Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.8.0.1
Fair Value Measurements
9 Months Ended
Sep. 30, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
Under applicable accounting standards, 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 standards and conducts a review of its fair value hierarchy classifications on a quarterly basis. Transfers into or out of fair value hierarchy classifications are considered to be effective as of the beginning of the quarter in which they occur. During the nine months ended September 30, 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 more information regarding the fair value hierarchy and how the Corporation measures fair value and valuation processes and techniques, 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.

Recurring Fair Value
Assets and liabilities carried at fair value on a recurring basis at September 30, 2017 and December 31, 2016, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
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
$

 
$
56,780

 
$

 
$

 
$
56,780

Trading account assets:
 

 
 

 
 

 
 

 
 

U.S. Treasury and agency securities (2)
32,688

 
589

 

 

 
33,277

Corporate securities, trading loans and other
535

 
27,760

 
1,742

 

 
30,037

Equity securities
58,886

 
29,149

 
244

 

 
88,279

Non-U.S. sovereign debt
16,623

 
14,346

 
552

 

 
31,521

Mortgage trading loans, MBS and ABS:
 
 
 
 
 
 
 
 
 
U.S. government-sponsored agency guaranteed (2)

 
18,973

 

 

 
18,973

Mortgage trading loans, ABS and other MBS

 
6,980

 
1,252

 

 
8,232

Total trading account assets (3)
108,732

 
97,797

 
3,790

 

 
210,319

Derivative assets (4, 5)
6,756

 
360,066

 
3,878

 
(332,316
)
 
38,384

AFS debt securities:
 

 
 

 
 

 
 

 
 

U.S. Treasury and agency securities
48,591

 
1,677

 

 

 
50,268

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

Agency

 
196,194

 

 

 
196,194

Agency-collateralized mortgage obligations

 
7,049

 

 

 
7,049

Non-agency residential

 
2,657

 

 

 
2,657

Commercial

 
12,464

 

 

 
12,464

Non-U.S. securities
774

 
4,630

 
36

 

 
5,440

Other taxable securities

 
6,555

 
483

 

 
7,038

Tax-exempt securities

 
18,725

 
467

 

 
19,192

Total AFS debt securities
49,365

 
249,951

 
986

 

 
300,302

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

 
5

 

 

 
5

Non-agency residential

 
3,036

 
22

 

 
3,058

Non-U.S. securities
11,911

 
1,349

 

 

 
13,260

Other taxable securities

 
239

 

 

 
239

Total other debt securities carried at fair value
11,911

 
4,629

 
22

 

 
16,562

Loans and leases

 
5,667

 
618

 

 
6,285

Mortgage servicing rights (6)

 

 
2,407

 

 
2,407

Loans held-for-sale

 
2,353

 
775

 

 
3,128

Customer and other receivables

 
230

 

 

 
230

Other assets
17,991

 
1,083

 
267

 

 
19,341

Total assets
$
194,755

 
$
778,556

 
$
12,743

 
$
(332,316
)
 
$
653,738

Liabilities
 

 
 

 
 

 
 

 
 

Interest-bearing deposits in U.S. offices
$

 
$
468

 
$

 
$

 
$
468

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

 
38,852

 

 

 
38,852

Trading account liabilities:
 

 
 

 
 

 
 

 
 
U.S. Treasury and agency securities
20,390

 
366

 

 

 
20,756

Equity securities
31,647

 
4,018

 

 

 
35,665

Non-U.S. sovereign debt
16,606

 
4,118

 

 

 
20,724

Corporate securities and other
211

 
9,053

 
25

 

 
9,289

Total trading account liabilities
68,854

 
17,555

 
25

 

 
86,434

Derivative liabilities (4, 5)
6,589

 
349,863

 
5,901

 
(330,572
)
 
31,781

Short-term borrowings

 
1,904

 

 

 
1,904

Accrued expenses and other liabilities
21,121

 
1,239

 
9

 

 
22,369

Long-term debt

 
28,007

 
1,890

 

 
29,897

Total liabilities
$
96,564

 
$
437,888

 
$
7,825

 
$
(330,572
)
 
