Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v2.4.1.9
Fair Value Measurements
12 Months Ended
Dec. 31, 2014
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
Under applicable accounting guidance, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value. The Corporation conducts a review of its fair value hierarchy classifications on a quarterly basis. Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable, respectively, in the current marketplace. These transfers are considered to be effective as of the beginning of the quarter in which they occur. For more information regarding the fair value hierarchy and how the Corporation measures fair value, see Note 1 – Summary of Significant Accounting Principles. The Corporation accounts for certain financial instruments under the fair value option. For additional information, see Note 21 – Fair Value Option.
Valuation Processes and Techniques
The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of models by personnel who are independent of the front office, and periodic reassessments of models to ensure that they are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are conducted on a daily basis by personnel who are independent of the front office. A price verification group, which is also independent of the front office, utilizes available market information including executed trades, market prices and market-observable valuation model inputs to ensure that fair values are reasonably estimated. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are escalated through a management review process.
While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
During 2014, except for the adoption of FVA, there were no changes to the valuation techniques that had, or are expected to have, a material impact on the Corporation’s consolidated financial position or results of operations.
Level 1, 2 and 3 Valuation Techniques
Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
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, or 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 determined using models that rely on estimates of prepayment rates, the resultant weighted-average lives of the MSRs and the option-adjusted spread levels. For more information on MSRs, see Note 23 – Mortgage Servicing Rights.
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.
Private Equity Investments
Private equity investments consist of direct investments and fund investments which are initially valued at their transaction price. Thereafter, the fair value of direct investments is based on an assessment of each individual investment using methodologies that include publicly-traded comparables derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, entry level multiples and discounted cash flow analyses, and are subject to appropriate discounts for lack of liquidity or marketability. After initial recognition, the fair value of fund investments is based on the Corporation’s proportionate interest in the fund’s capital as reported by the respective fund managers.
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 spreads 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 spreads 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, 2014 and 2013, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
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
$

 
$
62,182

 
$

 
$

 
$
62,182

Trading account assets:
 

 
 

 
 

 
 

 
 

U.S. government and agency securities (2)
33,470

 
17,549

 

 

 
51,019

Corporate securities, trading loans and other
243

 
31,699

 
3,270

 

 
35,212

Equity securities
33,518

 
22,488

 
352

 

 
56,358

Non-U.S. sovereign debt
20,348

 
15,332

 
574

 

 
36,254

Mortgage trading loans and ABS

 
10,879

 
2,063

 

 
12,942

Total trading account assets
87,579

 
97,947

 
6,259

 

 
191,785

Derivative assets (3)
4,957

 
972,977

 
6,851

 
(932,103
)
 
52,682

AFS debt securities:
 

 
 

 
 

 
 

 
 

U.S. Treasury and agency securities
67,413

 
2,182

 

 

 
69,595

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

Agency

 
165,039

 

 

 
165,039

Agency-collateralized mortgage obligations

 
14,248

 

 

 
14,248

Non-agency residential

 
4,175

 
279

 

 
4,454

Commercial

 
4,000

 

 

 
4,000

Non-U.S. securities
3,191

 
3,029

 
10

 

 
6,230

Corporate/Agency bonds

 
368

 

 

 
368

Other taxable securities
20

 
9,104

 
1,667

 

 
10,791

Tax-exempt securities

 
8,950

 
599

 

 
9,549

Total AFS debt securities
70,624

 
211,095

 
2,555

 

 
284,274

Other debt securities carried at fair value:
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
1,541

 

 

 

 
1,541

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
15,704

 

 

 
15,704

Non-agency residential

 
3,745

 

 

 
3,745

Non-U.S. securities
13,270

 
1,862

 

 

 
15,132

Other taxable securities

 
299

 

 

 
299

Total other debt securities carried at fair value
14,811

 
21,610

 

 

 
36,421

Loans and leases

 
6,698

 
1,983

 

 
8,681

Mortgage servicing rights

 

 
3,530

 

 
3,530

Loans held-for-sale

 
6,628

 
173

 

 
6,801

Other assets
11,581

 
1,381

 
911

 

 
13,873

Total assets (4)
$
189,552

 
$
1,380,518

 
$
22,262

 
$
(932,103
)
 
$
660,229

Liabilities
 

 
 

 
 

 
 

 
 

Interest-bearing deposits in U.S. offices
$

 
$
1,469

 
$

 
$

 
$
1,469

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

 
35,357

 

 

 
35,357

Trading account liabilities:
 

 
 

 
 

 
 

 
 
U.S. government and agency securities
18,514

 
446

 

 

 
18,960

Equity securities
24,679

 
3,670

 

 

 
28,349

Non-U.S. sovereign debt
16,089

 
3,625

 

 

 
19,714

Corporate securities and other
189

 
6,944

 
36

 

 
7,169

Total trading account liabilities
59,471

 
14,685

 
36

 

 
74,192

Derivative liabilities (3)
4,493

 
969,502

 
7,771

 
(934,857
)
 
46,909

Short-term borrowings

 
2,697

 

 

 
2,697

Accrued expenses and other liabilities
10,795

 
1,250

 
10

 

 
12,055

Long-term debt

 
34,042

 
2,362

 

 
36,404

Total liabilities (4)
$
74,759

 
$
1,059,002

 
$
10,179

 
$
(934,857
)
 
