Bank of America Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

Fair Value Measurements

12 Months Ended

Dec. 31, 2017

Under applicable accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Corporation determines the fair values of its financial instruments under applicable accounting standards that require an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The Corporation categorizes its financial instruments into three levels based on the established fair value hierarchy. The Corporation conducts a review of its fair value hierarchy classifications on a quarterly basis. Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable in the current marketplace. These transfers are considered to be effective as of the beginning of the quarter in which they occur. For more information regarding the fair value hierarchy and how the Corporation measures fair value, see Note 1 – Summary of Significant Accounting Principles. The Corporation accounts for certain financial instruments under the fair value option. For more information, see Note 21 – Fair Value Option.

Valuation Processes and Techniques

The Corporation has various processes and controls in place so that fair value is reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of models by personnel who are independent of the front office and periodic reassessments of models so that they are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are conducted on a daily basis by personnel who are independent of the front office. A price verification group, which is also independent of the front office, utilizes available market information including executed trades, market prices and market-observable valuation model inputs so that fair values are reasonably estimated. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are escalated through a management review process.

While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

During 2017, there were no changes to valuation approaches or techniques that had, or are expected to have, a material impact on the Corporation’s consolidated financial position or results of operations.

Trading Account Assets and Liabilities and Debt Securities

The fair values of trading account assets and liabilities are primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. The fair values of debt securities are generally based on quoted market prices or market prices for similar assets. Liquidity is a significant factor in the determination of the fair values of trading account assets and liabilities and debt securities. Market price quotes may not be readily available for some positions such as positions within a market sector where trading activity has slowed significantly or ceased. Some of these instruments are valued using a discounted cash flow model, which estimates the fair value of the securities using internal credit risk, interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Principal and interest cash flows are discounted using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value for the specific security. Other instruments are valued using a net asset value approach which considers the value of the underlying securities. Underlying assets are valued using external pricing services, where available, or matrix pricing based on the vintages and ratings. Situations of illiquidity generally are triggered by the market’s perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer’s financial statements and changes in credit ratings made by one or more rating agencies.

Derivative Assets and Liabilities

The fair values of derivative assets and liabilities traded in the OTC market are determined using quantitative models that utilize multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. When third-party pricing services are used, the methods and assumptions are reviewed by the Corporation. Estimation risk is greater for derivative asset and liability positions that are either option-based or have longer maturity dates where observable market inputs are less readily available, or are unobservable, in which case, quantitative-based extrapolations of rate, price or index scenarios are used in determining fair values. The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality and other instrument-specific factors, where appropriate. In addition, the Corporation incorporates within its fair value measurements of OTC derivatives a valuation adjustment to reflect the credit risk associated with the net position. Positions are netted by counterparty, and fair value for net long exposures is adjusted for counterparty credit risk while the fair value for net short exposures is adjusted for the Corporation’s own credit risk. The Corporation also incorporates FVA within its fair value measurements to include funding costs on uncollateralized derivatives and derivatives where the Corporation is not permitted to use the collateral it receives. An estimate of severity of loss is also used in the determination of fair value, primarily based on market data.

Loans and Loan Commitments

The fair values of loans and loan commitments are based on market prices, where available, or discounted cash flow analyses using market-based credit spreads of comparable debt instruments or credit derivatives of the specific borrower or comparable borrowers. Results of discounted cash flow analyses may be adjusted, as appropriate, to reflect other market conditions or the perceived credit risk of the borrower.

Mortgage Servicing Rights

The fair values of MSRs are primarily determined using an option-adjusted spread (OAS) valuation approach, which factors in prepayment risk to determine the fair value of MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates.

Loans Held-for-sale

The fair values of LHFS are based on quoted market prices, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans adjusted to reflect the inherent credit risk. The borrower-specific credit risk is embedded within the quoted market prices or is implied by considering loan performance when selecting comparables.

Short-term Borrowings and Long-term Debt

The Corporation issues structured liabilities that have coupons or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities. The fair values of these structured liabilities are estimated using quantitative models for the combined derivative and debt portions of the notes. These models incorporate observable and, in some instances, unobservable inputs including security prices, interest rate yield curves, option volatility, currency, commodity or equity rates and correlations among these inputs. The Corporation also considers the impact of its own credit spread in determining the discount rate used to value these liabilities. The credit spread is determined by reference to observable spreads in the secondary bond market.

Securities Financing Agreements

The fair values of certain reverse repurchase agreements, repurchase agreements and securities borrowed transactions are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Deposits

The fair values of deposits are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The Corporation considers the impact of its own credit spread in the valuation of these liabilities. The credit risk is determined by reference to observable credit spreads in the secondary cash market.

Asset-backed Secured Financings

The fair values of asset-backed secured financings are based on external broker bids, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans adjusted to reflect the inherent credit risk.