$
211,705

(1) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(2) 
Includes $19.5 billion of GSE obligations.
(3) 
Includes securities with a fair value of $15.3 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 nine months ended September 30, 2017, $3.0 billion of derivative assets and $2.4 billion of derivative liabilities were transferred from Level 1 to Level 2 and $543 million of derivative assets and $496 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) 
Derivative assets and liabilities reflect the effects of contractual amendments by two central clearing counterparties to legally re-characterize daily cash variation margin from collateral, which secures an outstanding exposure, to settlement, which discharges an outstanding exposure. One of these central clearing counterparties amended its governing documents, which became effective in January 2017. In addition, the Corporation elected to transfer its existing positions to the settlement platform for the other central clearing counterparty in September 2017.
(6) 
MSRs include the $1.7 billion core MSR portfolio held in Consumer Banking, the $162 million non-core MSR portfolio held in All Other and the $518 million non-U.S. MSR portfolio held in Global Markets.
 
 
 
 
 
 
 
 
 
 
 
December 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
$

 
$
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

 
(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:
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency-collateralized mortgage obligations

 
5

 

 

 
5

Non-agency residential

 
3,114

 
25

 

 
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

 
4,586

 
25

 

 
19,720

Loans and leases

 
6,365

 
720

 

 
7,085

Mortgage servicing rights (5)

 

 
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.
(5) 
MSRs include the $2.1 billion core MSR portfolio held in Consumer Banking, the $212 million non-core MSR portfolio held in All Other and the $469 million non-U.S. MSR portfolio held in Global Markets.
The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2017 and 2016, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 – Fair Value Measurements (1)
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
Gross
 
 
 
 
(Dollars in millions)
Balance
July 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
September 30
2017
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
Trading account assets:
 

 

 

 

 
 
 
 

 

 

 
Corporate securities, trading loans and other
$
1,777

$
77

$

$
35

$
(79
)
$
5

$
(208
)
$
288

$
(153
)
$
1,742

$
35

Equity securities
229

8


3

(3
)


17

(10
)
244

10

Non-U.S. sovereign debt
506

33

18




(5
)


552

33

Mortgage trading loans, ABS and other MBS
1,232

10

(1
)
150

(157
)

(46
)
83

(19
)
1,252

(2
)
Total trading account assets
3,744

128

17

188

(239
)
5

(259
)
388

(182
)
3,790

76

Net derivative assets (4)
(1,803
)
(252
)

150

(367
)

278

7

(36
)
(2,023
)
(283
)
AFS debt securities:
 

 

 

 

 

 

 

 

 

 

 
Non-U.S. securities
139

1

4

7



(115
)


36


Other taxable securities
483


1




(1
)


483


Tax-exempt securities
518


1




(7
)

(45
)
467


Total AFS debt securities
1,140

1

6

7



(123
)

(45
)
986


Other debt securities carried at fair value – Non-agency residential MBS
23






(1
)


22


Loans and leases (5, 6)
667

2


2

(24
)

(29
)


618

2

Mortgage servicing rights (6, 7)
2,501

54



(28
)
69

(189
)


2,407

(20
)
Loans held-for-sale (5)
766

38

10


(4
)

(93
)
58


775

27

Other assets
294

70

(43
)

(52
)

(2
)


267

28

Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
(135
)





135





Trading account liabilities – Corporate securities and other
(22
)
1



(3
)
(1
)



(25
)

Accrued expenses and other liabilities (5)
(9
)








(9
)

Long-term debt (5)
(1,646
)
(87
)
(7
)
63


(129
)
115

(244
)
45

(1,890
)
(87
)
(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 - primarily 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 - 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 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 $3.9 billion and derivative liabilities of $5.9 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.
Significant transfers into Level 3, primarily due to decreased price observability, during the three months ended September 30, 2017 included $388 million of trading account assets and $244 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 September 30, 2017 included $182 million of trading account assets.
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 – Fair Value Measurements (1)
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
Gross
 
 
 
 
(Dollars in millions)
Balance
July 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
September 30
2016
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
Trading account assets:
 

 

 

 
 
 
 

 
 

 

 
Corporate securities, trading loans and other
$
2,654

$
57

$

$
226

$
(245
)
$

$
(134
)
$
202

$
(198
)
$
2,562

$
20

Equity securities
455

11


10

(98
)


27

(39
)
366

5

Non-U.S. sovereign debt
630

20

(7
)



(4
)


639

19

Mortgage trading loans, ABS and other MBS
1,286

102


331

(441
)

(103
)
15

(24
)
1,166

62

Total trading account assets
5,025

190

(7
)
567

(784
)

