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, 2018

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. 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 Techniques

The following sections outline the valuation methodologies for the Corporation’s assets and liabilities. 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 2018, 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, 2018 and 2017, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.




	December 31, 2018
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Time deposits placed and other short-term investments	$	1,214	$	—	$	—	$	—		$	1,214
Federal funds sold and securities borrowed or purchased under agreements to resell	—		56,399		—		—			56,399
Trading account assets:
U.S. Treasury and agency securities ⁽²⁾	53,131		1,593		—		—			54,724
Corporate securities, trading loans and other	—		24,630		1,558		—			26,188
Equity securities	53,840		23,163		276		—			77,279
Non-U.S. sovereign debt	5,818		19,210		465		—			25,493
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed	—		19,586		—		—			19,586
Mortgage trading loans, ABS and other MBS	—		9,443		1,635		—			11,078
Total trading account assets ⁽³⁾	112,789		97,625		3,934		—			214,348
Derivative assets	9,967		315,413		3,466		(285,121		)	43,725
AFS debt securities:
U.S. Treasury and agency securities	53,663		1,260		—		—			54,923
Mortgage-backed securities:
Agency	—		121,826		—		—			121,826
Agency-collateralized mortgage obligations	—		5,530		—		—			5,530
Non-agency residential	—		1,320		597		—			1,917
Commercial	—		14,078		—		—			14,078
Non-U.S. securities	—		9,304		2		—			9,306
Other taxable securities	—		4,403		7		—			4,410
Tax-exempt securities	—		17,376		—		—			17,376
Total AFS debt securities	53,663		175,097		606		—			229,366
Other debt securities carried at fair value:
U.S. Treasury and agency securities	1,282		—		—		—			1,282
Mortgage-backed securities:
Non-agency residential	—		1,434		172		—			1,606
Non-U.S. securities	490		5,354		—		—			5,844
Other taxable securities	—		3		—		—			3
Total other debt securities carried at fair value	1,772		6,791		172		—			8,735
Loans and leases	—		4,011		338		—			4,349
Loans held-for-sale	—		2,400		542		—			2,942
Other assets ⁽⁴⁾	15,032		1,775		2,932		—			19,739
Total assets⁽⁵⁾	$	194,437	$	659,511	$	11,990	$	(285,121	)	$	580,817
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	492	$	—	$	—		$	492
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		28,875		—		—			28,875
Trading account liabilities:
U.S. Treasury and agency securities	7,894		761		—		—			8,655
Equity securities	33,739		4,070		—		—			37,809
Non-U.S. sovereign debt	7,452		9,182		—		—			16,634
Corporate securities and other	—		5,104		18		—			5,122
Total trading account liabilities	49,085		19,117		18		—			68,220
Derivative liabilities	9,931		303,441		4,401		(279,882		)	37,891
Short-term borrowings	—		1,648		—		—			1,648
Accrued expenses and other liabilities	18,096		1,979		—		—			20,075
Long-term debt	—		26,820		817		—			27,637
Total liabilities ⁽⁵⁾	$	77,112	$	382,372	$	5,236	$	(279,882	)	$	184,838


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


⁽²⁾	Includes $20.2 billion of GSE obligations.


⁽³⁾	Includes securities with a fair value of $16.6 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⁾	Includes MSRs of $2.0 billion which are classified as Level 3 assets.


⁽⁵⁾	Total recurring Level 3 assets were 0.51 percent of total consolidated assets, and total recurring Level 3 liabilities were 0.25 percent of total consolidated liabilities.




	December 31, 2017
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Time deposits placed and other short-term investments	$	2,234	$	—	$	—	$	—		$	2,234
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⁾	38,720		1,922		—		—			40,642
Corporate securities, trading loans and other	—		28,714		1,864		—			30,578
Equity securities	60,747		23,958		235		—			84,940
Non-U.S. sovereign debt	6,545		15,839		556		—			22,940
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed	—		20,586		—		—			20,586
Mortgage trading loans, ABS and other MBS	—		8,174		1,498		—			9,672
Total trading account assets ⁽³⁾	106,012		99,193		4,153		—			209,358
Derivative assets	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:
Non-agency residential	—		2,769		—		—			2,769
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
Loans held-for-sale	—		1,466		690		—			2,156
Other assets ⁽⁴⁾	19,367		789		2,425		—			22,581
Total assets ⁽⁵⁾	$	194,796	$	753,907	$	12,909	$	(313,788	)	$	647,824
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	33,019		3,885		—		—			36,904
Non-U.S. sovereign debt	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	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 ⁽⁵⁾	$	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⁾	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.


⁽⁴⁾	Includes MSRs of $2.3 billion which are classified as Level 3 assets.

⁽⁵⁾

Total recurring Level 3 assets were 0.57 percent of total consolidated assets, and total recurring Level 3 liabilities were 0.38 percent of total consolidated liabilities.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 2018, 2017 and 2016, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.