$
209,083

(1) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(2) 
Includes $17.2 billion of government-sponsored enterprise obligations.
(3) 
For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.
(4) 
During 2014, the Corporation reclassified certain assets and liabilities within its fair value hierarchy based on a review of its inputs used to measure fair value. Accordingly, approximately $4.1 billion of assets related to U.S. government and agency securities, non-U.S. government securities and equity derivatives, and $570 million of liabilities related to equity derivatives were transferred from Level 1 to Level 2.
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
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
$

 
$
68,656

 
$

 
$

 
$
68,656

Trading account assets:
 

 
 

 
 

 
 

 
 

U.S. government and agency securities (2)
34,222

 
14,625

 

 

 
48,847

Corporate securities, trading loans and other
1,147

 
27,746

 
3,559

 

 
32,452

Equity securities
41,324

 
22,741

 
386

 

 
64,451

Non-U.S. sovereign debt
24,357

 
12,399

 
468

 

 
37,224

Mortgage trading loans and ABS

 
13,388

 
4,631

 

 
18,019

Total trading account assets
101,050

 
90,899

 
9,044

 

 
200,993

Derivative assets (3)
2,374

 
910,602

 
7,277

 
(872,758
)
 
47,495

AFS debt securities:
 

 
 

 
 

 
 

 
 

U.S. Treasury and agency securities
6,591

 
2,363

 

 

 
8,954

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

Agency

 
164,935

 

 

 
164,935

Agency-collateralized mortgage obligations

 
22,492

 

 

 
22,492

Non-agency residential

 
6,239

 

 

 
6,239

Commercial

 
2,480

 

 

 
2,480

Non-U.S. securities
3,698

 
3,415

 
107

 

 
7,220

Corporate/Agency bonds

 
873

 

 

 
873

Other taxable securities
20

 
12,963

 
3,847

 

 
16,830

Tax-exempt securities

 
5,122

 
806

 

 
5,928

Total AFS debt securities
10,309

 
220,882

 
4,760

 

 
235,951

Other debt securities carried at fair value:
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
4,062

 

 

 

 
4,062

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
16,500

 

 

 
16,500

Agency-collateralized mortgage obligations

 
218

 

 

 
218

Commercial

 
749

 

 

 
749

Non-U.S. securities
7,457

 
3,858

 

 

 
11,315

Total other debt securities carried at fair value
11,519

 
21,325

 

 

 
32,844

Loans and leases

 
6,985

 
3,057

 

 
10,042

Mortgage servicing rights

 

 
5,042

 

 
5,042

Loans held-for-sale

 
5,727

 
929

 

 
6,656

Other assets
14,474

 
1,912

 
1,669

 

 
18,055

Total assets (4)
$
139,726

 
$
1,326,988

 
$
31,778

 
$
(872,758
)
 
$
625,734

Liabilities
 

 
 

 
 

 
 

 
 

Interest-bearing deposits in U.S. offices
$

 
$
1,899

 
$

 
$

 
$
1,899

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

 
26,500

 

 

 
26,500

Trading account liabilities:
 

 
 

 
 

 
 

 
 
U.S. government and agency securities
26,915

 
348

 

 

 
27,263

Equity securities
23,874

 
3,711

 

 

 
27,585

Non-U.S. sovereign debt
20,755

 
1,387

 

 

 
22,142

Corporate securities and other
518

 
5,926

 
35

 

 
6,479

Total trading account liabilities
72,062

 
11,372

 
35

 

 
83,469

Derivative liabilities (3)
1,968

 
896,907

 
7,501

 
(868,969
)
 
37,407

Short-term borrowings

 
1,520

 

 

 
1,520

Accrued expenses and other liabilities
10,130

 
1,093

 
10

 

 
11,233

Long-term debt

 
45,045

 
1,990

 

 
47,035

Total liabilities (4)
$
84,160

 
$
984,336

 
$
9,536

 
$
(868,969
)
 
$
209,063


(1) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(2) 
Includes $15.6 billion of government-sponsored enterprise obligations.
(3) 
For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.
(4) 
During 2013, $500 million of other assets were transferred from Level 1 to Level 2 primarily due to a restriction that became effective for a private equity investment that was subsequently sold once the restriction was lifted.
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 2014, 2013 and 2012, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.
 
 
 
 
 
 
 
 
 
 
 
Level 3 – Fair Value Measurements (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
January 1
2014
Gains
(Losses)
in Earnings
Gains
(Losses)
in OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3 
Gross
Transfers
out of
Level 3 
Balance
December 31
2014
Trading account assets:
 

 

 

 

 
 
 
 

 

 

U.S. government and agency securities
$

$

$

$
87

$
(87
)
$

$

$

$

$

Corporate securities, trading loans and other
3,559

180


1,675

(857
)

(938
)
1,275

(1,624
)
3,270

Equity securities
386



104

(86
)

(16
)
146

(182
)
352

Non-U.S. sovereign debt
468

30


120

(34
)

(19
)
11

(2
)
574

Mortgage trading loans and ABS
4,631

199


1,643

(1,259
)

(585
)
39

(2,605
)
2,063

Total trading account assets
9,044

409


3,629

(2,323
)

(1,558
)
1,471

(4,413
)
6,259

Net derivative assets (2)
(224
)
463


823

(1,738
)

(432
)
28

160

(920
)
AFS debt securities:
 