(241
)
244

(261
)
4,733

106

Net derivative assets (4)
(648
)
(131
)

114

(346
)

118

(53
)
(41
)
(987
)
(198
)
AFS debt securities:
 

 

 

 
 
 
 

 

 

 

 
Non-agency residential MBS
134



189



(102
)
6


227


Other taxable securities
717

1

(1
)



(30
)


687


Tax-exempt securities
559


2





10


571


Total AFS debt securities
1,410

1

1

189



(132
)
16


1,485


Other debt securities carried at fair value – Non-agency residential MBS
28

(2
)







26


Loans and leases (5, 6)
1,459

(9
)




(54
)

(41
)
1,355

(8
)
Mortgage servicing rights (6, 7)
2,269

313




101

(206
)


2,477

262

Loans held-for-sale (5)
690

13

(4
)

(56
)

(25
)
4

(35
)
587

10

Other assets
348

11


4






363

17

Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
(313
)
(17
)




10

(19
)
1

(338
)
(17
)
Trading account liabilities – Corporate securities and other
(26
)
2



(2
)




(26
)
1

Accrued expenses and other liabilities (5)
(9
)








(9
)

Long-term debt (5)
(2,156
)
(22
)
(23
)
15


(3
)
363

(206
)
98

(1,934
)
(24
)
(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 - 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 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 $4.9 billion and derivative liabilities of $5.9 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.
Significant transfers into Level 3, primarily due to decreased price observability, during the three months ended September 30, 2016 included $244 million of trading account assets and $206 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 September 30, 2016 included $261 million of trading account assets.
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 – Fair Value Measurements (1)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
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
September 30
2017
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
Trading account assets:
 

 

 

 

 
 
 
 

 

 

 
Corporate securities, trading loans and other
$
2,777

$
225

$

$
353

$
(679
)
$
5

$
(443
)
$
506

$
(1,002
)
$
1,742

$
72

Equity securities
281

23


45

(67
)

(10
)
119

(147
)
244

11

Non-U.S. sovereign debt
510

64

12

26

(59
)

(73
)
72


552

60

Mortgage trading loans, ABS and other MBS
1,211

195

(2
)
747

(846
)

(169
)
187

(71
)
1,252

107

Total trading account assets
4,779

507

10

1,171

(1,651
)
5

(695
)
884

(1,220
)
3,790

250

Net derivative assets (4)
(1,313
)
(1,098
)

558

(843
)

722

36

(85
)
(2,023
)
(561
)
AFS debt securities:
 

 

 

 

 

 

 

 

 

 

 
Non-U.S. securities
229

2

16

49



(260
)


36


Other taxable securities
594

3

6

5



(31
)

(94
)
483


Tax-exempt securities
542


1


(56
)

(10
)
35

(45
)
467


Total AFS debt securities
1,365

5

23

54

(56
)

(301
)
35

(139
)
986


Other debt securities carried at fair value – Non-agency residential MBS
25

(1
)




(2
)


22


Loans and leases (5, 6)
720

20


2

(24
)

(93
)

(7
)
618

18

Mortgage servicing rights (6, 7)
2,747

40



(22
)
207

(565
)


2,407

(202
)
Loans held-for-sale (5)
656

109

7

2

(159
)

(281
)
473

(32
)
775

60

Other assets
239

53

(31
)
2

(52
)

(8
)
64


267

21

Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
(359
)
(5
)



(12
)
171

(58
)
263


(5
)
Trading account liabilities – Corporate securities and other
(27
)
13


4

(13
)
(2
)



(25
)
(1
)
Accrued expenses and other liabilities (5)
(9
)








(9
)

Long-term debt (5)
(1,514
)
(160
)
(18
)
81


(279
)
398

(530
)
132

(1,890
)
(158
)
(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 - primarily 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 - 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 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 $3.9 billion and derivative liabilities of $5.9 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.
Significant transfers into Level 3, primarily due to decreased price observability, during the nine months ended September 30, 2017 included $884 million of trading account assets, $473 million of LHFS and $530 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 nine months ended September 30, 2017 included $1.2 billion of trading account assets, $139 million of AFS debt securities, $263 million of federal funds purchased and securities loaned or sold under agreements to repurchase and $132 million of long-term debt.

