A significant increase in price would result in a significantly higher fair value for long positions and short positions would be impacted in a directionally opposite way.
Mortgage Servicing Rights
The weighted-average lives and fair value of MSRs are sensitive to changes in modeled assumptions. The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions. The weighted-average life represents the average period of time that the MSRs' cash flows are expected to be received. Absent other changes, an increase (decrease) to the weighted-average life would generally result in an increase (decrease) in the fair value of the MSRs. For example, a 10 percent or 20 percent decrease in prepayment rates, which impact the weighted-average life, could result in an increase in fair value of $94 million or $196 million, while a 10 percent or 20 percent increase in prepayment rates could result in a decrease in fair value of $88 million or $169 million. A 100 bp or 200 bp decrease in option-adjusted spread (OAS) levels could result in an increase in fair value of $87 million or $180 million, while a 100 bp or 200 bp increase in OAS levels could result in a decrease in fair value of $81 million or $157 million. These sensitivities are hypothetical and actual amounts may vary materially. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSRs that continue to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. In addition, these sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk. The Corporation manages the risk in MSRs with derivatives such as options and interest rate swaps, which are not designated as accounting hedges, as well as securities including MBS and U.S. Treasury securities. The securities used to manage the risk in the MSRs are classified in other assets on the Consolidated Balance Sheet.
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.
Structured credit derivatives are impacted by credit 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.
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 depend on whether the Corporation is long or short the exposure. For structured liabilities, a significant increase in yield or decrease in price would result in a significantly lower fair value. A significant decrease in duration may result in a significantly higher fair value.
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, 2017 and 2016.
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Assets Measured at Fair Value on a Nonrecurring Basis |
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March 31, 2017 |
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Three Months Ended March 31, 2017 |
(Dollars in millions) |
Level 2 |
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Level 3 |
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Gains (Losses) |
Assets |
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Loans held-for-sale |
$ |
69 |
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|
$ |
18 |
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|
$ |
(4 |
) |
Loans and leases (1)
|
— |
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|
438 |
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(123 |
) |
Foreclosed properties (2, 3)
|
— |
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|
82 |
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|
(25 |
) |
Other assets |
91 |
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|
— |
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(86 |
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March 31, 2016 |
|
Three Months Ended March 31, 2016 |
Assets |
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Loans held-for-sale |
$ |
775 |
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|
$ |
29 |
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|
$ |
(21 |
) |
Loans and leases (1)
|
— |
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|
758 |
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(182 |
) |
Foreclosed properties (2, 3)
|
— |
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|
82 |
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(20 |
) |
Other assets |
36 |
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— |
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(18 |
) |
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(1) |
Includes $46 million of losses on loans that were written down to a collateral value of zero during the | |