Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v3.6.0.2
Fair Value Measurements
12 Months Ended
Dec. 31, 2016
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 under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The Corporation categorizes its financial instruments into three levels based on the established fair value hierarchy. The Corporation conducts a review of its fair value hierarchy classifications on a quarterly basis. Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable in the current marketplace. These transfers are considered to be effective as of the beginning of the quarter in which they occur. For more information regarding the fair value hierarchy and how the Corporation measures fair value, see Note 1 – Summary of Significant Accounting Principles. 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 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 2016, there were no changes to valuation approaches or techniques that had, or are expected to have, a material impact on the Corporation’s consolidated financial position or results of operations.
For information regarding Level 1, 2 and 3 valuation techniques, see Note 1 – Summary of Significant Accounting Principles.
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 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.
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, 2016 and 2015, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Fair Value Measurements
 
 
 
 
(Dollars in millions)
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments (1)
 
Assets/Liabilities at Fair Value
Assets
 

 
 

 
 

 
 

 
 

Federal funds sold and securities borrowed or purchased under agreements to resell
$

 
$
49,750

 
$

 
$

 
$
49,750

Trading account assets:
 

 
 

 
 

 
 

 
 

U.S. Treasury and agency securities (2)
34,587

 
1,927

 

 

 
36,514

Corporate securities, trading loans and other
171

 
22,861

 
2,777

 

 
25,809

Equity securities
50,169

 
21,601

 
281

 

 
72,051

Non-U.S. sovereign debt
9,578

 
9,940

 
510

 

 
20,028

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

 
15,799

 

 

 
15,799

Mortgage trading loans, ABS and other MBS

 
8,797

 
1,211

 

 
10,008

Total trading account assets (3)
94,505

 
80,925

 
4,779

 

 
180,209

Derivative assets (4)
7,337

 
619,848

 
3,931

 
(588,604
)
 
42,512

AFS debt securities:
 

 
 

 
 

 
 

 
 

U.S. Treasury and agency securities
46,787

 
1,465

 

 

 
48,252

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

Agency

 
189,486

 

 

 
189,486

Agency-collateralized mortgage obligations

 
8,330

 

 

 
8,330

Non-agency residential

 
2,013

 

 

 
2,013

Commercial

 
12,322

 

 

 
12,322

Non-U.S. securities
2,553

 
3,600

 
229

 

 
6,382

Other taxable securities

 
10,020

 
594

 

 
10,614

Tax-exempt securities

 
16,618

 
542

 

 
17,160

Total AFS debt securities
49,340

 
243,854

 
1,365

 

 
294,559

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

 
5

 

 

 
5

Non-agency residential

 
3,114

 
25

 

 
3,139

Non-U.S. securities
15,109

 
1,227

 

 

 
16,336

Other taxable securities

 
240

 

 

 
240

Total other debt securities carried at fair value
15,109

 
4,586

 
25

 

 
19,720

Loans and leases

 
6,365

 
720

 

 
7,085

Mortgage servicing rights

 

 
2,747

 

 
2,747

Loans held-for-sale

 
3,370

 
656

 

 
4,026

Other assets
11,824

 
1,739

 
239

 

 
13,802

Total assets
$
178,115

 
$
1,010,437

 
$
14,462

 
$
(588,604
)
 
$
614,410

Liabilities
 

 
 

 
 

 
 

 
 

Interest-bearing deposits in U.S. offices
$

 
$
731

 
$

 
$

 
$
731

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

 
35,407

 
359

 

 
35,766

Trading account liabilities:
 

 
 

 
 

 
 

 
 
U.S. Treasury and agency securities
15,854

 
197

 

 

 
16,051

Equity securities
25,884

 
3,014

 

 

 
28,898

Non-U.S. sovereign debt
9,409

 
2,103

 

 

 
11,512

Corporate securities and other
163

 
6,380

 
27

 

 
6,570

Total trading account liabilities
51,310

 
11,694

 
27

 

 
63,031

Derivative liabilities (4)
7,173

 
615,896

 
5,244

 
(588,833
)
 