Recurring Fair Value

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




	December 31, 2017
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	52,906	$	—	$	—		$	52,906
Trading account assets:
U.S. Treasury and agency securities ^{(2, 3)}	38,720		1,922		—		—			40,642
Corporate securities, trading loans and other	—		28,714		1,864		—			30,578
Equity securities ⁽³⁾	60,747		23,958		235		—			84,940
Non-U.S. sovereign debt ⁽³⁾	6,545		15,839		556		—			22,940
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed ⁽²⁾	—		20,586		—		—			20,586
Mortgage trading loans, ABS and other MBS	—		8,174		1,498		—			9,672
Total trading account assets ⁽⁴⁾	106,012		99,193		4,153		—			209,358
Derivative assets ^{(3, 5)}	6,305		341,178		4,067		(313,788		)	37,762
AFS debt securities:
U.S. Treasury and agency securities	51,915		1,608		—		—			53,523
Mortgage-backed securities:
Agency	—		192,929		—		—			192,929
Agency-collateralized mortgage obligations	—		6,804		—		—			6,804
Non-agency residential	—		2,669		—		—			2,669
Commercial	—		13,684		—		—			13,684
Non-U.S. securities	772		5,880		25		—			6,677
Other taxable securities	—		5,261		509		—			5,770
Tax-exempt securities	—		20,106		469		—			20,575
Total AFS debt securities	52,687		248,941		1,003		—			302,631
Other debt securities carried at fair value:
Mortgage-backed securities:
Agency-collateralized mortgage obligations	—		5		—		—			5
Non-agency residential	—		2,764		—		—			2,764
Non-U.S. securities	8,191		1,297		—		—			9,488
Other taxable securities	—		229		—		—			229
Total other debt securities carried at fair value	8,191		4,295		—		—			12,486
Loans and leases	—		5,139		571		—			5,710
Mortgage servicing rights ⁽⁶⁾	—		—		2,302		—			2,302
Loans held-for-sale	—		1,466		690		—			2,156
Other assets	19,367		789		123		—			20,279
Total assets	$	192,562	$	753,907	$	12,909	$	(313,788	)	$	645,590
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	449	$	—	$	—		$	449
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		36,182		—		—			36,182
Trading account liabilities:
U.S. Treasury and agency securities	17,266		734		—		—			18,000
Equity securities ⁽³⁾	33,019		3,885		—		—			36,904
Non-U.S. sovereign debt ⁽³⁾	11,976		7,382		—		—			19,358
Corporate securities and other	—		6,901		24		—			6,925
Total trading account liabilities	62,261		18,902		24		—			81,187
Derivative liabilities ^{(3, 5)}	6,029		334,261		5,781		(311,771		)	34,300
Short-term borrowings	—		1,494		—		—			1,494
Accrued expenses and other liabilities	21,887		945		8		—			22,840
Long-term debt	—		29,923		1,863		—			31,786
Total liabilities	$	90,177	$	422,156	$	7,676	$	(311,771	)	$	208,238


⁽¹⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽²⁾	Includes $21.3 billion of GSE obligations.

⁽³⁾

During 2017, for trading account assets and liabilities, $1.1 billion of U.S. Treasury and agency securities assets, $5.3 billion of equity securities assets, $3.1 billion of equity securities liabilities, $3.3 billion of non-U.S. sovereign debt assets and $1.5 billion of non-U.S. sovereign debt liabilities were transferred from Level 1 to Level 2 based on the liquidity of the positions. In addition, $14.1 billion of equity securities assets and $4.3 billion of equity securities liabilities were transferred from Level 2 to Level 1. Also in 2017, $4.2 billion of derivative assets and $3.0 billion of derivative liabilities were transferred from Level 1 to Level 2 and $758 million of derivative assets and $608 million of derivative liabilities were transferred from Level 2 to Level 1 based on the observability of inputs used to measure fair value. For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.


⁽⁴⁾	Includes securities with a fair value of $16.8 billion that were segregated in compliance with securities regulations or deposited with clearing organizations. This amount is included in the parenthetical disclosure on the Consolidated Balance Sheet.

⁽⁵⁾

Derivative assets and liabilities reflect the effects of contractual amendments by two central clearing counterparties to legally re-characterize daily cash variation margin from collateral, which secures an outstanding exposure, to settlement, which discharges an outstanding exposure. One of these central clearing counterparties amended its governing documents, which became effective in January 2017. In addition, the Corporation elected to transfer its existing positions to the settlement platform for the other central clearing counterparty in September 2017.


⁽⁶⁾	MSRs include the $1.7 billion core MSR portfolio held in Consumer Banking, the $135 million non-core MSR portfolio held in All Other and the $510 million non-U.S. MSR portfolio held in Global Markets.