 
 
 
 
 
 
 
 
 
 
 
 
Level 3 – Fair Value Measurements (1)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 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
September 30
2016
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
Trading account assets:
 

 

 

 
 
 
 

 
 

 

 
Corporate securities, trading loans and other
$
2,838

$
118

$
2

$
925

$
(638
)
$

$
(479
)
$
432

$
(636
)
$
2,562

$
11

Equity securities
407

93


53

(135
)

(72
)
60

(40
)
366

(19
)
Non-U.S. sovereign debt
521

112

91

3

(1
)

(87
)


639

110

Mortgage trading loans, ABS and other MBS
1,868

197

(2
)
681

(1,264
)

(270
)
91

(135
)
1,166

110

Total trading account assets
5,634

520

91

1,662

(2,038
)

(908
)
583

(811
)
4,733

212

Net derivative assets (4)
(441
)
356


313

(965
)

7

(177
)
(80
)
(987
)
(108
)
AFS debt securities:
 

 

 

 
 
 
 

 

 

 

 
Non-agency residential MBS
106


3

385

(92
)

(181
)
6


227


Other taxable securities
757

3

(7
)



(66
)


687


Tax-exempt securities
569


(8
)
1



(1
)
10


571


Total AFS debt securities
1,432

3

(12
)
386

(92
)

(248
)
16


1,485


Other debt securities carried at fair value – Non-agency residential MBS
30

(4
)







26


Loans and leases (5, 6)
1,620

(13
)

69


50

(143
)
6

(234
)
1,355

(3
)
Mortgage servicing rights (6, 7)
3,087

(295
)



307

(622
)


2,477

(457
)
Loans held-for-sale (5)
787

97

51

20

(236
)

(77
)
43

(98
)
587

76

Other assets
374

(27
)

38



(24
)
2


363

(15
)
Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
(335
)
12




(14
)
17

(19
)
1

(338
)
(21
)
Trading account liabilities – Corporate securities and other
(21
)
4


1

(10
)




(26
)
3

Short-term borrowings (5)
(30
)
1





29





Accrued expenses and other liabilities (5)
(9
)








(9
)

Long-term debt (5)
(1,513
)
(192
)
(41
)
44


(326
)
496

(751
)
349

(1,934
)
(208
)
(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 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 $4.9 billion and derivative liabilities of $5.9 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.
Significant transfers into Level 3, primarily due to decreased price observability, during the nine months ended September 30, 2016 included $583 million of trading account assets, $177 million of net derivative assets and $751 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 nine months ended September 30, 2016 included $811 million of trading account assets, $234 million of loans and leases and $349 million of long-term debt.
The following tables present information about significant unobservable inputs related to the Corporation’s material categories of Level 3 financial assets and liabilities at September 30, 2017 and December 31, 2016.
 
 
 
 
 
 
Quantitative Information about Level 3 Fair Value Measurements at September 30, 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
$
914

Discounted cash flow
Yield
0% to 25%

6
%
Trading account assets – Mortgage trading loans, ABS and other MBS
293

Prepayment speed
0% to 22% CPR

12
%
Loans and leases
617

Default rate
0% to 3% CDR

2
%
Loans held-for-sale
4

Loss severity
0% to 54%

18
%
Instruments backed by commercial real estate assets
$
264

Discounted cash flow
Yield
0% to 25%

6
%
Trading account assets – Corporate securities, trading loans and other
218

Price
$0 to $100

$68
Trading account assets – Mortgage trading loans, ABS and other MBS
46

 
 
 
Commercial loans, debt securities and other
$
3,754

Discounted cash flow, Market comparables
Yield
0% to 12%

4
%
Trading account assets – Corporate securities, trading loans and other
1,498

Prepayment speed
10% to 20%

15
%
Trading account assets – Non-U.S. sovereign debt
552

Default rate
3% to 4%

4
%
Trading account assets – Mortgage trading loans, ABS and other MBS
913

Loss severity
35% to 40%

37
%
AFS debt securities – Other taxable securities
19

Price
$0 to $185

$63
Loans and leases


1

 
 
 
Loans held-for-sale

771

 
 
 
Auction rate securities
$
957

Discounted cash flow, Market comparables
Price
$10 to $100

$94
Trading account assets – Corporate securities, trading loans and other
26

 
 
 
AFS debt securities – Other taxable securities
464

 
 
 
AFS debt securities – Tax-exempt securities
467

 
 