39,480

Short-term borrowings

 
2,024

 

 

 
2,024

Accrued expenses and other liabilities
12,978

 
1,643

 
9

 

 
14,630

Long-term debt

 
28,523

 
1,514

 

 
30,037

Total liabilities
$
71,461

 
$
695,918

 
$
7,153

 
$
(588,833
)
 
$
185,699

(1) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(2) 
Includes $17.5 billion of GSE obligations.
(3) 
Includes securities with a fair value of $14.6 billion that were segregated in compliance with securities regulations or deposited with clearing organizations. This amount is included in the parenthetical disclosure on the Consolidated Balance Sheet.
(4) 
During 2016, $2.3 billion of derivative assets and $2.4 billion of derivative liabilities were transferred from Level 1 to Level 2 and $2.0 billion of derivative assets and $1.8 billion of derivative liabilities were transferred from Level 2 to Level 1 based on the inputs used to measure fair value. For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
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
$

 
$
55,143

 
$

 
$

 
$
55,143

Trading account assets:
 

 
 

 
 

 
 

 
 

U.S. Treasury and agency securities (2)
33,034

 
2,413

 

 

 
35,447

Corporate securities, trading loans and other
325

 
22,738

 
2,838

 

 
25,901

Equity securities
41,735

 
20,887

 
407

 

 
63,029

Non-U.S. sovereign debt
15,651

 
12,915

 
521

 

 
29,087

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

 
13,088

 

 

 
13,088

Mortgage trading loans, ABS and other MBS

 
8,107

 
1,868

 

 
9,975

Total trading account assets (3)
90,745

 
80,148

 
5,634

 

 
176,527

Derivative assets (4)
5,149

 
678,355

 
5,134

 
(638,648
)
 
49,990

AFS debt securities:
 

 
 

 
 

 
 

 
 

U.S. Treasury and agency securities
23,374

 
1,903

 

 

 
25,277

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

Agency

 
228,947

 

 

 
228,947

Agency-collateralized mortgage obligations

 
10,985

 

 

 
10,985

Non-agency residential

 
3,073

 
106

 

 
3,179

Commercial

 
7,165

 

 

 
7,165

Non-U.S. securities
2,768

 
2,999

 

 

 
5,767

Other taxable securities

 
9,688

 
757

 

 
10,445

Tax-exempt securities

 
13,439

 
569

 

 
14,008

Total AFS debt securities
26,142

 
278,199

 
1,432

 

 
305,773

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

 
7

 

 

 
7

Non-agency residential

 
3,460

 
30

 

 
3,490

Non-U.S. securities
11,691

 
1,152

 

 

 
12,843

Other taxable securities

 
267

 

 

 
267

Total other debt securities carried at fair value
11,691

 
4,886

 
30

 

 
16,607

Loans and leases

 
5,318

 
1,620

 

 
6,938

Mortgage servicing rights

 

 
3,087

 

 
3,087

Loans held-for-sale

 
4,031

 
787

 

 
4,818

Other assets (5)
11,923

 
2,023

 
374

 

 
14,320

Total assets
$
145,650

 
$
1,108,103

 
$
18,098

 
$
(638,648
)
 
$
633,203

Liabilities
 

 
 

 
 

 
 

 
 

Interest-bearing deposits in U.S. offices
$

 
$
1,116

 
$

 
$

 
$
1,116

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

 
24,239

 
335

 

 
24,574

Trading account liabilities:
 

 
 

 
 

 
 

 
 
U.S. Treasury and agency securities
14,803

 
169

 

 

 
14,972

Equity securities
27,898

 
2,392

 

 

 
30,290

Non-U.S. sovereign debt
13,589

 
1,951

 

 

 
15,540

Corporate securities and other
193

 
5,947

 
21

 

 
6,161

Total trading account liabilities
56,483

 
10,459

 
21

 

 
66,963

Derivative liabilities (4)
4,941

 
670,600

 
5,575

 
(642,666
)
 