	December 31, 2016
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	49,750	$	—	$	—		$	49,750
Trading account assets:
U.S. Treasury and agency securities ⁽²⁾	34,587		1,927		—		—			36,514
Corporate securities, trading loans and other	171		22,861		2,777		—			25,809
Equity securities	50,169		21,601		281		—			72,051
Non-U.S. sovereign debt	9,578		9,940		510		—			20,028
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed ⁽²⁾	—		15,799		—		—			15,799
Mortgage trading loans, ABS and other MBS	—		8,797		1,211		—			10,008
Total trading account assets ⁽³⁾	94,505		80,925		4,779		—			180,209
Derivative assets ⁽⁴⁾	7,337		619,848		3,931		(588,604		)	42,512
AFS debt securities:
U.S. Treasury and agency securities	46,787		1,465		—		—			48,252
Mortgage-backed securities:
Agency	—		189,486		—		—			189,486
Agency-collateralized mortgage obligations	—		8,330		—		—			8,330
Non-agency residential	—		2,013		—		—			2,013
Commercial	—		12,322		—		—			12,322
Non-U.S. securities	1,934		3,600		229		—			5,763
Other taxable securities	—		10,020		594		—			10,614
Tax-exempt securities	—		16,618		542		—			17,160
Total AFS debt securities	48,721		243,854		1,365		—			293,940
Other debt securities carried at fair value:
Mortgage-backed securities:
Agency-collateralized mortgage obligations	—		5		—		—			5
Non-agency residential	—		3,114		25		—			3,139
Non-U.S. securities	15,109		1,227		—		—			16,336
Other taxable securities	—		240		—		—			240
Total other debt securities carried at fair value	15,109		4,586		25		—			19,720
Loans and leases	—		6,365		720		—			7,085
Mortgage servicing rights ⁽⁵⁾	—		—		2,747		—			2,747
Loans held-for-sale	—		3,370		656		—			4,026
Debt securities in assets of business held for sale	619		—		—		—			619
Other assets	11,824		1,739		239		—			13,802
Total assets	$	178,115	$	1,010,437	$	14,462	$	(588,604	)	$	614,410
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	731	$	—	$	—		$	731
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		35,407		359		—			35,766
Trading account liabilities:
U.S. Treasury and agency securities	15,854		197		—		—			16,051
Equity securities	25,884		3,014		—		—			28,898
Non-U.S. sovereign debt	9,409		2,103		—		—			11,512
Corporate securities and other	163		6,380		27		—			6,570
Total trading account liabilities	51,310		11,694		27		—			63,031
Derivative liabilities ⁽⁴⁾	7,173		615,896		5,244		(588,833		)	39,480
Short-term borrowings	—		2,024		—		—			2,024
Accrued expenses and other liabilities	12,978		1,643		9		—			14,630
Long-term debt	—		28,523		1,514		—			30,037
Total liabilities	$	71,461	$	695,918	$	7,153	$	(588,833	)	$	185,699


⁽¹⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽²⁾	Includes $17.5 billion of GSE obligations.


⁽³⁾	Includes securities with a fair value of $14.6 billion that were segregated in compliance with securities regulations or deposited with clearing organizations. This amount is included in the parenthetical disclosure on the Consolidated Balance Sheet.

⁽⁴⁾

During 2016, $2.3 billion of derivative assets and $2.4 billion of derivative liabilities were transferred from Level 1 to Level 2 and $2.0 billion of derivative assets and $1.8 billion of derivative liabilities were transferred from Level 2 to Level 1 based on the observability of inputs used to measure fair value. For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.


⁽⁵⁾	MSRs include the $2.1 billion core MSR portfolio held in Consumer Banking, the $212 million non-core MSR portfolio held in All Other and the $469 million non-U.S. MSR portfolio held in Global Markets.

The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2017, 2016 and 2015, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.




