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 that require 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. The Corporation accounts for certain financial instruments under the fair value option. For more information, see Note 21 – 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 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.
Trading Account Assets and Liabilities and Debt Securities
The fair values of trading account assets and liabilities are primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. The fair values of debt securities are generally based on quoted market prices or market prices for similar assets. Liquidity is a significant factor in the determination of the fair values of trading account assets and liabilities and debt securities. Market price quotes may not be readily available for some positions such as positions within a market sector where trading activity has slowed significantly or ceased. Some of these instruments are valued using a discounted cash flow model, which estimates the fair value of the securities using internal credit risk, interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Principal and interest cash flows are discounted using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value for the specific security. Other instruments are valued using a net asset value approach which considers the value of the underlying securities. Underlying assets are valued using external pricing services, where available, or matrix pricing based on the vintages and ratings. Situations of illiquidity generally are triggered by the market’s perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer’s financial statements and changes in credit ratings made by one or more rating agencies.
Derivative Assets and Liabilities
The fair values of derivative assets and liabilities traded in the OTC market are determined using quantitative models that utilize multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. When third-party pricing services are used, the methods and assumptions are reviewed by the Corporation. Estimation risk is greater for derivative asset and liability positions that are either option-based or have longer maturity dates where observable market inputs are less readily available, or are unobservable, in which case, quantitative-based extrapolations of rate, price or index scenarios are used in determining fair values. The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality and other instrument-specific factors, where appropriate. In addition, the Corporation incorporates within its fair value measurements of OTC derivatives a valuation adjustment to reflect the credit risk associated with the net position. Positions are netted by counterparty, and fair value for net long exposures is adjusted for counterparty credit risk while the fair value for net short exposures is adjusted for the Corporation’s own credit risk. The Corporation also incorporates FVA within its fair value measurements to include funding costs on uncollateralized derivatives and derivatives where the Corporation is not permitted to use the collateral it receives. An estimate of severity of loss is also used in the determination of fair value, primarily based on market data.
Loans and Loan Commitments
The fair values of loans and loan commitments are based on market prices, where available, or discounted cash flow analyses using market-based credit spreads of comparable debt instruments or credit derivatives of the specific borrower or comparable borrowers. Results of discounted cash flow analyses may be adjusted, as appropriate, to reflect other market conditions or the perceived credit risk of the borrower.
Mortgage Servicing Rights
The fair values of MSRs are primarily determined using an option-adjusted spread (OAS) valuation approach, which factors in prepayment risk to determine the fair value of MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates.
Loans Held-for-sale
The fair values of LHFS are based on quoted market prices, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans adjusted to reflect the inherent credit risk. The borrower-specific credit risk is embedded within the quoted market prices or is implied by considering loan performance when selecting comparables.
Short-term Borrowings and Long-term Debt
The Corporation issues structured liabilities that have coupons or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities. The fair values of these structured liabilities are estimated using quantitative models for the combined derivative and debt portions of the notes. These models incorporate observable and, in some instances, unobservable inputs including security prices, interest rate yield curves, option volatility, currency, commodity or equity rates and correlations among these inputs. The Corporation also considers the impact of its own credit spread in determining the discount rate used to value these liabilities. The credit spread is determined by reference to observable spreads in the secondary bond market.
Securities Financing Agreements
The fair values of certain reverse repurchase agreements, repurchase agreements and securities borrowed transactions are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Deposits
The fair values of deposits are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The Corporation considers the impact of its own credit spread in the valuation of these liabilities. The credit risk is determined by reference to observable credit spreads in the secondary cash market.
Asset-backed Secured Financings
The fair values of asset-backed secured financings are based on external broker bids, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans adjusted to reflect the inherent credit risk.
Recurring Fair Value
Assets and liabilities carried at fair value on a recurring basis at December 31, 2017 and 2016, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.