38,450

Short-term borrowings

 
1,295

 
30

 

 
1,325

Accrued expenses and other liabilities
11,656

 
2,234

 
9

 

 
13,899

Long-term debt

 
28,584

 
1,513

 

 
30,097

Total liabilities
$
73,080

 
$
738,527

 
$
7,483

 
$
(642,666
)
 
$
176,424


(1) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(2) 
Includes $14.8 billion of GSE obligations.
(3) 
Includes securities with a fair value of $16.4 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 2015, $6.6 billion of derivative assets and $6.7 billion of derivative liabilities were transferred from Level 1 to Level 2 based on inputs used to measure fair value. Additionally $6.4 billion of derivative assets and $6.2 billion of derivative liabilities were transferred from Level 2 to Level 1 due to additional information related to certain options. For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.
(5) 
During 2015, approximately $327 million of assets were transferred from Level 2 to Level 1 due to a restriction that was lifted for an equity investment.
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 2016, 2015 and 2014, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 – Fair Value Measurements (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
Gross
 
 
 
 
(Dollars in millions)
Balance
January 1
2016
Total Realized/Unrealized Gains/(Losses) (2)
Gains
(Losses)
in OCI
(3)
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3 
Gross
Transfers
out of
Level 3 
Balance
December 31
2016
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
Trading account assets:
 

 

 

 

 
 
 
 

 

 

 
Corporate securities, trading loans and other
$
2,838

$
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)
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 (losses); Net derivative assets - primarily trading account profits (losses) and mortgage banking income (loss); Mortgage servicing rights - primarily mortgage banking income (loss); Long-term debt - primarily trading account profits (losses). 
(3) 
Includes gains/losses in OCI related to unrealized gains/losses on AFS debt securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option. 
(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 retained following securitizations or whole-loan sales.

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 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, 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 (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
Gross
 
 
 
 
(Dollars in millions)
Balance
January 1
2015
Total Realized/Unrealized Gains/(Losses) (2)
Gains
(Losses)
in OCI
(3)
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3 
Gross
Transfers
out of
Level 3 
Balance
December 31
2015
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
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)
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 (losses); Net derivative assets - primarily trading account profits (losses) and mortgage banking income (loss); Mortgage servicing rights - primarily mortgage banking income (loss); Long-term debt - primarily trading account profits (losses). 
(3) 
Includes gains/losses in OCI related to unrealized gains/losses on AFS debt securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option. 
(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 retained following securitizations or whole-loan sales.

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.
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 – Fair Value Measurements (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
Gross
 
 
 
 
(Dollars in millions)
Balance
January 1
2014
Total Realized/Unrealized Gains/(Losses) (2)
Gains
(Losses)
in OCI (3)
Purchases
Sales
Issuances
Settlements
Gross Transfers
into
Level 3
Gross Transfers
out of
Level 3 
Balance
December 31
2014
Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held (2)
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

69

Equity securities
386



104

(86
)

(16
)
146

(182
)
352

(8
)
Non-U.S. sovereign debt
468

30


120

(34
)

(19
)
11

(2
)
574

31

Mortgage trading loans, ABS and other MBS
4,631

199


1,643

(1,259
)

(585
)
39

(2,605
)
2,063

79

Total trading account assets
9,044

409


3,629

(2,323
)

(1,558
)
1,471

(4,413
)
6,259

171

Net derivative assets (4)
(224
)
463


823

(1,738
)

(432
)
28

160

(920
)
(87
)
AFS debt securities:
 

 

 

 

 
 
 
 
 
 

 
Non-agency residential MBS

(2
)

11




270


279


Non-U.S. securities
107

(7
)
(11
)
241



(147
)

(173
)
10


Other taxable securities
3,847

9

(8
)
154



(1,381
)
93

(1,047
)
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 (5, 6)
3,057

69



(3
)
699

(1,591
)
25

(273
)
1,983

76

Mortgage servicing rights (6)
5,042

(1,231
)


(61
)
707

(927
)