Level 3 – Fair Value Measurements in 2017 ⁽¹⁾

(Dollars in millions)	Balance January 1 2017			Total Realized/Unrealized Gains/(Losses) ⁽²⁾			Gains/ (Losses) in OCI ⁽³⁾			Gross											Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance December 31 2017			Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held ⁽²⁾
										Purchases		Sales			Issuances			Settlements
Trading account assets:
Corporate securities, trading loans and other	$	2,777		$	229		$	—		$	547	$	(702	)	$	5		$	(666	)	$	728		$	(1,054	)	$	1,864		$	2
Equity securities	281			18			—			55		(70		)	—			(10		)	146			(185		)	235			(1		)
Non-U.S. sovereign debt	510			74			(8		)	53		(59		)	—			(73		)	72			(13		)	556			70
Mortgage trading loans, ABS and other MBS	1,211			165			(2		)	1,210		(990		)	—			(233		)	218			(81		)	1,498			72
Total trading account assets	4,779			486			(10		)	1,865		(1,821		)	5			(982		)	1,164			(1,333		)	4,153			143
Net derivative assets ⁽⁴⁾	(1,313		)	(984		)	—			664		(979		)	—			949			48			(99		)	(1,714		)	(409		)
AFS debt securities:
Non-U.S. securities	229			2			16			49		—			—			(271		)	—			—			25			—
Other taxable securities	594			4			8			5		—			—			(42		)	34			(94		)	509			—
Tax-exempt securities	542			1			3			14		(70		)	—			(11		)	35			(45		)	469			—
Total AFS debt securities	1,365			7			27			68		(70		)	—			(324		)	69			(139		)	1,003			—
Other debt securities carried at fair value – Non-agency residential MBS	25			(1		)	—			—		(21		)	—			(3		)	—			—			—			—
Loans and leases ^{(5, 6)}	720			15			—			3		(34		)	—			(126		)	—			(7		)	571			11
Mortgage servicing rights ^{(6, 7)}	2,747			70			—			—		(25		)	258			(748		)	—			—			2,302			(248		)
Loans held-for-sale ⁽⁵⁾	656			100			(3		)	3		(189		)	—			(346		)	501			(32		)	690			14
Other assets	239			74			(57		)	2		(189		)	—			(10		)	64			—			123			22
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁵⁾	(359		)	(5		)	—			—		—			(12		)	171			(58		)	263			—			—
Trading account liabilities – Corporate securities and other	(27		)	14			—			8		(17		)	(2		)	—			—			—			(24		)	2
Accrued expenses and other liabilities ⁽⁵⁾	(9		)	—			—			—		—			—			1			—			—			(8		)	—
Long-term debt ⁽⁵⁾	(1,514		)	(135		)	(31		)	84		—			(288		)	514			(711		)	218			(1,863		)	(196		)


⁽¹⁾	Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.

⁽²⁾

Includes gains/losses reported in earnings in the following income statement line items: Trading account assets/liabilities - primarily trading account profits; Net derivative assets - primarily trading account profits and mortgage banking income; MSRs - primarily mortgage banking income; Long-term debt - primarily trading account profits. For MSRs, the amounts reflect the changes in modeled MSR fair value due to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve, and periodic adjustments to the valuation model to reflect changes in the modeled relationships between inputs and projected cash flows, as well as changes in cash flow assumptions including cost to service.


⁽³⁾	Includes unrealized gains/losses in OCI on AFS securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option. For more information, see Note 1 – Summary of Significant Accounting Principles.


⁽⁴⁾	Net derivatives include derivative assets of $4.1 billion and derivative liabilities of $5.8 billion.


⁽⁵⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁶⁾	Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.


⁽⁷⁾	Settlements represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Significant transfers into Level 3, primarily due to decreased price observability, during 2017 included $1.2 billion of trading account assets, $501 million of LHFS and $711 million of long-term debt. Transfers occur on a regular basis for long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

Significant transfers out of Level 3, primarily due to increased price observability, during 2017 included $1.3 billion of trading account assets, $139 million of AFS debt securities, $263 million of federal funds purchased and securities loaned or sold under agreements to repurchase and $218 million of long-term debt.




Level 3 – Fair Value Measurements in 2016 ⁽¹⁾

	Balance January 1 2016			Total Realized/Unrealized Gains/(Losses) ⁽²⁾			Gains/ (Losses) in OCI ⁽³⁾			Gross											Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance December 31 2016			Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held ⁽²⁾
(Dollars in millions)										Purchases		Sales			Issuances			Settlements
Trading account assets:
Corporate securities, trading loans and other	$	2,838		$	78		$	2		$	1,508	$	(847	)	$	—		$	(725	)	$	728		$	(805	)	$	2,777		$	(82	)
Equity securities	407			74			—			73		(169		)	—			(82		)	70			(92		)	281			(59		)
Non-U.S. sovereign debt	521			122			91			12		(146		)	—			(90		)	—			—			510			120
Mortgage trading loans, ABS and other MBS	1,868			188			(2		)	988		(1,491		)	—			(344		)	158			(154		)	1,211			64
Total trading account assets	5,634			462			91			2,581		(2,653		)	—			(1,241		)	956			(1,051		)	4,779			43
Net derivative assets ⁽⁴⁾	(441		)	285			—			470		(1,155		)	—			76			(186		)	(362		)	(1,313		)	(376		)
AFS debt securities:
Non-agency residential MBS	106			—			—			—		(106		)	—			—			—			—			—			—
Non-U.S. securities	—			—			(6		)	584		(92		)	—			(263		)	6			—			229			—
Other taxable securities	757			4			(2		)	—		—			—			(83		)	—			(82		)	594			—
Tax-exempt securities	569			—			(1		)	1		—			—			(2		)	10			(35		)	542			—
Total AFS debt securities	1,432			4			(9		)	585		(198		)	—			(348		)	16			(117		)	1,365			—
Other debt securities carried at fair value – Non-agency residential MBS	30			(5		)	—			—		—			—			—			—			—			25			—
Loans and leases ^{(5, 6)}	1,620			(44		)	—			69		(553		)	50			(194		)	6			(234		)	720			17
Mortgage servicing rights ^{(6, 7)}	3,087			149			—			—		(80		)	411			(820		)	—			—			2,747			(107		)
Loans held-for-sale ⁽⁵⁾	787			79			50			22		(256		)	—			(93		)	173			(106		)	656			70
Other assets	374			(13		)	—			38		(111		)	—			(52		)	3			—			239			(36		)
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁵⁾	(335		)	(11		)	—			—		—			(22		)	27			(19		)	1			(359		)	4
Trading account liabilities – Corporate securities and other	(21		)	5			—			—		(11		)	—			—			—			—			(27		)	4
Short-term borrowings ⁽⁵⁾	(30		)	1			—			—		—			—			29			—			—			—			—
Accrued expenses and other liabilities ⁽⁵⁾	(9		)	—			—			—		—			—			—			—			—			(9		)	—
Long-term debt ⁽⁵⁾	(1,513		)	(74		)	(20		)	140		—			(521		)	948			(939		)	465			(1,514		)	(184		)