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December 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 |
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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 |
$ |
— |
|
|
$ |
52,906 |
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|
$ |
— |
|
|
$ |
— |
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|
$ |
52,906 |
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Trading account assets: |
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|
|
|
|
|
|
|
|
|
|
|
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U.S. Treasury and agency securities (2, 3)
|
38,720 |
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|
1,922 |
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|
— |
|
|
— |
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|
40,642 |
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Corporate securities, trading loans and other |
— |
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28,714 |
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1,864 |
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— |
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30,578 |
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Equity securities (3)
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60,747 |
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|
23,958 |
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|
235 |
|
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— |
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|
84,940 |
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Non-U.S. sovereign debt (3)
|
6,545 |
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|
15,839 |
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|
556 |
|
|
— |
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22,940 |
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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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20,586 |
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— |
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— |
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20,586 |
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Mortgage trading loans, ABS and other MBS |
— |
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|
8,174 |
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|
1,498 |
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— |
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9,672 |
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Total trading account assets (4)
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106,012 |
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99,193 |
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4,153 |
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— |
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209,358 |
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Derivative assets (3, 5)
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6,305 |
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341,178 |
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4,067 |
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(313,788 |
) |
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37,762 |
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AFS debt securities: |
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U.S. Treasury and agency securities |
51,915 |
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1,608 |
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— |
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— |
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53,523 |
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Mortgage-backed securities: |
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Agency |
— |
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192,929 |
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— |
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— |
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192,929 |
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Agency-collateralized mortgage obligations |
— |
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6,804 |
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— |
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— |
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6,804 |
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Non-agency residential |
— |
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2,669 |
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— |
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— |
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2,669 |
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Commercial |
— |
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13,684 |
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— |
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— |
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13,684 |
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Non-U.S. securities |
772 |
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5,880 |
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25 |
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— |
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6,677 |
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Other taxable securities |
— |
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5,261 |
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|
509 |
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— |
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5,770 |
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Tax-exempt securities |
— |
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20,106 |
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|
469 |
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— |
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20,575 |
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Total AFS debt securities |
52,687 |
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248,941 |
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|
1,003 |
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— |
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302,631 |
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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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2,764 |
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— |
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— |
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2,764 |
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Non-U.S. securities |
8,191 |
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1,297 |
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— |
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— |
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9,488 |
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Other taxable securities |
— |
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|
229 |
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— |
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— |
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|
229 |
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Total other debt securities carried at fair value |
8,191 |
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4,295 |
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— |
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— |
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12,486 |
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Loans and leases |
— |
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5,139 |
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|
571 |
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— |
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5,710 |
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Mortgage servicing rights (6)
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— |
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— |
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2,302 |
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— |
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2,302 |
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Loans held-for-sale |
— |
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1,466 |
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|
690 |
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— |
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2,156 |
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Other assets |
19,367 |
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|
789 |
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|
123 |
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— |
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20,279 |
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Total assets |
$ |
192,562 |
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$ |
753,907 |
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$ |
12,909 |
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$ |
(313,788 |
) |
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$ |
645,590 |
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Liabilities |
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Interest-bearing deposits in U.S. offices |
$ |
— |
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$ |
449 |
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$ |
— |
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$ |
— |
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$ |
449 |
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Federal funds purchased and securities loaned or sold under agreements to repurchase |
— |
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36,182 |
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— |
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— |
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36,182 |
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Trading account liabilities: |
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U.S. Treasury and agency securities |
17,266 |
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|
734 |
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— |
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— |
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18,000 |
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Equity securities (3)
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33,019 |
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3,885 |
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— |
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— |
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36,904 |
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Non-U.S. sovereign debt (3)
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11,976 |
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|
7,382 |
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— |
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— |
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19,358 |
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Corporate securities and other |
— |
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|
6,901 |
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|
24 |
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— |
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|
6,925 |
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Total trading account liabilities |
62,261 |
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18,902 |
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24 |
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— |
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|
81,187 |
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Derivative liabilities (3, 5)
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6,029 |
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334,261 |
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|
5,781 |
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(311,771 |
) |
|
34,300 |
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Short-term borrowings |
— |
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|
1,494 |
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|
— |
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|
— |
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|
1,494 |
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Accrued expenses and other liabilities |
21,887 |
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|
945 |
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|
8 |
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|
— |
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|
22,840 |
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Long-term debt |
— |
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|
29,923 |
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|
1,863 |
|
|
— |
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|
31,786 |
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Total liabilities |
$ |
90,177 |
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|
$ |
422,156 |
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$ |
7,676 |
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|
$ |
(311,771 |
) |
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$ |
208,238 |
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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 $21.3 billion of GSE obligations.