 

 

 

 

 

 

 

 

 

Non-agency residential MBS

(2
)

11




270


279

Non-U.S. securities
107

(7
)
(11
)
241



(147
)

(173
)
10

Corporate/Agency bonds







93

(93
)

Other taxable securities
3,847

9

(8
)
154



(1,381
)

(954
)
1,667

Tax-exempt securities
806

8



(16
)

(235
)
36


599

Total AFS debt securities
4,760

8

(19
)
406

(16
)

(1,763
)
399

(1,220
)
2,555

Loans and leases (3, 4)
3,057

69



(3
)
699

(1,591
)
25

(273
)
1,983

Mortgage servicing rights (4)
5,042

(1,231
)


(61
)
707

(927
)


3,530

Loans held-for-sale (3)
929

45


59

(725
)
23

(216
)
83

(25
)
173

Other assets (5)
1,669

(98
)


(430
)

(245
)
39

(24
)
911

Trading account liabilities – Corporate securities and other
(35
)
1


10

(13
)


(9
)
10

(36
)
Accrued expenses and other liabilities (3)
(10
)
2




(3
)


1

(10
)
Long-term debt (3)
(1,990
)
49


169


(615
)
540

(1,581
)
1,066

(2,362
)
(1) 
Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2) 
Net derivatives include derivative assets of $6.9 billion and derivative liabilities of $7.8 billion.
(3) 
Amounts represent instruments that are accounted for under the fair value option.
(4) 
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.
(5) 
Other assets is primarily comprised of private equity investments and certain long-term fixed-rate margin loans that are accounted for under the fair value option.
During 2014, the transfers into Level 3 included $1.5 billion of trading account assets, $399 million of AFS debt securities and $1.6 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased availability of third-party prices for certain corporate loans and securities. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability related to municipal auction rate securities (ARS). Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. 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.
During 2014, the transfers out of Level 3 included $4.4 billion of trading account assets, $160 million of net derivative assets, $1.2 billion of AFS debt securities, $273 million of loans and leases and $1.1 billion of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and price observability on certain CLOs. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability for certain equity derivatives. Transfers out of Level 3 for AFS debt securities were primarily due to increased price observability on certain CLOs. Transfers out of Level 3 for loans and leases were primarily due to increased price observability. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.
 
 
 
 
 
 
 
 
 
 
 
Level 3 – Fair Value Measurements (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
January 1
2013
Gains
(Losses)
in Earnings
Gains
(Losses)
in OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3 
Gross
Transfers
out of
Level 3 
Balance
December 31
2013
Trading account assets:
 

 

 

 
 
 
 

 
 

 

Corporate securities, trading loans and other
$
3,726

$
242

$

$
3,848

$
(3,110
)
$
59

$
(651
)
$
890

$
(1,445
)
$
3,559

Equity securities
545

74


96

(175
)

(100
)
70

(124
)
386

Non-U.S. sovereign debt
353

50


122

(18
)

(36
)
2

(5
)
468

Mortgage trading loans and ABS
4,935

53


2,514

(1,993
)

(868
)
20

(30
)
4,631

Total trading account assets
9,559

419


6,580

(5,296
)
59

(1,655
)
982

(1,604
)
9,044

Net derivative assets (2)
1,468

(304
)

824

(1,467
)

(1,362
)
(10
)
627

(224
)
AFS debt securities:
 

 

 

 
 
 
 

 

 

 

Commercial MBS
10






(10
)



Non-U.S. securities

5

2

1

(1
)


100


107

Corporate/Agency bonds
92


4






(96
)

Other taxable securities
3,928

9

15

1,055



(1,155
)

(5
)
3,847

Tax-exempt securities
1,061

3

19




(109
)

(168
)
806

Total AFS debt securities
5,091

17

40

1,056

(1
)

(1,274
)
100

(269
)
4,760

Loans and leases (3, 4)
2,287

98


310

(128
)
1,252

(757
)
19

(24
)
3,057

Mortgage servicing rights (4)
5,716

1,941



(2,044
)
472

(1,043
)


5,042

Loans held-for-sale (3)
2,733

62


8

(402
)
4

(1,507
)
34

(3
)
929

Other assets (5)
3,129

(288
)

46

(383
)

(1,019
)
239

(55
)
1,669

Trading account liabilities – Corporate securities and other
(64
)
10


43

(54
)
(5
)

(9
)
44

(35
)
Accrued expenses and other liabilities (3)
(15
)
30




(751
)
724

(1
)
3

(10
)
Long-term debt (3)
(2,301
)
13


358

(4
)
(172
)
258

(1,331
)
1,189

(1,990
)
(1) 
Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2) 
Net derivatives include derivative assets of $7.3 billion and derivative liabilities of $7.5 billion.
(3) 
Amounts represent instruments that are accounted for under the fair value option.
(4) 
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.
(5) 
Other assets is primarily comprised of private equity investments and certain long-term fixed-rate margin loans that are accounted for under the fair value option.
During 2013, the transfers into Level 3 included $982 million of trading account assets, $100 million of AFS debt securities, $239 million of other assets and $1.3 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased third-party prices available for certain corporate loans and securities. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability. Transfers into Level 3 for other assets were primarily due to a lack of independent pricing data for certain receivables. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. 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.
During 2013, the transfers out of Level 3 included $1.6 billion of trading account assets, $627 million of net derivative assets, $269 million of AFS debt securities and $1.2 billion of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and third-party prices available for certain corporate loans and securities. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability (i.e., market comparables for the referenced instruments) for certain options. Transfers out of Level 3 for AFS debt securities were primarily due to increased market liquidity. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.
 