⁽¹⁾	Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.

⁽²⁾

Includes gains/losses reported in earnings in the following income statement line items: Trading account assets/liabilities - trading account profits; Net derivative assets - primarily trading account profits and mortgage banking income; MSRs - primarily mortgage banking income; Long-term debt - primarily trading account profits. For MSRs, the amounts reflect the changes in modeled MSR fair value due principally to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve.


⁽³⁾	Includes unrealized gains/losses in OCI on AFS securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option. For more information, see Note 1 – Summary of Significant Accounting Principles.


⁽⁴⁾	Net derivatives include derivative assets of $3.9 billion and derivative liabilities of $5.2 billion.


⁽⁵⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁶⁾	Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.


⁽⁷⁾	Settlements represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Significant transfers into Level 3, primarily due to decreased price observability, during 2016 included $956 million of trading account assets, $186 million of net derivative assets, $173 million of LHFS and $939 million of long-term debt. Transfers occur on a regular basis for long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

Significant transfers out of Level 3, primarily due to increased price observability, during 2016 included $1.1 billion of trading account assets, $362 million of net derivative assets, $117 million of AFS debt securities, $234 million of loans and leases, $106 million of LHFS and $465 million of long-term debt.




Level 3 – Fair Value Measurements in 2015 ⁽¹⁾

(Dollars in millions)	Balance January 1 2015			Total Realized/Unrealized Gains/(Losses) ⁽²⁾			Gains/ (Losses) in OCI ⁽³⁾			Gross											Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance December 31 2015			Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held ⁽²⁾
										Purchases		Sales			Issuances			Settlements
Trading account assets:
Corporate securities, trading loans and other	$	3,270		$	(31	)	$	(11	)	$	1,540	$	(1,616	)	$	—		$	(1,122	)	$	1,570		$	(762	)	$	2,838		$	(123	)
Equity securities	352			9			—			49		(11		)	—			(11		)	41			(22		)	407			3
Non-U.S. sovereign debt	574			114			(179		)	185		(1		)	—			(145		)	—			(27		)	521			74
Mortgage trading loans, ABS and other MBS	2,063			154			1			1,250		(1,117		)	—			(493		)	50			(40		)	1,868			(93		)
Total trading account assets	6,259			246			(189		)	3,024		(2,745		)	—			(1,771		)	1,661			(851		)	5,634			(139		)
Net derivative assets ⁽⁴⁾	(920		)	1,335			(7		)	273		(863		)	—			(261		)	(40		)	42			(441		)	605
AFS debt securities:
Non-agency residential MBS	279			(12		)	—			134		—			—			(425		)	167			(37		)	106			—
Non-U.S. securities	10			—			—			—		—			—			(10		)	—			—			—			—
Other taxable securities	1,667			—			—			189		—			—			(160		)	—			(939		)	757			—
Tax-exempt securities	599			—			—			—		—			—			(30		)	—			—			569			—
Total AFS debt securities	2,555			(12		)	—			323		—			—			(625		)	167			(976		)	1,432			—
Other debt securities carried at fair value – Non-agency residential MBS	—			(3		)	—			33		—			—			—			—			—			30			—
Loans and leases ^{(5, 6)}	1,983			(23		)	—			—		(4		)	57			(237		)	144			(300		)	1,620			13
Mortgage servicing rights ^{(6, 7)}	3,530			187			—			—		(393		)	637			(874		)	—			—			3,087			(85		)
Loans held-for-sale ⁽⁵⁾	173			(51		)	(8		)	771		(203		)	61			(61		)	203			(98		)	787			(39		)
Other assets	911			(55		)	—			11		(130		)	—			(51		)	10			(322		)	374			(61		)
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁵⁾	—			(11		)	—			—		—			(131		)	217			(411		)	1			(335		)	—
Trading account liabilities – Corporate securities and other	(36		)	19			—			30		(34		)	—			—			—			—			(21		)	(3		)
Short-term borrowings ⁽⁵⁾	—			17			—			—		—			(52		)	10			(24		)	19			(30		)	1
Accrued expenses and other liabilities ⁽⁵⁾	(10		)	1			—			—		—			—			—			—			—			(9		)	1
Long-term debt ⁽⁵⁾	(2,362		)	287			19			616		—			(188		)	273			(1,592		)	1,434			(1,513		)	255