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(3) |
During 2017, for trading account assets and liabilities, $1.1 billion of U.S. Treasury and agency securities assets, $5.3 billion of equity securities assets, $3.1 billion of equity securities liabilities, $3.3 billion of non-U.S. sovereign debt assets and $1.5 billion of non-U.S. sovereign debt liabilities were transferred from Level 1 to Level 2 based on the liquidity of the positions. In addition, $14.1 billion of equity securities assets and $4.3 billion of equity securities liabilities were transferred from Level 2 to Level 1. Also in 2017, $4.2 billion of derivative assets and $3.0 billion of derivative liabilities were transferred from Level 1 to Level 2 and $758 million of derivative assets and $608 million of derivative liabilities were transferred from Level 2 to Level 1 based on the observability of inputs used to measure fair value. For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.
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(4) |
Includes securities with a fair value of $16.8 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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(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.
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(6) |
MSRs include the $1.7 billion core MSR portfolio held in Consumer Banking, the $135 million non-core MSR portfolio held in All Other and the $510 million non-U.S. MSR portfolio held in Global Markets.
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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 |
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Trading account assets: |
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|
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U.S. Treasury and agency securities (2)
|
34,587 |
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|
1,927 |
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|
— |
|
|
— |
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|
36,514 |
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Corporate securities, trading loans and other |
171 |
|
|
22,861 |
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|
2,777 |
|
|
— |
|
|
25,809 |
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Equity securities |
50,169 |
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|
21,601 |
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|
281 |
|
|
— |
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|
72,051 |
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Non-U.S. sovereign debt |
9,578 |
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|
9,940 |
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|
510 |
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|
— |
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|
20,028 |
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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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|
15,799 |
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|
— |
|
|
— |
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|
15,799 |
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Mortgage trading loans, ABS and other MBS |
— |
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|
8,797 |
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|
1,211 |
|
|
— |
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|
10,008 |
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Total trading account assets (3)
|
94,505 |
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|
80,925 |
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|
4,779 |
|
|
— |
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|
180,209 |
|
Derivative assets (4)
|
7,337 |
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|
619,848 |
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|
3,931 |
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(588,604 |
) |
|
42,512 |
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AFS debt securities: |
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|
|
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U.S. Treasury and agency securities |
46,787 |
|
|
1,465 |
|
|
— |
|
|
— |
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|
48,252 |
|
Mortgage-backed securities: |
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|
|
|
|
|
|
|
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Agency |
— |
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|
189,486 |
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|
— |
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|
— |
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|
189,486 |
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Agency-collateralized mortgage obligations |
— |
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|
8,330 |
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|
— |
|
|
— |
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|
8,330 |
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Non-agency residential |
— |
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|
2,013 |
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|
— |
|
|
— |
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|
2,013 |
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Commercial |
— |
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|
12,322 |
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|
— |
|
|
— |
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|
12,322 |
|
Non-U.S. securities |
1,934 |
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|
3,600 |
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|
229 |
|
|
— |
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|
5,763 |
|
Other taxable securities |
— |
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|
10,020 |
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|
594 |
|
|
— |
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|
10,614 |
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Tax-exempt securities |
— |