3,530

(1,753
)
Loans held-for-sale (5)
929

45


59

(725
)
23

(216
)
83

(25
)
173

(4
)
Other assets
1,669

(98
)


(430
)

(245
)
39

(24
)
911

52

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


10

(13
)


(9
)
10

(36
)
1

Accrued expenses and other liabilities (5)
(10
)
2




(3
)


1

(10
)
1

Long-term debt (5)
(1,990
)
49


169


(615
)
540

(1,581
)
1,066

(2,362
)
(8
)
(1) 
Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2) 
Includes gains/losses reported in earnings in the following income statement line items: Trading account assets/liabilities - trading account profits (losses); Net derivative assets - trading account profits (losses), mortgage banking income (loss) and other income (loss); Mortgage servicing rights - primarily mortgage banking income (loss); Long-term debt - trading account profits (losses) and other income (loss). 
(3) 
Includes gains/losses in OCI related to unrealized gains/losses on AFS debt securities. 
(4) 
Net derivatives include derivative assets of $6.9 billion and derivative liabilities of $7.8 billion.
(5) 
Amounts represent instruments that are accounted for under the fair value option.
(6) 
Issuances represent loan originations and MSRs retained following securitizations or whole-loan sales.

Significant transfers into Level 3, primarily due to decreased price observability, during 2014 included $1.5 billion of trading account assets, $399 million of AFS debt securities 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 2014 included $4.4 billion of trading account assets, as a result of increased market liquidity, $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.
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, 2016 and 2015.
 
 
 
 
 
 
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2016
 
 
 
 
 
 
(Dollars in millions)
 
 
Inputs
Financial Instrument
Fair
Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted Average
Loans and Securities (1)
 
 
 
 
 
Instruments backed by residential real estate assets
$
1,066

Discounted cash flow, Market comparables
Yield
0% to 50%

7
%
Trading account assets – Mortgage trading loans, ABS and other MBS
337

Prepayment speed
0% to 27% CPR

14
%
Loans and leases
718

Default rate
0% to 3% CDR

2
%
Loans held-for-sale
11

Loss severity
0% to 54%

18
%
Instruments backed by commercial real estate assets
$
317

Discounted cash flow, Market comparables
Yield
0% to 39%

11
%
Trading account assets – Corporate securities, trading loans and other
178

Price
$0 to $100

$65
Trading account assets – Mortgage trading loans, ABS and other MBS
53

 
 
 
Loans held-for-sale
86

 
 
 
Commercial loans, debt securities and other
$
4,486

Discounted cash flow, Market comparables
Yield
1% to 37%

14
%
Trading account assets – Corporate securities, trading loans and other
2,565

Prepayment speed
5% to 20%

19
%
Trading account assets – Non-U.S. sovereign debt
510

Default rate
3% to 4%

4
%
Trading account assets – Mortgage trading loans, ABS and other MBS
821

Loss severity
0% to 50%

19
%
AFS debt securities – Other taxable securities
29

Price
$0 to $292

$68
Loans and leases
2

Duration
0 to 5 years

3 years
Loans held-for-sale
559

Enterprise value/EBITDA multiple
34x

n/a
Auction rate securities
$
1,141

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

$94
Trading account assets – Corporate securities, trading loans and other
34

 
 
 
AFS debt securities – Other taxable securities
565

 
 
 
AFS debt securities – Tax-exempt securities
542

 
 
 
MSRs
$
2,747

Discounted cash flow, Market comparables
Weighted-average life, fixed rate (4)
0 to 15 years

6 years

 
 
Weighted-average life, variable rate (4)
0 to 14 years

4 years

 
 
Option Adjusted Spread, fixed rate
9% to 14%

10
%
 
 
Option Adjusted Spread, variable rate
9% to 15%

12
%
Structured liabilities
 
 
 
 
 
Long-term debt
$
(1,514
)
Discounted cash flow, Market comparables, Industry standard derivative pricing (2)
Equity correlation
13% to 100%