⁽¹⁾	Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.

⁽²⁾


⁽³⁾	Includes unrealized gains/losses in OCI on AFS securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option. For more information, see Note 1 – Summary of Significant Accounting Principles.


⁽⁴⁾	Net derivatives include derivative assets of $5.1 billion and derivative liabilities of $5.6 billion.


⁽⁵⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁶⁾	Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.


⁽⁷⁾	Settlements represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Significant transfers into Level 3, primarily due to decreased price observability, during 2015 included $1.7 billion of trading account assets, $167 million of AFS debt securities, $144 million of loans and leases, $203 million of LHFS, $411 million of federal funds purchased and securities loaned or sold under agreements to repurchase and $1.6 billion of long-term debt. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

Significant transfers out of Level 3, primarily due to increased price observability, unless otherwise noted, during 2015 included $851 million of trading account assets, as a result of increased market liquidity, $976 million of AFS debt securities, $300 million of loans and leases, $322 million of other assets and $1.4 billion of long-term debt.

The following tables present information about significant unobservable inputs related to the Corporation’s material categories of Level 3 financial assets and liabilities at December 31, 2017 and 2016.




Quantitative Information about Level 3 Fair Value Measurements at December 31, 2017

(Dollars in millions)					Inputs
Financial Instrument	Fair Value			Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs		Weighted Average
Loans and Securities ⁽¹⁾
Instruments backed by residential real estate assets	$	871		Discounted cash flow	Yield	0% to 25%		6	%
Trading account assets – Mortgage trading loans, ABS and other MBS	298				Prepayment speed	0% to 22% CPR		12	%
Loans and leases	570				Default rate	0% to 3% CDR		1	%
Loans held-for-sale	3				Loss severity	0% to 53%		17	%
Instruments backed by commercial real estate assets	$	286		Discounted cash flow	Yield	0% to 25%		9	%
Trading account assets – Corporate securities, trading loans and other	244				Price	$0 to $100		$67
Trading account assets – Mortgage trading loans, ABS and other MBS	42
Commercial loans, debt securities and other	$	4,023		Discounted cash flow, Market comparables	Yield	0% to 12%		5	%
Trading account assets – Corporate securities, trading loans and other	1,613				Prepayment speed	10% to 20%		16	%
Trading account assets – Non-U.S. sovereign debt	556				Default rate	3% to 4%		4	%
Trading account assets – Mortgage trading loans, ABS and other MBS	1,158				Loss severity	35% to 40%		37	%
AFS debt securities – Other taxable securities	8				Price	$0 to $145		$63
Loans and leases	1
Loans held-for-sale	687
Auction rate securities	$	977		Discounted cash flow, Market comparables	Price	$10 to $100		$94
Trading account assets – Corporate securities, trading loans and other	7
AFS debt securities – Other taxable securities	501
AFS debt securities – Tax-exempt securities	469
MSRs	$	2,302		Discounted cash flow	Weighted-average life, fixed rate ⁽⁴⁾	0 to 14 years		5 years
					Weighted-average life, variable rate ⁽⁴⁾	0 to 10 years		3 years
					Option Adjusted Spread, fixed rate	9% to 14%		10	%
					Option Adjusted Spread, variable rate	9% to 15%		12	%
Structured liabilities
Long-term debt	$	(1,863	)	Discounted cash flow, Market comparables, Industry standard derivative pricing ⁽²⁾	Equity correlation	15% to 100%		63	%
					Long-dated equity volatilities	4% to 84%		22	%
					Yield	7.5	%	n/a
					Price	$0 to $100		$66
Net derivative assets
Credit derivatives	$	(282	)	Discounted cash flow, Stochastic recovery correlation model	Yield	1% to 5%		3	%
					Upfront points	0 points to 100 points		71 points
					Credit correlation	35% to 83%		42	%
					Prepayment speed	15% to 20% CPR		16	%
					Default rate	1% to 4% CDR		2	%
					Loss severity	35	%	n/a
					Price	$0 to $102		$82
Equity derivatives	$	(2,059	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	15% to 100%		63	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 84%		22	%
Commodity derivatives	$	(3	)	Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$1/MMBtu to $5/MMBtu		$3/MMBtu
					Correlation	71% to 87%		81	%
					Volatilities	26% to 132%		57	%
Interest rate derivatives	$	630		Industry standard derivative pricing ⁽³⁾	Correlation (IR/IR)	15% to 92%		50	%
					Correlation (FX/IR)	0% to 46%		1	%
					Long-dated inflation rates	-14% to 38%		4	%
					Long-dated inflation volatilities	0% to 1%		1	%
Total net derivative assets	$	(1,714	)