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|
16,618 |
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|
542 |
|
|
— |
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|
17,160 |
|
Total AFS debt securities |
48,721 |
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|
243,854 |
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|
1,365 |
|
|
— |
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|
293,940 |
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Other debt securities carried at fair value: |
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|
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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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|
3,114 |
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|
25 |
|
|
— |
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|
3,139 |
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Non-U.S. securities |
15,109 |
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|
1,227 |
|
|
— |
|
|
— |
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|
16,336 |
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Other taxable securities |
— |
|
|
240 |
|
|
— |
|
|
— |
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|
240 |
|
Total other debt securities carried at fair value |
15,109 |
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|
4,586 |
|
|
25 |
|
|
— |
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|
19,720 |
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Loans and leases |
— |
|
|
6,365 |
|
|
720 |
|
|
— |
|
|
7,085 |
|
Mortgage servicing rights (5)
|
— |
|
|
— |
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|
2,747 |
|
|
— |
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|
2,747 |
|
Loans held-for-sale |
— |
|
|
3,370 |
|
|
656 |
|
|
— |
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|
4,026 |
|
Debt securities in assets of business held for sale |
619 |
|
|
— |
|
|
— |
|
|
— |
|
|
619 |
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Other assets |
11,824 |
|
|
1,739 |
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|
239 |
|
|
— |
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|
13,802 |
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Total assets |
$ |
178,115 |
|
|
$ |
1,010,437 |
|
|
$ |
14,462 |
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|
$ |
(588,604 |
) |
|
$ |
614,410 |
|
Liabilities |
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|
|
|
|
|
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|
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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 observability of 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 2017, 2016 and 2015, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 – Fair Value Measurements in 2017 (1)
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
Balance
January 1
2017
|
Total Realized/Unrealized Gains/(Losses) (2)
|
Gains/ (Losses) in OCI (3)
|
Gross |
Gross Transfers into
Level 3
|
Gross Transfers out of
Level 3
|
Balance December 31 2017 |
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
|
Purchases |
Sales |
Issuances |
Settlements |
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
$ |
2,777 |
|
$ |
229 |
|
$ |
— |
|
$ |
547 |
|
$ |
(702 |
) |
$ |
5 |
|
$ |
(666 |
) |
$ |
728 |
|
$ |
(1,054 |
) |
$ |
1,864 |
|
$ |
2 |
|
Equity securities |
281 |
|
18 |
|
— |
|
55 |
|
(70 |
) |
— |
|
(10 |
) |
146 |
|
(185 |
) |
235 |
|
(1 |
) |
Non-U.S. sovereign debt |
510 |
|
74 |
|
(8 |
) |
53 |
|
(59 |
) |
— |
|
(73 |
) |
72 |
|
(13 |
) |
556 |
|
70 |
|
Mortgage trading loans, ABS and other MBS |
1,211 |
|
165 |
|
(2 |
) |
1,210 |
|
(990 |
) |
— |
|
(233 |
) |
218 |
|
(81 |
) |
1,498 |
|
72 |
|
Total trading account assets |
4,779 |
|
486 |
|
(10 |
) |
1,865 |
|
(1,821 |
) |
5 |
|
(982 |
) |
1,164 |
|
(1,333 |
) |
4,153 |
|
143 |
|
Net derivative assets (4)
|
(1,313 |
) |
(984 |
) |
— |
|
664 |
|
(979 |
) |
— |
|
949 |
|
48 |
|
(99 |
) |
(1,714 |
) |
(409 |
) |
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. securities |
229 |
|
2 |
|
16 |
|
49 |
|
— |
|
— |
|
(271 |
) |
— |
|
— |
|
25 |
|
— |
|
Other taxable securities |
594 |
|
4 |
|
8 |
|
5 |
|
— |
|
— |
|
(42 |
) |
34 |
|
(94 |
) |
509 |
|
— |
|
Tax-exempt securities |
542 |
|
1 |
|
3 |
|
14 |
|
(70 |
) |
— |
|
(11 |
) |
35 |
|
(45 |
) |
469 |
|
— |
|
Total AFS debt securities |
1,365 |
|
7 |
|
27 |
|
68 |
|
(70 |
) |
— |
|
(324 |
) |
69 |
|
(139 |
) |
1,003 |
|
— |
|
Other debt securities carried at fair value – Non-agency residential MBS |
25 |
|
(1 |
) |
— |
|
— |
|
(21 |
) |
— |
|
(3 |
) |
— |
|
— |
|
— |
|
— |
|
Loans and leases (5, 6)
|
720 |
|
15 |
|
— |
|
3 |
|
(34 |
) |
— |
|
(126 |
) |
— |
|
(7 |
) |
571 |
|
11 |
|
Mortgage servicing rights (6, 7)
|
2,747 |
|
70 |
|
— |
|
— |
|
(25 |
) |
258 |
|
(748 |
) |
— |
|
— |
|
2,302 |
|
(248 |
) |
Loans held-for-sale (5)
|
656 |
|
100 |
|
(3 |
) |
3 |
|
(189 |
) |
— |
|
(346 |
) |
501 |
|
(32 |
) |
690 |
|
14 |
|
Other assets |
239 |
|
74 |
|
(57 |
) |
2 |
|
(189 |
) |
— |
|
(10 |
) |
64 |
|
— |
|
123 |
|
22 |
|
Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
|
(359 |
) |
(5 |
) |
— |
|
— |
|
— |
|
(12 |
) |
171 |
|
(58 |
) |
263 |
|
— |
|
— |
|
Trading account liabilities – Corporate securities and other |
(27 |
) |
14 |
|
— |
|
8 |
|
(17 |
) |
(2 |
) |
— |
|
— |
|
— |
|
(24 |
) |
2 |
|
Accrued expenses and other liabilities (5)
|
(9 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
1 |
|
— |
|
— |
|
(8 |
) |
— |
|
Long-term debt (5)
|
(1,514 |
) |
(135 |
) |
(31 |
) |
84 |
|
— |
|
(288 |
) |
514 |
|
(711 |
) |
218 |
|
(1,863 |
) |
(196 |
) |
|
|
(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; Net derivative assets - primarily trading account profits and mortgage banking income; MSRs - primarily mortgage banking income; Long-term debt - primarily trading account profits. 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 unrealized gains/losses in OCI 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 more information, see Note 1 – Summary of Significant Accounting Principles.