68
%
 
 
Long-dated equity volatilities
4% to 76%

26
%
 
 
Yield
6% to 37%

20
%
 
 
Price
$12 to $87

$73
 
 
Duration
0 to 5 years

3 years
Net derivative assets
 
 
 
 
 
Credit derivatives
$
(129
)
Discounted cash flow, Stochastic recovery correlation model
Yield
0% to 24%

13
%
 
 
Upfront points
0 points to 100 points

72 points

 
 
Credit spreads
17 bps to 814 bps

248 bps

 
 
Credit correlation
21% to 80%

44
%
 
 
Prepayment speed
10% to 20% CPR

18
%
 
 
Default rate
1% to 4% CDR

3
%
 
 
Loss severity
35
%
n/a

Equity derivatives
$
(1,690
)
Industry standard derivative pricing (2)
Equity correlation
13% to 100%

68
%
 
 
Long-dated equity volatilities
4% to 76%

26
%
Commodity derivatives
$
6

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

$4/MMBtu

 
 
Correlation
66% to 95%

85
%
 
 
Volatilities
23% to 96%

36
%
Interest rate derivatives
$
500

Industry standard derivative pricing (3)
Correlation (IR/IR)
15% to 99%

56
%
 
 
Correlation (FX/IR)
0% to 40%

2
%
 
 
Illiquid IR and long-dated inflation rates
-12% to 35%

5
%
 
 
Long-dated inflation volatilities
0% to 2%

1
%
Total net derivative assets
$
(1,313
)
 
 
 
 
(1) 
The categories are aggregated based upon product type which differs from financial statement classification. The following is a reconciliation to the line items in the table on page 200: Trading account assets – Corporate securities, trading loans and other of $2.8 billion, Trading account assets – Non-U.S. sovereign debt of $510 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.2 billion, AFS debt securities – Other taxable securities of $594 million, AFS debt securities – Tax-exempt securities of $542 million, Loans and leases of $720 million and LHFS of $656 million.
(2) 
Includes models such as Monte Carlo simulation and Black-Scholes.
(3) 
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
(4) 
The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
EBITDA = Earnings before interest, taxes, depreciation and amortization
MMBtu = Million British thermal units
IR = Interest Rate
FX = Foreign Exchange
n/a = not applicable
 
 
 
 
 
 
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2015
 
 
 
 
 
(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
$
2,017

Discounted cash flow, Market comparables
Yield
0% to 25%
6
 %
Trading account assets – Mortgage trading loans, ABS and other MBS
400

Prepayment speed
0% to 27% CPR
11
 %
Loans and leases
1,520

Default rate
0% to 10% CDR
4
 %
Loans held-for-sale
97

Loss severity
0% to 90%
40
 %
Instruments backed by commercial real estate assets
$
852

Discounted cash flow, Market comparables
Yield
0% to 25%
8
 %
Trading account assets – Mortgage trading loans, ABS and other MBS
162

Price
$0 to $100
$73
Loans held-for-sale
690

 
 
 
Commercial loans, debt securities and other
$
4,558

Discounted cash flow, Market comparables
Yield
0% to 37%
13
 %
Trading account assets – Corporate securities, trading loans and other
2,503

Prepayment speed
5% to 20%
16
 %
Trading account assets – Non-U.S. sovereign debt
521

Default rate
2% to 5%
4
 %
Trading account assets – Mortgage trading loans, ABS and other MBS
1,306

Loss severity
25% to 50%
37
 %
AFS debt securities – Other taxable securities
128

Duration
0 to 5 years
3 years

Loans and leases
100

Price
$0 to $258
$64
Auction rate securities
$
1,533

Discounted cash flow, Market comparables
Price
$10 to $100
$94
Trading account assets – Corporate securities, trading loans and other
335

 
 
AFS debt securities – Other taxable securities
629

 
 
 
AFS debt securities – Tax-exempt securities
569

 
 
 
MSRs
$
3,087

Discounted cash flow, Market comparables
Weighted-average life, fixed rate (4)
0 to 15 years
4 years

 
 