 
MSRs
$
2,407

Discounted cash flow
Weighted-average life, fixed rate (4)
0 to 14 years

5 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
$
(1,890
)
Discounted cash flow, Market comparables, Industry standard derivative pricing (2)
Equity correlation
3% to 100%

64
%
 
 
Long-dated equity volatilities
4% to 76%

22
%
 
 
Yield
7.5
%
n/a

 
 
Price
$0 to $100

$65
Net derivative assets
 
 
 
 
 
Credit derivatives
$
(325
)
Discounted cash flow, Stochastic recovery correlation model
Yield
1% to 5%

3
%
 
 
Upfront points
0 points to 100 points

73 points

 
 
Credit correlation
12% to 90%

58
%
 
 
Prepayment speed
15% to 20% CPR

16
%
 
 
Default rate
1% to 4% CDR

2
%
 
 
Loss severity
35
%
n/a

 
 
Price
$0 to $102

$76
Equity derivatives
$
(2,235
)
Industry standard derivative pricing (2)
Equity correlation
3% to 100%

64
%
 
 
Long-dated equity volatilities
4% to 76%

22
%
Commodity derivatives
$
2

Discounted cash flow, Industry standard derivative pricing (2)
Natural gas forward price
$2/MMBtu to $6/MMBtu

$3/MMBtu

 
 
Correlation
68% to 90%

85
%
 
 
Volatilities
25% to 90%

49
%
Interest rate derivatives
$
535

Industry standard derivative pricing (3)
Correlation (IR/IR)
15% to 90%

53
%
 
 
Correlation (FX/IR)
0% to 46%

1
%
 
 
Long-dated inflation rates
-10% to 38%

6
%
 
 
Long-dated inflation volatilities
0% to 1%

1
%
Total net derivative assets
$
(2,023
)
 
 
 
 
(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 114: Trading account assets – Corporate securities, trading loans and other of $1.7 billion, Trading account assets – Non-U.S. sovereign debt of $552 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.3 billion, AFS debt securities – Other taxable securities of $483 million, AFS debt securities – Tax-exempt securities of $467 million, Loans and leases of $618 million and LHFS of $775 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
 
 
 
 
 
(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
$
1,066

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
)
 
 
 
 

(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 115: 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.
(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
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 results 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 $88 million or $183 million, while a 10 percent or 20 percent increase in prepayment rates could result in a decrease in fair value of $81 million or $156 million. A 100 bp or 200 bp decrease in option-adjusted spread (OAS) levels could result in an increase in fair value of $74 million or $154 million, while a 100 bp or 200 bp increase in OAS levels could result in a decrease in fair value of $69 million or $135 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 (i.e., 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 and nine months ended September 30, 2017 and 2016.
 
 
 
 
 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
 
September 30, 2017
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
(Dollars in millions)
Level 2
 
Level 3
 
Gains (Losses)
Assets
 

 
 

 
 
 
 
Loans held-for-sale
$
70

 
$
16

 
$

 
$
(4
)
Loans and leases (1)

 
813

 
(152
)
 
(307
)
Foreclosed properties (2, 3)

 
79

 
(21
)
 
(35
)
Other assets
353

 

 
(1
)
 
(121
)
 
 
 
 
 
 
 
 
 
September 30, 2016
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Assets
 

 
 

 
 
 
 
Loans held-for-sale
$
191

 
$
48

 
$
(1
)
 
$
(44
)
Loans and leases (1)

 
1,333

 
(143
)
 
(399
)
Foreclosed properties (2, 3)

 
113

 
(23
)
 
(41
)
Other assets
173

 

 
(18
)
 
(44
)
(1) 
Includes $71 million and $132 million of losses on loans that were written down to a collateral value of zero during the three and nine months ended September 30, 2017, compared to losses of $48 million and $112 million for the same periods in 2016.
(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 $879 million and $1.3 billion of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) at September 30, 2017 and 2016.
The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial assets and liabilities at September 30, 2017 and December 31, 2016. Loans and leases 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
 
 
 
 
 
 
 
September 30, 2017
(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
$
813

Market comparables
OREO discount
8% to 54%
21
%
 
 
 
Costs to sell
7% to 45%
9
%
 
December 31, 2016
Loans and leases backed by residential real estate assets
$
1,416

Market comparables
OREO discount
8% to 56%
21
%
 
 
 
Costs to sell
7% to 45%
9
%