|
|
|
(4) |
Net derivatives include derivative assets of $4.1 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. |
Significant transfers into Level 3, primarily due to decreased price observability, during 2017 included $1.2 billion of trading account assets, $501 million of LHFS and $711 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 2017 included $1.3 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 $218 million of long-term debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 – Fair Value Measurements in 2016 (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1
2016
|
Total Realized/Unrealized Gains/(Losses) (2)
|
Gains/ (Losses) in OCI (3)
|
Gross |
Gross Transfers into
Level 3
|
Gross Transfers out of
Level 3
|
Balance December 31 2016 |
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
|
(Dollars in millions) |
Purchases |
Sales |
Issuances |
Settlements |
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
$ |
2,838 |
|
$ |
78 |
|
$ |
2 |
|
$ |
1,508 |
|
$ |
(847 |
) |
$ |
— |
|
$ |
(725 |
) |
$ |
728 |
|
$ |
(805 |
) |
$ |
2,777 |
|
$ |
(82 |
) |
Equity securities |
407 |
|
74 |
|
— |
|
73 |
|
(169 |
) |
— |
|
(82 |
) |
70 |
|
(92 |
) |
281 |
|
(59 |
) |
Non-U.S. sovereign debt |
521 |
|
122 |
|
91 |
|
12 |
|
(146 |
) |
— |
|
(90 |
) |
— |
|
— |
|
510 |
|
120 |
|
Mortgage trading loans, ABS and other MBS |
1,868 |
|
188 |
|
(2 |
) |
988 |
|
(1,491 |
) |
— |
|
(344 |
) |
158 |
|
(154 |
) |
1,211 |
|
64 |
|
Total trading account assets |
5,634 |
|
462 |
|
91 |
|
2,581 |
|
(2,653 |
) |
— |
|
(1,241 |
) |
956 |
|
(1,051 |
) |
4,779 |
|
43 |
|
Net derivative assets (4)
|
(441 |
) |
285 |
|
— |
|
470 |
|
(1,155 |
) |
— |
|
76 |
|
(186 |
) |
(362 |
) |
(1,313 |
) |
(376 |
) |
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency residential MBS |
106 |
|
— |
|
— |
|
— |
|
(106 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
Non-U.S. securities |
— |
|
— |
|
(6 |
) |
584 |
|
(92 |
) |
— |
|
(263 |
) |
6 |
|
— |
|
229 |
|
— |
|
Other taxable securities |
757 |
|
4 |
|
(2 |
) |
— |
|
— |
|
— |
|
(83 |
) |
— |
|
(82 |
) |
594 |
|
— |
|
Tax-exempt securities |
569 |
|
— |
|
(1 |
) |
1 |
|
— |
|
— |
|
(2 |
) |
10 |
|
(35 |
) |
542 |
|
— |
|
Total AFS debt securities |
1,432 |
|
4 |
|
(9 |
) |
585 |
|
(198 |
) |
— |
|
(348 |
) |
16 |
|
(117 |
) |
1,365 |
|
— |
|
Other debt securities carried at fair value – Non-agency residential MBS |
30 |
|
(5 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
25 |
|
— |
|
Loans and leases (5, 6)
|
1,620 |
|
(44 |
) |
— |
|
69 |
|
(553 |
) |
50 |
|
(194 |
) |
6 |
|
(234 |
) |
720 |
|
17 |
|
Mortgage servicing rights (6, 7)
|
3,087 |
|
149 |
|
— |
|
— |
|
(80 |
) |
411 |
|
(820 |
) |
— |
|
— |
|
2,747 |
|
(107 |
) |
Loans held-for-sale (5)
|
787 |
|
79 |
|
50 |
|
22 |
|
(256 |
) |
— |
|
(93 |
) |
173 |
|
(106 |
) |
656 |
|
70 |
|
Other assets |
374 |
|
(13 |
) |
— |
|
38 |
|
(111 |
) |
— |
|
(52 |
) |
3 |
|
— |