 
 
 
 
 
 
 
 
 
 
Level 3 – Fair Value Measurements (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
January 1
2012
Gains
(Losses)
in Earnings
Gains
(Losses)
in OCI
Purchases
Sales
Issuances
Settlements
Gross Transfers
into
Level 3
Gross Transfers
out of
Level 3 
Balance
December 31
2012
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other (2)
$
6,880

$
195

$

$
2,798

$
(4,556
)
$

$
(1,077
)
$
436

$
(950
)
$
3,726

Equity securities
544

31


201

(271
)

27

90

(77
)
545

Non-U.S. sovereign debt
342

8


388

(359
)

(5
)

(21
)
353

Mortgage trading loans and ABS (2)
3,689

215


2,574

(1,536
)

(678
)
844

(173
)
4,935

Total trading account assets
11,455

449


5,961

(6,722
)

(1,733
)
1,370

(1,221
)
9,559

Net derivative assets (3)
5,866

(221
)

893

(1,012
)

(3,328
)
(269
)
(461
)
1,468

AFS debt securities:
 

 

 

 

 
 
 
 
 
 

Mortgage-backed securities:
 

 

 

 

 
 
 
 
 

 

Agency
37






(4
)

(33
)

Non-agency residential
860

(69
)
19


(306
)

(2
)

(502
)

Non-agency commercial
40




(24
)

(6
)


10

Corporate/Agency bonds
162

(2
)

(2
)


(39
)

(27
)
92

Other taxable securities
4,265

23

26

3,196

(28
)

(3,345
)

(209
)
3,928

Tax-exempt securities
2,648

61

20


(133
)

(1,535
)


1,061

Total AFS debt securities
8,012

13

65

3,194

(491
)

(4,931
)

(771
)
5,091

Loans and leases (4, 5)
2,744

334


564

(1,520
)

(274
)
450

(11
)
2,287

Mortgage servicing rights (5)
7,378

(430
)


(122
)
374

(1,484
)


5,716

Loans held-for-sale (4)
3,387

352


794

(834
)

(414
)
80

(632
)
2,733

Other assets (6)
4,235

(54
)

109

(1,039
)
270

(381
)

(11
)
3,129

Trading account liabilities – Corporate securities and other
(114
)
4


116

(136
)

80

(68
)
54

(64
)
Short-term borrowings (4)





(232
)
232




Accrued expenses and other liabilities (4)
(14
)
(4
)

8


(9
)


4

(15
)
Long-term debt (4)
(2,943
)
(307
)

290

(33
)
(259
)
1,239

(2,040
)
1,752

(2,301
)
(1) 
Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2) 
During 2012, approximately $900 million was reclassified from Trading account assets – Corporate securities, trading loans and other to Trading account assets – Mortgage trading loans and ABS. In the table above, this reclassification is presented as a sale of Trading account assets – Corporate securities, trading loans and other and as a purchase of Trading account assets – Mortgage trading loans and ABS.
(3) 
Net derivatives include derivative assets of $8.1 billion and derivative liabilities of $6.6 billion.
(4) 
Amounts represent instruments that are accounted for under the fair value option.
(5) 
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.
(6) 
Other assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.
During 2012, the transfers into Level 3 included $1.4 billion of trading account assets, $269 million of net derivative assets, $450 million of loans and leases and $2.0 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased market liquidity for certain corporate loans and updated information related to certain CLOs. Transfers into Level 3 for net derivative assets were primarily related to decreased price observability for certain long-dated equity derivative liabilities due to a lack of independent pricing. Transfers into Level 3 for loans and leases were due to updated information related to certain commercial loans. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. 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.
During 2012, the transfers out of Level 3 included $1.2 billion of trading account assets, $461 million of net derivative assets, $771 million of AFS debt securities, $632 million of LHFS and $1.8 billion of long-term debt. Transfers out of Level 3 for trading account assets were primarily related to increased market liquidity for certain corporate and commercial real estate loans. Transfers out of Level 3 for net derivative assets were primarily related to increased price observability (i.e., market comparables for the referenced instruments) for certain total return swaps and foreign exchange swaps. Transfers out of Level 3 for AFS debt securities were primarily related to increased price observability for certain non-agency RMBS and ABS. Transfers out of Level 3 for LHFS were primarily related to increased observable inputs, primarily liquid comparables. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.
The following tables summarize gains (losses) due to changes in fair value, including both realized and unrealized gains (losses), recorded in earnings for Level 3 assets and liabilities during 2014, 2013 and 2012. These amounts include gains (losses) on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.
 