Level 3 – Fair Value Measurements in 2018 ⁽¹⁾

(Dollars in millions)	Balance January 1 2018			Total Realized/Unrealized Gains (Losses) in Net Income ⁽²⁾			Gains (Losses) in OCI ⁽³⁾			Gross											Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance December 31 2018			Change in Unrealized Gains (Losses) in Net Income Related to Financial Instruments Still Held ⁽²⁾
										Purchases		Sales			Issuances			Settlements
Trading account assets:
Corporate securities, trading loans and other	$	1,864		$	(32	)	$	(1	)	$	436	$	(403	)	$	5		$	(568	)	$	804		$	(547	)	$	1,558		$	(117	)
Equity securities	235			(17		)	—			44		(11		)	—			(4		)	78			(49		)	276			(22		)
Non-U.S. sovereign debt	556			47			(44		)	13		(57		)	—			(30		)	117			(137		)	465			48
Mortgage trading loans, ABS and other MBS	1,498			148			3			585		(910		)	—			(158		)	705			(236		)	1,635			97
Total trading account assets	4,153			146			(42		)	1,078		(1,381		)	5			(760		)	1,704			(969		)	3,934			6
Net derivative assets ⁽⁴⁾	(1,714		)	106			—			531		(1,179		)	—			778			39			504			(935		)	(116		)
AFS debt securities:
Non-agency residential MBS	—			27			(33		)	—		(71		)	—			(25		)	774			(75		)	597			—
Non-U.S. securities	25			—			(1		)	—		(10		)	—			(15		)	3			—			2			—
Other taxable securities	509			1			(3		)	—		(23		)	—			(11		)	60			(526		)	7			—
Tax-exempt securities	469			—			—			—		—			—			(1		)	1			(469		)	—			—
Total AFS debt securities ⁽⁵⁾	1,003			28			(37		)	—		(104		)	—			(52		)	838			(1,070		)	606			—
Other debt securities carried at fair value – Non-agency residential MBS	—			(18		)	—			—		(8		)	—			(34		)	365			(133		)	172			(18		)
Loans and leases ^{(6, 7)}	571			(16		)	—			—		(134		)	—			(83		)	—			—			338			(9		)
Loans held-for-sale ⁽⁶⁾	690			44			(26		)	71		—			1			(201		)	23			(60		)	542			31
Other assets ^{(5, 7, 8)}	2,425			414			(38		)	2		(69		)	96			(792		)	929			(35		)	2,932			149
Trading account liabilities – Corporate securities and other	(24		)	11			—			9		(12		)	(2		)	—			—			—			(18		)	(7		)
Accrued expenses and other liabilities ⁽⁶⁾	(8		)	—			—			—		—			—			8			—			—			—			—
Long-term debt ⁽⁶⁾	(1,863		)	103			4			9		—			(141		)	486			(262		)	847			(817		)	95


⁽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 - predominantly trading account profits; Net derivative assets - primarily trading account profits and other income; Other debt securities carried at fair value - other income; Loans and leases - other income; Loans held-for-sale - other income; Other assets - primarily other income related to MSRs; 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 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. Total gains (losses) in OCI include net unrealized losses of $105 million related to financial instruments still held at December 31, 2018. For additional information, see Note 1 – Summary of Significant Accounting Principles.


⁽⁴⁾	Net derivative assets include derivative assets of $3.5 billion and derivative liabilities of $4.4 billion.


⁽⁵⁾	Transfers out of AFS debt securities and into other assets primarily relate to the reclassification of certain securities.


⁽⁶⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁷⁾	Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.


⁽⁸⁾	Settlements primarily represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Transfers into Level 3, primarily due to decreased price observability, during 2018 included $1.7 billion of trading account assets, $838 million of AFS debt securities, $365 million of other debt securities carried at fair value and $262 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.

Transfers out of Level 3, primarily due to increased price observability, during 2018 included $969 million of trading account assets, $504 million of net derivatives assets, $1.1 billion of AFS debt securities and $847 million of long-term debt.




Level 3 – Fair Value Measurements in 2017 ⁽¹⁾

	Balance January 1 2017			Total Realized/Unrealized Gains (Losses) in Net Income ⁽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) in Net Income Related to Financial Instruments Still Held ⁽²⁾
(Dollars in millions)										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⁾	720			15			—			3		(34		)	—			(126		)	—			(7		)	571			11
Loans held-for-sale ^{(5, 6)}	656			100			(3		)	3		(189		)	—			(346		)	501			(32		)	690			14
Other assets ^{(6, 7)}	2,986			144			(57		)	2		(214		)	258			(758		)	64			—			2,425			(226		)
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 - predominantly trading account profits; Net derivative assets - primarily trading account profits and other income; Other debt securities carried at fair value - other income; Loans and leases - other income; Loans held-for-sale - other income; Other assets - primarily other income related to MSRs; Long-term debt - 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 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. For additional information, see Note 1 – Summary of Significant Accounting Principles.


⁽⁴⁾	Net derivative assets 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 primarily represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

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.

