Annual report pursuant to Section 13 and 15(d)

Fair Value Option

v3.20.4
Fair Value Option
12 Months Ended
Dec. 31, 2020
Fair Value Disclosures [Abstract]  
Fair Value Option Fair Value Option
Loans and Loan Commitments
The Corporation elects to account for certain loans and loan commitments that exceed the Corporation’s single-name credit risk concentration guidelines under the fair value option. Lending commitments are actively managed and, as appropriate, credit risk for these lending relationships may be mitigated through the use of credit derivatives, with the Corporation’s public side credit view and market perspectives determining the size and timing of the hedging activity. These credit derivatives do not meet the requirements for designation as accounting hedges and therefore are carried at fair value. The fair value option allows the Corporation to carry these loans and loan commitments at fair value, which is more consistent with management’s view of the underlying economics and the manner in which they are managed. In addition, the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at historical cost and the credit derivatives at fair value.
Loans Held-for-sale
The Corporation elects to account for residential mortgage LHFS, commercial mortgage LHFS and certain other LHFS under the fair value option. These loans are actively managed and monitored and, as appropriate, certain market risks of the loans may be mitigated through the use of derivatives. The Corporation has elected not to designate the derivatives as qualifying accounting hedges, and therefore, they are carried at fair value. The changes in fair value of the loans are largely
offset by changes in the fair value of the derivatives. The fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of cost or fair value and the derivatives at fair value. The Corporation has not elected to account for certain other LHFS under the fair value option primarily because these loans are floating-rate loans that are not hedged using derivative instruments.
Loans Reported as Trading Account Assets
The Corporation elects to account for certain loans that are held for the purpose of trading and are risk-managed on a fair value basis under the fair value option.
Other Assets
The Corporation elects to account for certain long-term fixed-rate margin loans that are hedged with derivatives under the fair value option. Election of the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at historical cost and the derivatives at fair value.
Securities Financing Agreements
The Corporation elects to account for certain securities financing agreements, including resale and repurchase agreements, under the fair value option. These elections include certain agreements collateralized by the U.S. government and its agencies, which are generally short-dated and have minimal interest rate risk.
Long-term Deposits
The Corporation elects to account for certain long-term fixed-rate and rate-linked deposits that are hedged with derivatives that do not qualify for hedge accounting. Election of the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at historical cost and the derivatives at fair value. The Corporation has not elected to carry other long-term deposits at fair value because they are not hedged using derivatives.
Short-term Borrowings
The Corporation elects to account for certain short-term borrowings, primarily short-term structured liabilities, under the fair value option because this debt is risk-managed on a fair value basis.
The Corporation elects to account for certain asset-backed secured financings, which are also classified in short-term borrowings, under the fair value option. Election of the fair value option allows the Corporation to reduce the accounting volatility
that would otherwise result from the asymmetry created by accounting for the asset-backed secured financings at historical cost and the corresponding mortgage LHFS securing these financings at fair value.
Long-term Debt
The Corporation elects to account for certain long-term debt, primarily structured liabilities, under the fair value option. This long-term debt is either risk-managed on a fair value basis or the related hedges do not qualify for hedge accounting.
Fair Value Option Elections
The following tables provide information about the fair value carrying amount and the contractual principal outstanding of assets and liabilities accounted for under the fair value option at December 31, 2020 and 2019, and information about where changes in the fair value of assets and liabilities accounted for under the fair value option are included in the Consolidated Statement of Income for 2020, 2019 and 2018.
Fair Value Option Elections
December 31, 2020 December 31, 2019
(Dollars in millions)
Fair Value Carrying Amount Contractual Principal Outstanding Fair Value Carrying Amount Less Unpaid Principal Fair Value
Carrying
Amount
Contractual Principal Outstanding Fair Value Carrying
Amount Less Unpaid Principal
Federal funds sold and securities borrowed or purchased under agreements to resell
$ 108,856  $ 108,811  $ 45  $ 50,364  $ 50,318  $ 46 
Loans reported as trading account assets (1)
7,967  17,372  (9,405) 6,989  14,703  (7,714)
Trading inventory – other 22,790  n/a n/a 19,574  n/a n/a
Consumer and commercial loans 6,681  6,778  (97) 8,335  8,372  (37)
Loans held-for-sale (1)
1,585  2,521  (936) 3,709  4,879  (1,170)
Other assets 200  n/a n/a n/a n/a
Long-term deposits 481  448  33  508  496  12 
Federal funds purchased and securities loaned or sold under agreements to repurchase
135,391  135,390  1  16,008  16,029  (21)
Short-term borrowings 5,874  5,178  696  3,941  3,930  11 
Unfunded loan commitments 99  n/a n/a 90  n/a n/a
Long-term debt 32,200  33,470  (1,270) 34,975  35,730  (755)
(1)A significant portion of the loans reported as trading account assets and LHFS are distressed loans that were purchased at a deep discount to par, and the remainder are loans with a fair value near contractual principal outstanding.
n/a = not applicable
Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option
Market making and similar activities Other
Income
Total
(Dollars in millions) 2020
Loans reported as trading account assets $ 107  $   $ 107 
Trading inventory – other (1)
3,216    3,216 
Consumer and commercial loans 22  (3) 19 
Loans held-for-sale (2)
  103  103 
Short-term borrowings (170)   (170)
Unfunded loan commitments   (65) (65)
Long-term debt (3)
(2,175) (53) (2,228)
Other (4)
35  (22) 13 
Total $ 1,035  $ (40) $ 995 
2019
Loans reported as trading account assets $ 203  $ —  $ 203 
Trading inventory – other (1)
5,795  —  5,795 
Consumer and commercial loans 92  12  104 
Loans held-for-sale (2)
—  98  98 
Short-term borrowings (24) —  (24)
Unfunded loan commitments —  79  79 
Long-term debt (3)
(1,098) (78) (1,176)
Other (4)
(27) (18)
Total $ 4,977  $ 84  $ 5,061 
2018
Loans reported as trading account assets $ $ —  $
Trading inventory – other (1)
1,750  —  1,750 
Consumer and commercial loans (422) (53) (475)
Loans held-for-sale (2)
24  25 
Short-term borrowings — 
Unfunded loan commitments —  (49) (49)
Long-term debt (3)
2,157  (93) 2,064 
Other (4)
18  24 
Total $ 3,502  $ (153) $ 3,349 
(1)    The gains in market making and similar activities are primarily offset by losses on trading liabilities that hedge these assets.
(2)    Includes the value of IRLCs on funded loans, including those sold during the period.
(3)    The net gains (losses) in market making and similar activities relate to the embedded derivatives in structured liabilities and are typically offset by (losses) gains on derivatives and securities that hedge these liabilities. For the cumulative impact of changes in the Corporation’s own credit spreads and the amount recognized in accumulated OCI, see Note 14 – Accumulated Other Comprehensive Income (Loss). For more information on how the Corporation’s own credit spread is determined, see Note 20 – Fair Value Measurements.
(4)    Includes gains (losses) on federal funds sold and securities borrowed or purchased under agreements to resell, long-term deposits and federal funds purchased and securities loaned or sold under agreements to repurchase.
Gains (Losses) Related to Borrower-specific Credit Risk for Assets and Liabilities Accounted for Under the Fair Value Option
(Dollars in millions) 2020 2019 2018
Loans reported as trading account assets $ (172) $ 43  $
Consumer and commercial loans (19) 15  (56)
Loans held-for-sale (105) 57  (4)
Unfunded loan commitments (65) 79  (94)