 
 
 
 
 
 
 
Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings
 
 
 
 
 
 
 
 
 
2014
(Dollars in millions)
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other (2)
 
Total
Trading account assets:
 

 
 

 
 

 
 

Corporate securities, trading loans and other
$
180

 
$

 
$

 
$
180

Non-U.S. sovereign debt
30

 

 

 
30

Mortgage trading loans and ABS
199

 

 

 
199

Total trading account assets
409

 

 

 
409

Net derivative assets
(475
)
 
834

 
104

 
463

AFS debt securities:
 

 
 

 
 

 
 

Non-agency residential MBS

 

 
(2
)
 
(2
)
Non-U.S. securities

 

 
(7
)
 
(7
)
Other taxable securities

 

 
9

 
9

Tax-exempt securities

 

 
8

 
8

Total AFS debt securities

 

 
8

 
8

Loans and leases (3)

 

 
69

 
69

Mortgage servicing rights
(6
)
 
(1,225
)
 

 
(1,231
)
Loans held-for-sale (3)
(14
)
 

 
59

 
45

Other assets

 
(79
)
 
(19
)
 
(98
)
Trading account liabilities – Corporate securities and other
1

 

 

 
1

Accrued expenses and other liabilities (3)

 

 
2

 
2

Long-term debt (3)
78

 

 
(29
)
 
49

Total
$
(7
)
 
$
(470
)
 
$
194

 
$
(283
)
 
 
 
 
 
 
 
 
 
2013
Trading account assets:
 

 
 

 
 

 
 

Corporate securities, trading loans and other
$
242

 
$

 
$

 
$
242

Equity securities
74

 

 

 
74

Non-U.S. sovereign debt
50

 

 

 
50

Mortgage trading loans and ABS
53

 

 

 
53

Total trading account assets
419

 

 

 
419

Net derivative assets
(1,224
)
 
927

 
(7
)
 
(304
)
AFS debt securities:
 

 
 

 
 

 
 

Non-U.S. securities

 

 
5

 
5

Other taxable securities

 

 
9

 
9

Tax-exempt securities

 

 
3

 
3

Total AFS debt securities

 

 
17

 
17

Loans and leases (3)

 
(38
)
 
136

 
98

Mortgage servicing rights

 
1,941

 

 
1,941

Loans held-for-sale (3)

 
2

 
60

 
62

Other assets

 
122

 
(410
)
 
(288
)
Trading account liabilities – Corporate securities and other
10

 

 

 
10

Accrued expenses and other liabilities (3)

 
30

 

 
30

Long-term debt (3)
45

 

 
(32
)
 
13

Total
$
(750
)
 
$
2,984

 
$
(236
)
 
$
1,998

(1) 
Mortgage banking income (loss) does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts included are primarily recorded in other income (loss). Equity investment gains of $86 million and $77 million recorded on net derivative assets and other assets were also included for 2014 and 2013.
(3) 
Amounts represent instruments that are accounted for under the fair value option.
 
 
 
 
 
 
 
 
Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings (continued)
 
 
 
 
 
 
 
 
 
2012
(Dollars in millions)
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other (2)
 
Total
Trading account assets:
 

 
 

 
 

 
 

Corporate securities, trading loans and other
$
195

 
$

 
$

 
$
195

Equity securities
31

 

 

 
31

Non-U.S. sovereign debt
8

 

 

 
8

Mortgage trading loans and ABS
215

 

 

 
215

Total trading account assets
449

 

 

 
449

Net derivative assets
(3,208
)
 
2,987

 

 
(221
)
AFS debt securities:
 

 
 

 
 

 
 

Non-agency residential MBS

 

 
(69
)
 
(69
)
Corporate/Agency bonds

 

 
(2
)
 
(2
)
Other taxable securities
2

 

 
21

 
23

Tax-exempt securities

 

 
61

 
61

Total AFS debt securities
2

 

 
11

 
13

Loans and leases (3)

 

 
334

 
334

Mortgage servicing rights

 
(430
)
 

 
(430
)
Loans held-for-sale (3)

 
148

 
204

 
352

Other assets

 
(74
)
 
20

 
(54
)
Trading account liabilities – Corporate securities and other
4

 

 

 
4

Accrued expenses and other liabilities (3)

 

 
(4
)
 
(4
)
Long-term debt (3)
(133
)
 

 
(174
)
 
(307
)
Total
$
(2,886
)
 
$
2,631

 
$
391

 
$
136

(1) 
Mortgage banking income (loss) does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts included are primarily recorded in other income (loss). Equity investment gains of $97 million recorded on other assets were also included for 2012.
(3) 
Amounts represent instruments that are accounted for under the fair value option.
The table below summarizes changes in unrealized gains (losses) recorded in earnings during 2014, 2013 and 2012 for Level 3 assets and liabilities that were still held at December 31, 2014, 2013 and 2012. These amounts include changes in fair value on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.
 
 
 
 
 
 
 
 
Level 3 – Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date
 
 
 
 
 
 
 
 
 
2014
(Dollars in millions)
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other (2)
 
Total
Trading account assets:
 

 
 

 
 

 
 

Corporate securities, trading loans and other
$
69

 
$

 
$

 
$
69

Equity securities
(8
)
 

 

 
(8
)
Non-U.S. sovereign debt
31

 

 

 
31

Mortgage trading loans and ABS
79

 

 

 
79

Total trading account assets
171

 

 

 
171

Net derivative assets
(276
)
 
85

 
104

 
(87
)
Loans and leases (3)

 

 
76

 
76

Mortgage servicing rights
(6
)
 
(1,747
)
 

 
(1,753
)
Loans held-for-sale (3)
(14
)
 

 
10

 
(4
)
Other assets

 
(50
)
 
102

 
52

Trading account liabilities – Corporate securities and other
1

 