|
239 |
|
(36 |
) |
Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
|
(335 |
) |
(11 |
) |
— |
|
— |
|
— |
|
(22 |
) |
27 |
|
(19 |
) |
1 |
|
(359 |
) |
4 |
|
Trading account liabilities – Corporate securities and other |
(21 |
) |
5 |
|
— |
|
— |
|
(11 |
) |
— |
|
— |
|
— |
|
— |
|
(27 |
) |
4 |
|
Short-term borrowings (5)
|
(30 |
) |
1 |
|
— |
|
— |
|
— |
|
— |
|
29 |
|
— |
|
— |
|
— |
|
— |
|
Accrued expenses and other liabilities (5)
|
(9 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(9 |
) |
— |
|
Long-term debt (5)
|
(1,513 |
) |
(74 |
) |
(20 |
) |
140 |
|
— |
|
(521 |
) |
948 |
|
(939 |
) |
465 |
|
(1,514 |
) |
(184 |
) |
|
|
(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; Net derivative assets - primarily trading account profits and mortgage banking income; MSRs - primarily mortgage banking income; Long-term debt - primarily trading account profits. 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 unrealized gains/losses in OCI 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 more information, see Note 1 – Summary of Significant Accounting Principles.
|
|
|
(4) |
Net derivatives include derivative assets of $3.9 billion and derivative liabilities of $5.2 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 2016 included $956 million of trading account assets, $186 million of net derivative assets, $173 million of LHFS and $939 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 2016 included $1.1 billion of trading account assets, $362 million of net derivative assets, $117 million of AFS debt securities, $234 million of loans and leases, $106 million of LHFS and $465 million of long-term debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 – Fair Value Measurements in 2015 (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
Balance January 1
2015
|
Total Realized/Unrealized Gains/(Losses) (2)
|
Gains/ (Losses) in OCI (3)
|
Gross |
Gross Transfers into
Level 3
|
Gross Transfers out of
Level 3
|
Balance December 31
2015
|
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
|
Purchases |
Sales |
Issuances |
Settlements |
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
$ |
3,270 |
|
$ |
(31 |
) |
$ |
(11 |
) |
$ |
1,540 |
|
$ |
(1,616 |
) |
$ |
— |
|
$ |
(1,122 |
) |
$ |
1,570 |
|
$ |
(762 |
) |
$ |
2,838 |
|
$ |
(123 |
) |
Equity securities |
352 |
|
9 |
|
— |
|
49 |
|
(11 |
) |
— |
|
(11 |
) |
41 |
|
(22 |
) |
407 |
|
3 |
|
Non-U.S. sovereign debt |
574 |
|
114 |
|
(179 |
) |
185 |
|
(1 |
) |
— |
|
(145 |
) |
— |
|
(27 |
) |
521 |
|
74 |
|
Mortgage trading loans, ABS and other MBS |
2,063 |
|
154 |
|
1 |
|
1,250 |
|
(1,117 |
) |
— |
|
(493 |
) |
50 |
|
(40 |
) |
1,868 |
|
(93 |
) |
Total trading account assets |
6,259 |
|
246 |
|
(189 |
) |
3,024 |
|
(2,745 |
) |
— |
|
(1,771 |
) |
1,661 |
|
(851 |
) |
5,634 |
|
(139 |
) |
Net derivative assets (4)
|
(920 |
) |
1,335 |
|
(7 |
) |
273 |
|
(863 |
) |
— |
|
(261 |
) |
(40 |
) |