Weighted-average life, variable rate (4)
0 to 16 years
3 years

 
 
Option Adjusted Spread, fixed rate
3% to 11%
5
 %
 
 
Option Adjusted Spread, variable rate
3% to 11%
8
 %
Structured liabilities
 
 
 
 
 
Long-term debt
$
(1,513
)
Industry standard derivative pricing (3)
Equity correlation
25% to 100%
67
 %
 
 
Long-dated equity volatilities
4% to 101%
28
 %
Net derivative assets
 
 
 
 
 
Credit derivatives
$
(75
)
Discounted cash flow, Stochastic recovery correlation model
Yield
6% to 25%
16
 %
 
 
Upfront points
0 to 100 points
60 points

 
 
Credit spreads
0 bps to 447 bps
111 bps

 
 
Credit correlation
31% to 99%
38
 %
 
 
Prepayment speed
10% to 20% CPR
19
 %
 
 
Default rate
1% to 4% CDR
3
 %
 
 
Loss severity
35% to 40%
35
 %
Equity derivatives
$
(1,037
)
Industry standard derivative pricing (2)
Equity correlation
25% to 100%
67
 %
 
 
Long-dated equity volatilities
4% to 101%
28
 %
Commodity derivatives
$
169

Discounted cash flow, Industry standard derivative pricing (2)
Natural gas forward price
$1/MMBtu to $6/MMBtu
$4/MMBtu

 
 
Propane forward price
$0/Gallon to $1/Gallon
$1/Gallon

 
 
Correlation
66% to 93%
84
 %
 
 
Volatilities
18% to 125%
39
 %
Interest rate derivatives
$
502

Industry standard derivative pricing (3)
Correlation (IR/IR)
17% to 99%
48
 %
 
 
Correlation (FX/IR)
-15% to 40%
-9
 %
 
 
Long-dated inflation rates
0% to 7%
3
 %
 
 
Long-dated inflation volatilities
0% to 2%
1
 %
Total net derivative assets
$
(441
)
 
 
 
 

(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 201: Trading account assets – Corporate securities, trading loans and other of $2.8 billion, Trading account assets – Non-U.S. sovereign debt of $521 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.9 billion, AFS debt securities – Other taxable securities of $757 million, AFS debt securities – Tax-exempt securities of $569 million, Loans and leases of $1.6 billion and LHFS of $787 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
In the tables above, instruments backed by residential and commercial real estate assets include RMBS, commercial MBS, whole loans and mortgage CDOs. Commercial loans, debt securities and other include corporate CLOs and CDOs, commercial loans and bonds, and securities backed by non-real estate assets. Structured liabilities primarily include equity-linked notes that are accounted for under the fair value option.
The Corporation uses multiple market approaches in valuing certain of its Level 3 financial instruments. For example, market comparables and discounted cash flows are used together. For a given product, such as corporate debt securities, market comparables may be used to estimate some of the unobservable inputs and then these inputs are incorporated into a discounted cash flow model. Therefore, the balances disclosed encompass both of these techniques.
The level of aggregation and diversity within the products disclosed in the tables result in certain ranges of inputs being wide and unevenly distributed across asset and liability categories.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Loans and Securities
A significant increase in market yields, default rates, loss severities or duration would result in a significantly lower fair value for long positions. Short positions would be impacted in a directionally opposite way. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested. A significant increase in price would result in a significantly higher fair value for long positions and short positions would be impacted in a directionally opposite way.
Mortgage Servicing Rights
The weighted-average lives and fair value of MSRs are sensitive to changes in modeled assumptions. The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions. The weighted-average life represents the average period of time that the MSRs' cash flows are expected to be received. Absent other changes, an increase (decrease) to the weighted-average life would generally result in an increase (decrease) in the fair value of the MSRs. For example, a 10 percent or 20 percent decrease in prepayment rates, which impact the weighted-average life, could result in an increase in fair value of $101 million or $210 million, while a 10 percent or 20 percent increase in prepayment rates could result in a decrease in fair value of $93 million or $180 million. A 100 bp or 200 bp decrease in OAS levels could result in an increase in fair value of $95 million or $197 million, while a 100 bp or 200 bp increase in OAS levels could result in a decrease in fair value of $88 million or $171 million. These sensitivities are hypothetical and actual amounts may vary materially. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSRs that continue to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. In addition, these sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk.
Structured Liabilities and Derivatives
For credit derivatives, a significant increase in market yield, upfront points (i.e., a single upfront payment made by a protection buyer at inception), credit spreads, default rates or loss severities would result in a significantly lower fair value for protection sellers and higher fair value for protection buyers. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.
Structured credit derivatives are impacted by credit correlation. Default correlation is a parameter that describes the degree of dependence among credit default rates within a credit portfolio that underlies a credit derivative instrument. The sensitivity of this input on the fair value varies depending on the level of subordination of the tranche. For senior tranches that are net purchases of protection, a significant increase in default correlation would result in a significantly higher fair value. Net short protection positions would be impacted in a directionally opposite way.
For equity derivatives, commodity derivatives, interest rate derivatives and structured liabilities, a significant change in long-dated rates and volatilities and correlation inputs (e.g., the degree of correlation between an equity security and an index, between two different commodities, between two different interest rates, or between interest rates and foreign exchange rates) would result in a significant impact to the fair value; however, the magnitude and direction of the impact depends on whether the Corporation is long or short the exposure. For structured liabilities, a significant increase in yield or decrease in price would result in a significantly lower fair value. A significant decrease in duration may result in a significantly higher fair value.
Nonrecurring Fair Value
The Corporation holds certain assets that are measured at fair value, but only in certain situations (e.g., impairment) and these measurements are referred to herein as nonrecurring. The amounts below represent assets still held as of the reporting date for which a nonrecurring fair value adjustment was recorded during 2016, 2015 and 2014.
 