 

 
1

Accrued expenses and other liabilities (3)

 

 
1

 
1

Long-term debt (3)
29

 

 
(37
)
 
(8
)
Total
$
(95
)
 
$
(1,712
)
 
$
256

 
$
(1,551
)
 
 
 
 
 
 
 
 
 
2013
Trading account assets:
 

 
 

 
 

 
 

Corporate securities, trading loans and other
$
(130
)
 
$

 
$

 
$
(130
)
Equity securities
40

 

 

 
40

Non-U.S. sovereign debt
80

 

 

 
80

Mortgage trading loans and ABS
(174
)
 

 

 
(174
)
Total trading account assets
(184
)
 

 

 
(184
)
Net derivative assets
(1,375
)
 
42

 
(7
)
 
(1,340
)
Loans and leases (3)

 
(34
)
 
152

 
118

Mortgage servicing rights

 
1,541

 

 
1,541

Loans held-for-sale (3)

 
6

 
57

 
63

Other assets

 
166

 
14

 
180

Long-term debt (3)
(4
)
 

 
(32
)
 
(36
)
Total
$
(1,563
)
 
$
1,721

 
$
184

 
$
342

 
 
 
 
 
 
 
 
 
2012
Trading account assets:
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
(19
)
 
$

 
$

 
$
(19
)
Equity securities
17

 

 

 
17

Non-U.S. sovereign debt
20

 

 

 
20

Mortgage trading loans and ABS
36

 

 

 
36

Total trading account assets
54

 

 

 
54

Net derivative assets
(2,782
)
 
456

 

 
(2,326
)
AFS debt securities – Other taxable securities
2

 

 

 
2

Loans and leases (3)

 

 
214

 
214

Mortgage servicing rights

 
(1,100
)
 

 
(1,100
)
Loans held-for-sale (3)

 
112

 
168

 
280

Other assets

 
(71
)
 
50

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

 

 

 
4

Accrued expenses and other liabilities (3)

 

 
(2
)
 
(2
)
Long-term debt (3)
(136
)
 

 
(173
)
 
(309
)
Total
$
(2,858
)
 
$
(603
)
 
$
257

 
$
(3,204
)
(1) 
Mortgage banking income (loss) does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts included are primarily recorded in other income (loss). Equity investment gains of $170 million and $53 million recorded on net derivative assets and other assets were included for 2014 and 2013, and gains of $141 million recorded on other assets were included for 2012.
(3) 
Amounts represent instruments that are accounted for under the fair value option.
The following tables present information about significant unobservable inputs related to the Corporation’s material categories of Level 3 financial assets and liabilities at December 31, 2014 and 2013.
 
 
 
 
 
 
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2014
 
 
 
 
 
 
(Dollars in millions)
 
 
Inputs
Financial Instrument
Fair
Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted Average
Loans and Securities (1)
 
 
 
 
 
Instruments backed by residential real estate assets
$
2,030

Discounted cash flow, Market comparables
Yield
0% to 25%

6
 %
Trading account assets – Mortgage trading loans and ABS
483

Prepayment speed
0% to 35% CPR

14
 %
Loans and leases
1,374

Default rate
2% to 15% CDR

7
 %
Loans held-for-sale
173

Loss severity
26% to 100%

34
 %
Commercial loans, debt securities and other
$
7,203

Discounted cash flow, Market comparables
Yield
0% to 40%

9
 %
Trading account assets – Corporate securities, trading loans and other
3,224

Enterprise value/EBITDA multiple
0x to 30x

6x

Trading account assets – Non-U.S. sovereign debt
574

Prepayment speed
1% to 30%

12
 %
Trading account assets – Mortgage trading loans and ABS
1,580

Default rate
1% to 5%

4
 %
AFS debt securities – Other taxable securities
1,216

Loss severity
25% to 40%

38
 %
Loans and leases
609

Duration
0 years to 5 years

3 years

 
 
Price
$0 to $107

$76
Auction rate securities
$
1,096

Discounted cash flow, Market comparables
Price
$60 to $100

$95
Trading account assets – Corporate securities, trading loans and other
46

 
 
 
AFS debt securities – Other taxable securities
451

 
 
 
AFS debt securities – Tax-exempt securities
599

 
 
 
Structured liabilities
 
 
 
 
 
Long-term debt
$
(2,362
)
Industry standard derivative pricing (2, 3)
Equity correlation
20% to 98%

65
 %
 
 
Long-dated equity volatilities
6% to 69%

24
 %
 
 
Long-dated volatilities (IR)
0% to 2%

1
 %
Net derivative assets
 
 
 
 
 
Credit derivatives
$
22

Discounted cash flow, Stochastic recovery correlation model
Yield
0% to 25%

14
 %
 
 
Upfront points
0 points to 100 points

65 points

 
 
Spread to index
25 bps to 450 bps

119 bps

 
 
Credit correlation
24% to 99%

51
 %
 
 
Prepayment speed
3% to 20% CPR

11
 %
 
 
Default rate
4% CDR

n/a

 
 
Loss severity
35
%
n/a

Equity derivatives
$
(1,560
)
Industry standard derivative pricing (2)
Equity correlation
20% to 98%

65
 %
 
 
Long-dated equity volatilities
6% to 69%

24
 %
Commodity derivatives
$
141

Discounted cash flow, Industry standard derivative pricing (2)
Natural gas forward price
$2/MMBtu to $7/MMBtu