42 |
|
(441 |
) |
605 |
|
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency residential MBS |
279 |
|
(12 |
) |
— |
|
134 |
|
— |
|
— |
|
(425 |
) |
167 |
|
(37 |
) |
106 |
|
— |
|
Non-U.S. securities |
10 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(10 |
) |
— |
|
— |
|
— |
|
— |
|
Other taxable securities |
1,667 |
|
— |
|
— |
|
189 |
|
— |
|
— |
|
(160 |
) |
— |
|
(939 |
) |
757 |
|
— |
|
Tax-exempt securities |
599 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(30 |
) |
— |
|
— |
|
569 |
|
— |
|
Total AFS debt securities |
2,555 |
|
(12 |
) |
— |
|
323 |
|
— |
|
— |
|
(625 |
) |
167 |
|
(976 |
) |
1,432 |
|
— |
|
Other debt securities carried at fair value – Non-agency residential MBS |
— |
|
(3 |
) |
— |
|
33 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
30 |
|
— |
|
Loans and leases (5, 6)
|
1,983 |
|
(23 |
) |
— |
|
— |
|
(4 |
) |
57 |
|
(237 |
) |
144 |
|
(300 |
) |
1,620 |
|
13 |
|
Mortgage servicing rights (6, 7)
|
3,530 |
|
187 |
|
— |
|
— |
|
(393 |
) |
637 |
|
(874 |
) |
— |
|
— |
|
3,087 |
|
(85 |
) |
Loans held-for-sale (5)
|
173 |
|
(51 |
) |
(8 |
) |
771 |
|
(203 |
) |
61 |
|
(61 |
) |
203 |
|
(98 |
) |
787 |
|
(39 |
) |
Other assets |
911 |
|
(55 |
) |
— |
|
11 |
|
(130 |
) |
— |
|
(51 |
) |
10 |
|
(322 |
) |
374 |
|
(61 |
) |
Federal funds purchased and securities loaned or sold under agreements to repurchase (5)
|
— |
|
(11 |
) |
— |
|
— |
|
— |
|
(131 |
) |
217 |
|
(411 |
) |
1 |
|
(335 |
) |
— |
|
Trading account liabilities – Corporate securities and other |
(36 |
) |
19 |
|
— |
|
30 |
|
(34 |
) |
— |
|
— |
|
— |
|
— |
|
(21 |
) |
(3 |
) |
Short-term borrowings (5)
|
— |
|
17 |
|
— |
|
— |
|
— |
|
(52 |
) |
10 |
|
(24 |
) |
19 |
|
(30 |
) |
1 |
|
Accrued expenses and other liabilities (5)
|
(10 |
) |
1 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(9 |
) |
1 |
|
Long-term debt (5)
|
(2,362 |
) |
287 |
|
19 |
|
616 |
|
— |
|
(188 |
) |
273 |
|
(1,592 |
) |
1,434 |
|
(1,513 |
) |
255 |
|
|
|
(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; Net derivative assets - primarily trading account profits and mortgage banking income; MSRs - primarily mortgage banking income; Long-term debt - primarily trading account profits. 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 unrealized gains/losses in OCI 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 more information, see Note 1 – Summary of Significant Accounting Principles.
|
|
|
(4) |
Net derivatives include derivative assets of $5.1 billion and derivative liabilities of $5.6 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 2015 included $1.7 billion of trading account assets, $167 million of AFS debt securities, $144 million of loans and leases, $203 million of LHFS, $411 million of federal funds purchased and securities loaned or sold under agreements to repurchase and $1.6 billion of long-term debt. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.