⁽¹⁾

The categories are aggregated based upon product type which differs from financial statement classification. The following is a reconciliation to the line items in the table on page 173: Trading account assets – Corporate securities, trading loans and other of $1.9 billion, Trading account assets – Non-U.S. sovereign debt of $556 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.5 billion, AFS debt securities – Other taxable securities of $509 million, AFS debt securities – Tax-exempt securities of $469 million, Loans and leases of $571 million and LHFS of $690 million.


⁽²⁾	Includes models such as Monte Carlo simulation and Black-Scholes.


⁽³⁾	Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.


⁽⁴⁾	The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions.

CPR = Constant Prepayment Rate

CDR = Constant Default Rate

MMBtu = Million British thermal units

IR = Interest Rate

FX = Foreign Exchange

n/a = not applicable




Quantitative Information about Level 3 Fair Value Measurements at December 31, 2016

(Dollars in millions)					Inputs
Financial Instrument	Fair Value			Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs		Weighted Average
Loans and Securities ⁽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				Price
AFS debt securities – Other taxable securities	565
AFS debt securities – Tax-exempt securities	542
MSRs	$	2,747		Discounted cash flow	Weighted-average life, fixed rate ⁽⁴⁾	0 to 15 years		6 years
					Weighted-average life, variable rate ⁽⁴⁾	0 to 14 years		4 years
					Option Adjusted Spread, fixed rate	9% to 14%		10	%
					Option Adjusted Spread, variable rate	9% to 15%		12	%
Structured liabilities
Long-term debt	$	(1,514	)	Discounted cash flow, Market comparables, Industry standard derivative pricing ⁽²⁾	Equity correlation	13% to 100%		68	%
					Long-dated equity volatilities	4% to 76%		26	%
					Yield	6% to 37%		20	%
					Price	$12 to $87		$73
					Duration	0 to 5 years		3 years
Net derivative assets
Credit derivatives	$	(129	)	Discounted cash flow, Stochastic recovery correlation model	Yield	0% to 24%		13	%
					Upfront points	0 to 100 points		72 points
					Credit spreads	17 bps to 814 bps		248 bps
					Credit correlation	21% to 80%		44	%
					Prepayment speed	10% to 20% CPR		18	%
					Default rate	1% to 4% CDR		3	%
					Loss severity	35	%	n/a
Equity derivatives	$	(1,690	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	13% to 100%		68	%
				Industry standard derivative pricing ⁽²⁾	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 174: Trading account assets – Corporate securities, trading loans and other of $2.8 billion, Trading account assets – Non-U.S. sovereign debt of $510 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.2 billion, AFS debt securities – Other taxable securities of $594 million, AFS debt securities – Tax-exempt securities of $542 million, Loans and leases of $720 million and LHFS of $656 million.


⁽²⁾	Includes models such as Monte Carlo simulation and Black-Scholes.


⁽³⁾	Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.


⁽⁴⁾	The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions.

CPR = Constant Prepayment Rate

CDR = Constant Default Rate

EBITDA = Earnings before interest, taxes, depreciation and amortization

MMBtu = Million British thermal units

IR = Interest Rate

FX = Foreign Exchange

n/a = not applicable

In the previous tables, instruments backed by residential and commercial real estate assets include RMBS, commercial MBS, whole loans and mortgage CDOs. Commercial loans, debt securities and other include corporate CLOs and CDOs, commercial loans and bonds, and securities backed by non-real estate assets. Structured liabilities primarily include equity-linked notes that are accounted for under the fair value option.

The Corporation uses multiple market approaches in valuing certain of its Level 3 financial instruments. For example, market comparables and discounted cash flows are used together. For a given product, such as corporate debt securities, market comparables may be used to estimate some of the unobservable inputs and then these inputs are incorporated into a discounted cash flow model. Therefore, the balances disclosed encompass both of these techniques.