$5/MMBtu

 
 
Correlation
82% to 93%

90
 %
 
 
Volatilities
16% to 98%

35
 %
Interest rate derivatives
$
477

Industry standard derivative pricing (3)
Correlation (IR/IR)
11% to 99%

55
 %
 
 
Correlation (FX/IR)
-48% to 40%

-5
 %
 
 
Long-dated inflation rates
0% to 3%

1
 %
 
 
Long-dated inflation volatilities
0% to 2%

1
 %
Total net derivative assets
$
(920
)
 
 
 
 
(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 245: Trading account assets – Corporate securities, trading loans and other of $3.3 billion, Trading account assets – Non-U.S. sovereign debt of $574 million, Trading account assets – Mortgage trading loans and ABS of $2.1 billion, AFS debt securities – Other taxable securities of $1.7 billion, AFS debt securities – Tax-exempt securities of $599 million, Loans and leases of $2.0 billion and LHFS of $173 million.
(2) 
Includes models such as Monte Carlo simulation and Black-Scholes.
(3) 
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
EBITDA = Earnings before interest, taxes, depreciation and amortization
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, 2013
 
 
 
 
 
(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
$
3,443

Discounted cash flow, Market comparables
Yield
2% to 25%
6
 %
Trading account assets – Mortgage trading loans and ABS
363

Prepayment speed
0% to 35% CPR
9
 %
Loans and leases
2,151

Default rate
1% to 20% CDR
6
 %
Loans held-for-sale
929

Loss severity
21% to 80%
35
 %
Commercial loans, debt securities and other
$
12,135

Discounted cash flow, Market comparables
Yield
0% to 45%
5
 %
Trading account assets – Corporate securities, trading loans and other
3,462

Enterprise value/EBITDA multiple
0x to 24x
7x

Trading account assets – Non-U.S. sovereign debt
468

Prepayment speed
5% to 40%
19
 %
Trading account assets – Mortgage trading loans and ABS
4,268

Default rate
1% to 5%
4
 %
AFS debt securities – Other taxable securities
3,031

Loss severity
25% to 42%
36
 %
Loans and leases
906

Duration
1 year to 5 years
4 years

Auction rate securities
$
1,719

Discounted cash flow, Market comparables
Projected tender price/Refinancing level
60% to 100%
96
 %
Trading account assets – Corporate securities, trading loans and other
97

 
 
AFS debt securities – Other taxable securities
816

 
 
 
AFS debt securities – Tax-exempt securities
806

 
 
 
Structured liabilities
 
 
 
 
 
Long-term debt
$
(1,990
)
Industry standard derivative pricing (2, 3)
Equity correlation
18% to 98%
70
 %
 
 
Long-dated equity volatilities
4% to 63%
27
 %
 
 
Long-dated volatilities (IR)
0% to 2%
1
 %
Net derivative assets
 
 
 
 
 
Credit derivatives
$
808

Discounted cash flow, Stochastic recovery correlation model
Yield
3% to 25%
14
 %
 
 
Upfront points
0 points to 100 points
63 points

 
 
Spread to index
-1,407 bps to 1,741 bps
91 bps

 
 
Credit correlation
14% to 99%
47
 %
 
 
Prepayment speed
3% to 40% CPR
13
 %
 
 
Default rate
1% to 5% CDR
3
 %
 
 
Loss severity
20% to 42%
35
 %
Equity derivatives
$
(1,596
)
Industry standard derivative pricing (2)
Equity correlation
18% to 98%
70
 %
 
 
Long-dated equity volatilities
4% to 63%
27
 %
Commodity derivatives
$
6

Discounted cash flow, Industry standard derivative pricing (2)
Natural gas forward price
$3/MMBtu to $11/MMBtu
$6/MMBtu

 
 
Correlation
47% to 89%
81
 %
 
 
Volatilities
9% to 109%
30
 %
Interest rate derivatives
$
558

Industry standard derivative pricing (3)
Correlation (IR/IR)
24% to 99%
60
 %
 
 
Correlation (FX/IR)
-30% to 40%
-4
 %
 
 
Long-dated inflation rates
0% to 3%
2
 %
 
 
Long-dated inflation volatilities
0% to 2%
1
 %
Total net derivative assets
$
(224
)
 
 
 
 