Significant transfers out of Level 3, primarily due to increased price observability, unless otherwise noted, during 2015 included $851 million of trading account assets, as a result of increased market liquidity, $976 million of AFS debt securities, $300 million of loans and leases, $322 million of other assets and $1.4 billion 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 December 31, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements at December 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 |
$ |
871 |
|
Discounted cash flow |
Yield |
0% to 25% |
|
6 |
% |
Trading account assets – Mortgage trading loans, ABS and other MBS |
298 |
|
Prepayment speed |
0% to 22% CPR |
|
12 |
% |
Loans and leases |
570 |
|
Default rate |
0% to 3% CDR |
|
1 |
% |
Loans held-for-sale |
3 |
|
Loss severity |
0% to 53% |
|
17 |
% |
Instruments backed by commercial real estate assets |
$ |
286 |
|
Discounted cash flow |
Yield |
0% to 25% |
|
9 |
% |
Trading account assets – Corporate securities, trading loans and other |
244 |
|
Price |
$0 to $100 |
|
$67 |
Trading account assets – Mortgage trading loans, ABS and other MBS |
42 |
|
|
|
|
Commercial loans, debt securities and other |
$ |
4,023 |
|
Discounted cash flow, Market comparables |
Yield |
0% to 12% |
|
5 |
% |
Trading account assets – Corporate securities, trading loans and other |
1,613 |
|
Prepayment speed |
10% to 20% |
|
16 |
% |
Trading account assets – Non-U.S. sovereign debt |
556 |
|
Default rate |
3% to 4% |
|
4 |
% |
Trading account assets – Mortgage trading loans, ABS and other MBS |
1,158 |
|
Loss severity |
35% to 40% |
|
37 |
% |
AFS debt securities – Other taxable securities |
8 |
|
Price |
$0 to $145 |
|
$63 |
Loans and leases
|
1 |
|
|
|
|
Loans held-for-sale
|
687 |
|
|
|
|
Auction rate securities |
$ |
977 |
|
Discounted cash flow, Market comparables |
Price |
$10 to $100 |
|
$94 |
Trading account assets – Corporate securities, trading loans and other |
7 |
|
|
|
|
AFS debt securities – Other taxable securities |
501 |
|
|
|
|
AFS debt securities – Tax-exempt securities |
469 |
|
|
|
|
MSRs |
$ |
2,302 |
|
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 |
$ |
(1,863 |
) |
Discounted cash flow, Market comparables, Industry standard derivative pricing (2)
|
Equity correlation |
15% to 100% |
|
63 |
% |
|
|
Long-dated equity volatilities |
4% to 84% |
|
22 |
% |
|
|
Yield |
7.5 |
% |
n/a |
|
|
|
Price |
$0 to $100 |
|
$66 |
Net derivative assets |
|
|
|
|
|
Credit derivatives |
$ |
(282 |
) |
Discounted cash flow, Stochastic recovery correlation model |
Yield |
1% to 5% |
|
3 |
% |
|
|
Upfront points |
0 points to 100 points |
|
71 points |
|
|
|
Credit correlation |
35% to 83% |
|
42 |
% |
|
|
Prepayment speed |
15% to 20% CPR |
|
16 |
% |
|
|
Default rate |
1% to 4% CDR |
|
2 |
% |
|
|
Loss severity |
35 |
% |
n/a |
|
|
|
Price |
$0 to $102 |
|
$82 |
Equity derivatives |
$ |
(2,059 |
) |
Industry standard derivative pricing (2)
|
Equity correlation |
15% to 100% |
|
63 |
% |
|
|
Long-dated equity volatilities |
4% to 84% |
|
22 |
% |
Commodity derivatives |
$ |
(3 |
) |
Discounted cash flow, Industry standard derivative pricing (2)
|
Natural gas forward price |
$1/MMBtu to $5/MMBtu |
|
$3/MMBtu |
|
|
|
Correlation |
71% to 87% |
|
81 |
% |
|
|
Volatilities |
26% to 132% |
|
57 |
% |
Interest rate derivatives |
$ |
630 |
|
Industry standard derivative pricing (3)
|
Correlation (IR/IR) |
15% to 92% |
|
50 |
% |
|
|
Correlation (FX/IR) |
0% to 46% |
|
1 |
% |
|
|
Long-dated inflation rates |
-14% to 38% |
|
4 |
% |
|
|
Long-dated inflation volatilities |
0% to 1% |
|
1 |
% |
Total net derivative assets |
$ |
(1,714 |
) |
|
|
|
|
|
|
(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 173: Trading account assets – Corporate securities, trading loans and other of $1.9 billion, Trading account assets – Non-U.S. sovereign debt of $556 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.5 billion, AFS debt securities – Other taxable securities of $509 million, AFS debt securities – Tax-exempt securities of $469 million, Loans and leases of $571 million and LHFS of $690 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 | |