The level of aggregation and diversity within the products disclosed in the tables results in certain ranges of inputs being wide and unevenly distributed across asset and liability categories.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

A significant increase in market yields, default rates, loss severities or duration would result in a significantly lower fair value for long positions. Short positions would be impacted in a directionally opposite way. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested. A significant increase in price would result in a significantly higher fair value for long positions, and short positions would be impacted in a directionally opposite way.

Mortgage Servicing Rights

The weighted-average lives and fair value of MSRs are sensitive to changes in modeled assumptions. The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions. The weighted-average life represents the average period of time that the MSRs’ cash flows are expected to be received. Absent other changes, an increase (decrease) to the weighted-average life would generally result in an increase (decrease) in the fair value of the MSRs. For example, a 10 percent or 20 percent decrease in prepayment rates, which impacts the weighted-average life, could result in an increase in fair value of $83 million or $172 million, while a 10 percent or 20 percent increase in prepayment rates could result in a decrease in fair value of $76 million or $147 million. A 100 bp or 200 bp decrease in OAS levels could result in an increase in fair value of $69 million or $143 million, while a 100 bp or 200 bp increase in OAS levels could result in a decrease in fair value of $65 million or $125 million. These sensitivities are hypothetical and actual amounts may vary materially. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSRs that continue to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. In addition, these sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk. The Corporation manages the risk in MSRs with derivatives such as options and interest rate swaps, which are not designated as accounting hedges, as well as securities including MBS and U.S. Treasury securities. The securities used to manage the risk in the MSRs are classified in other assets on the Consolidated Balance Sheet.

Structured Liabilities and Derivatives

For credit derivatives, a significant increase in market yield, upfront points (i.e., a single upfront payment made by a protection buyer at inception), credit spreads, default rates or loss severities would result in a significantly lower fair value for protection sellers and higher fair value for protection buyers. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument.

Structured credit derivatives are impacted by credit correlation. Default correlation is a parameter that describes the degree of dependence among credit default rates within a credit portfolio that underlies a credit derivative instrument. The sensitivity of this input on the fair value varies depending on the level of subordination of the tranche. For senior tranches that are net purchases of protection, a significant increase in default correlation would result in a significantly higher fair value. Net short protection positions would be impacted in a directionally opposite way.

For equity derivatives, commodity derivatives, interest rate derivatives and structured liabilities, a significant change in long-dated rates and volatilities and correlation inputs (i.e., the degree of correlation between an equity security and an index, between two different commodities, between two different interest rates, or between interest rates and foreign exchange rates) would result in a significant impact to the fair value; however, the magnitude and direction of the impact depend on whether the Corporation is long or short the exposure. For structured liabilities, a significant increase in yield or decrease in price would result in a significantly lower fair value. A significant decrease in duration may result in a significantly higher fair value.

Nonrecurring Fair Value

The Corporation holds certain assets that are measured at fair value, but only in certain situations (e.g., impairment) and these measurements are referred to herein as nonrecurring. The amounts below represent assets still held as of the reporting date for which a nonrecurring fair value adjustment was recorded during 2017, 2016 and 2015.




Assets Measured at Fair Value on a Nonrecurring Basis

	December 31, 2017					December 31, 2016
(Dollars in millions)	Level 2		Level 3			Level 2			Level 3
Assets
Loans held-for-sale	$	—	$	2		$	193		$	44
Loans and leases ⁽¹⁾	—		894			—			1,416
Foreclosed properties ^{(2, 3)}	—		83			—			77
Other assets	425		—			358			—

			Gains (Losses)
			2017			2016			2015
Assets
Loans held-for-sale			$	(6	)	$	(54	)	$	(8	)
Loans and leases ⁽¹⁾			(336		)	(458		)	(993		)
Foreclosed properties			(41		)	(41		)	(57		)
Other assets			(124		)	(74		)	(28		)


⁽¹⁾	Includes $135 million of losses on loans that were written down to a collateral value of zero during 2017 compared to losses of $150 million and $174 million for 2016 and 2015.


⁽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 recorded during the first 90 days after transfer of a loan to foreclosed properties.


⁽³⁾	Excludes $801 million and $1.2 billion of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) at December 31, 2017 and 2016.

The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial assets and liabilities at December 31, 2017 and 2016. Loans and leases backed by residential real estate assets represent residential mortgages where the loan has been written down to the fair value of the underlying collateral.

Quantitative Information about Nonrecurring Level 3 Fair Value Measurements

(Dollars in millions)

Inputs

Financial Instrument

Fair Value

Valuation

Technique

Significant Unobservable

Inputs

Ranges of

Inputs

Weighted Average

December 31, 2017

Loans and leases backed by residential real estate assets

894

Market comparables

OREO discount

15% to 58%

Costs to sell

5% to 49%



	December 31, 2016
Loans and leases backed by residential real estate assets	$	1,416	Market comparables	OREO discount	8% to 56%	21	%
				Costs to sell	7% to 45%	9	%

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details