(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 246: Trading account assets – Corporate securities, trading loans and other of $3.6 billion, Trading account assets – Non-U.S. sovereign debt of $468 million, Trading account assets – Mortgage trading loans and ABS of $4.6 billion, AFS debt securities – Other taxable securities of $3.8 billion, AFS debt securities – Tax-exempt securities of $806 million, Loans and leases of $3.1 billion and LHFS of $929 million.
(2) 
Includes models such as Monte Carlo simulation and Black-Scholes.
(3) 
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
EBITDA = Earnings before interest, taxes, depreciation and amortization
MMBtu = Million British thermal units
IR = Interest Rate
FX = Foreign Exchange
In the tables above, instruments backed by residential real estate assets include RMBS, 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.
In addition to the instruments in the tables above, the Corporation held $347 million and $767 million of instruments at December 31, 2014 and 2013 consisting primarily of certain direct private equity investments and private equity funds that were classified as Level 3 and reported within other assets. Valuations of direct private equity investments are based on the most recent company financial information. Inputs generally include market and acquisition comparables, entry level multiples, as well as other variables. The Corporation selects a valuation methodology (e.g., market comparables) for each investment and, in certain instances, multiple inputs are weighted to derive the most representative value. Discounts are applied as appropriate to consider the lack of liquidity and marketability versus publicly-traded companies. For private equity funds, fair value is determined using the net asset value as provided by the individual fund’s general partner.
The Corporation uses multiple market approaches in valuing certain of its Level 3 financial instruments. For example, market comparables and discounted cash flows are used together. For a given product, such as corporate debt securities, market comparables may be used to estimate some of the unobservable inputs and then these inputs are incorporated into a discounted cash flow model. Therefore, the balances disclosed encompass both of these techniques.
The level of aggregation and diversity within the products disclosed in the tables result in certain ranges of inputs being wide and unevenly distributed across asset and liability categories. At December 31, 2014 and 2013, weighted averages are disclosed for all loans, securities, structured liabilities and net derivative assets.
For more information on the inputs and techniques used in the valuation of MSRs, see Note 23 – Mortgage Servicing Rights.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Loans and Securities
For instruments backed by residential real estate assets and commercial loans, debt securities and other, a significant increase in market yields, default rates, loss severities or duration would result in a significantly lower fair value for long positions. Short positions would be impacted in a directionally opposite way. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.
For auction rate securities, a significant increase in price and/or projected tender price/refinancing levels would result in a significantly higher fair value.
Structured Liabilities and Derivatives
For credit derivatives, a significant increase in market yield, including spreads to indices, upfront points (i.e., a single upfront payment made by a protection buyer at inception), default rates or loss severities would result in a significantly lower fair value for protection sellers and higher fair value for protection buyers. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.
Structured credit derivatives, which include tranched portfolio CDS and derivatives with derivative product company (DPC) and monoline counterparties, are impacted by credit correlation, including default and wrong-way correlation. Default correlation is a parameter that describes the degree of dependence among credit default rates within a credit portfolio that underlies a credit derivative instrument. The sensitivity of this input on the fair value varies depending on the level of subordination of the tranche. For senior tranches that are net purchases of protection, a significant increase in default correlation would result in a significantly higher fair value. Net short protection positions would be impacted in a directionally opposite way. Wrong-way correlation is a parameter that describes the probability that as exposure to a counterparty increases, the credit quality of the counterparty decreases. A significantly higher degree of wrong-way correlation between a DPC counterparty and underlying derivative exposure would result in a significantly lower fair value.
For equity derivatives, interest rate derivatives and structured liabilities, a significant change in long-dated rates and volatilities and correlation inputs (e.g., the degree of correlation between an equity security and an index, between two different interest rates, or between interest rates and foreign exchange rates) would result in a significant impact to the fair value; however, the magnitude and direction of the impact depends on whether the Corporation is long or short the exposure.
Nonrecurring Fair Value
The Corporation holds certain assets that are measured at fair value, but only in certain situations (e.g., impairment) and these measurements are referred to herein as nonrecurring. These assets primarily include LHFS, certain loans and leases, and foreclosed properties. The amounts below represent only balances measured at fair value during 2014, 2013 and 2012, and still held as of the reporting date.
 
 
 
 
 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
 
 
 
 
 
 
 
 
 
December 31
 
2014
 
2013
(Dollars in millions)
Level 2
 
Level 3
 
Level 2
 
Level 3
Assets
 

 
 

 
 
 
 

Loans held-for-sale
$
156

 
$
30

 
$
2,138

 
$
115

Loans and leases
5

 
4,636

 
18

 
5,240

Foreclosed properties (1)

 
1,197

 
12

 
1,258

Other assets
13

 

 
88

 

 
 
 
 
 
 
 
 
 
 
 
Gains (Losses)
 
 
 
2014
 
2013
 
2012
Assets
 
 
 

 
 

 
 

Loans held-for-sale
 
 
$
(19
)
 
$
(71
)
 
$
(24
)
Loans and leases
 
 
(1,132
)
 
(1,104
)
 
(3,116
)
Foreclosed properties (1)
 
 
(40
)
 
(39
)
 
(47
)
Other assets
 
 
(6
)
 
(20
)
 
(16
)
(1) 
Amounts are included in other assets on the Consolidated Balance Sheet and represent fair value of, and related losses on, foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.
The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial assets and liabilities at December 31, 2014 and 2013.
 
 
 
 
 
 
Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
 
 
 
 
 
 
 
December 31, 2014
(Dollars in millions)
 
 
Inputs
Financial Instrument
Fair Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted Average
Instruments backed by residential real estate assets
$
4,636

Market comparables
OREO discount
0% to 28%
8
%
Loans and leases
4,636

Cost to sell
7% to 14%
8
%
 
December 31, 2013
Instruments backed by residential real estate assets
$
5,240

Market comparables
OREO discount
0% to 19%

8
%
Loans and leases
5,240

Cost to sell
8
%
n/a


n/a = not applicable
Instruments backed by residential real estate assets represent residential mortgages where the loan has been written down to the fair value of the underlying collateral. In addition to the instruments disclosed in the table above, the Corporation holds foreclosed residential properties where the fair value is based on unadjusted third-party appraisals or broker price opinions. Appraisals are generally conducted every 90 days. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.