 
 
 
 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
 
 
 
 
 
 
 
 
 
December 31
 
2016
 
2015
(Dollars in millions)
Level 2
 
Level 3
 
Level 2
 
Level 3
Assets
 

 
 

 
 
 
 

Loans held-for-sale
$
193

 
$
44

 
$
9

 
$
33

Loans and leases (1)

 
1,416

 
34

 
2,739

Foreclosed properties (2, 3)

 
77

 

 
172

Other assets
358

 

 
88

 

 
 
 
 
 
 
 
 
 
 
 
Gains (Losses)
 
 
 
2016
 
2015
 
2014
Assets
 
 
 

 
 

 
 

Loans held-for-sale
 
 
$
(54
)
 
$
(8
)
 
$
(19
)
Loans and leases (1)
 
 
(458
)
 
(993
)
 
(1,152
)
Foreclosed properties
 
 
(41
)
 
(57
)
 
(66
)
Other assets
 
 
(74
)
 
(28
)
 
(26
)
(1) 
Includes $150 million of losses on loans that were written down to a collateral value of zero during 2016 compared to losses of $174 million and $370 million in 2015 and 2014.
(2) 
Amounts are included in other assets on the Consolidated Balance Sheet and represent the carrying value of foreclosed properties that were written down subsequent to their initial classification as foreclosed properties. Losses on foreclosed properties include losses taken during the first 90 days after transfer of a loan to foreclosed properties.
(3) 
Excludes $1.2 billion and $1.4 billion of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) as of December 31, 2016 and 2015.
The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial assets and liabilities at December 31, 2016 and 2015. 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.
 
 
 
 
 
 
Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
 
 
 
 
 
 
 
December 31, 2016
(Dollars in millions)
 
 
Inputs
Financial Instrument
Fair Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted Average
Loans and leases backed by residential real estate assets
$
1,416

Market comparables
OREO discount
8% to 56%
21
%
 
 
 
Cost to sell
7% to 45%
9
%
 
December 31, 2015
Loans and leases backed by residential real estate assets
$
2,739

Market comparables
OREO discount
7% to 55%
20
%
 
 
 
Cost to sell
8% to 45%
10
%