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⁾

(Dollars in millions)	Balance January 1 2016			Total Realized/Unrealized Gains/(Losses) in Net Income ⁽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) in Net Income Related to Financial Instruments Still Held ⁽²⁾
										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
Loans held-for-sale ⁽⁵⁾	787			79			50			22		(256		)	—			(93		)	173			(106		)	656			70
Other assets^{(6, 7)}	3,461			136			—			38		(191		)	411			(872		)	3			—			2,986			(143		)
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 other income; Other debt securities carried at fair value - other income; Loans and leases - other income; Loans held-for-sale - other income; Other assets - primarily other income related to MSRs; Long-term debt - predominantly 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 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. 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.

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.

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.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, 2018 and 2017.




Quantitative Information about Level 3 Fair Value Measurements at December 31, 2018

(Dollars in millions)					Inputs
Financial Instrument	Fair Value			Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average ⁽¹⁾
Loans and Securities ⁽²⁾
Instruments backed by residential real estate assets	$	1,536		Discounted cash flow, Market comparables	Yield	0% to 25%	8%
Trading account assets – Mortgage trading loans, ABS and other MBS	419				Prepayment speed	0% to 21% CPR	12%
Loans and leases	338				Default rate	0% to 3% CDR	1%
Loans held-for-sale	1				Loss severity	0% to 51%	17%
AFS debt securities, primarily non-agency residential	606				Price	$0 to $128	$72
Other debt securities carried at fair value - Non-agency residential	172
Instruments backed by commercial real estate assets	$	291		Discounted cash flow	Yield	0% to 25%	7%
Trading account assets – Corporate securities, trading loans and other	200				Price	$0 to $100	$79
Trading account assets – Mortgage trading loans, ABS and other MBS	91
Commercial loans, debt securities and other	$	3,489		Discounted cash flow, Market comparables	Yield	1% to 18%	13%
Trading account assets – Corporate securities, trading loans and other	1,358				Prepayment speed	10% to 20%	15%
Trading account assets – Non-U.S. sovereign debt	465				Default rate	3% to 4%	4%
Trading account assets – Mortgage trading loans, ABS and other MBS	1,125				Loss severity	35% to 40%	38%
Loans held-for-sale	541				Price	$0 to $141	$68
Other assets, primarily auction rate securities	$	890		Discounted cash flow, Market comparables	Price	$10 to $100	$95


MSRs	$	2,042		Discounted cash flow	Weighted-average life, fixed rate ⁽⁵⁾	0 to 14 years	5 years
					Weighted-average life, variable rate ⁽⁵⁾	0 to 10 years	3 years
					Option-adjusted spread, fixed rate	7% to 14%	9%
					Option-adjusted spread, variable rate	9% to 15%	12%
Structured liabilities
Long-term debt	$	(817	)	Discounted cash flow, Market comparables, Industry standard derivative pricing ⁽³⁾	Equity correlation	11% to 100%	67%
					Long-dated equity volatilities	4% to 84%	32%
					Yield	7% to 18%	16%
					Price	$0 to $100	$72
Net derivative assets
Credit derivatives	$	(565	)	Discounted cash flow, Stochastic recovery correlation model	Yield	0% to 5%	4%
					Upfront points	0 points to 100 points	70 points
					Credit correlation	70%	n/a
					Prepayment speed	15% to 20% CPR	15%
					Default rate	1% to 4% CDR	2%
					Loss severity	35%	n/a
					Price	$0 to $138	$93
Equity derivatives	$	(348	)	Industry standard derivative pricing ⁽³⁾	Equity correlation	11% to 100%	67%
				Industry standard derivative pricing ⁽³⁾	Long-dated equity volatilities	4% to 84%	32%
Commodity derivatives	$	10		Discounted cash flow, Industry standard derivative pricing ⁽³⁾	Natural gas forward price	$1/MMBtu to $12/MMBtu	$3/MMBtu
					Correlation	38% to 87%	71%
					Volatilities	15% to 132%	38%
Interest rate derivatives	$	(32	)	Industry standard derivative pricing ⁽⁴⁾	Correlation (IR/IR)	15% to 70%	61%
					Correlation (FX/IR)	0% to 46%	1%
					Long-dated inflation rates	-20% to 38%	2%
					Long-dated inflation volatilities	0% to 1%	1%
Total net derivative assets	$	(935	)


⁽¹⁾	For loans and securities, structured liabilities and net derivative assets, the weighted average is calculated based upon the absolute fair value of the instruments.

⁽²⁾

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 152: Trading account assets – Corporate securities, trading loans and other of $1.6 billion, Trading account assets – Non-U.S. sovereign debt of $465 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.6 billion, AFS debt securities of $606 million, Other debt securities carried at fair value - Non-agency residential of $172 million, Other assets, including MSRs, of $2.9 billion, Loans and leases of $338 million and LHFS of $542 million.


⁽³⁾	Includes models such as Monte Carlo simulation and Black-Scholes.


⁽⁴⁾	Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.


⁽⁵⁾	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, 2017

(Dollars in millions)					Inputs
Financial Instrument	Fair Value			Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average ⁽¹⁾
Loans and Securities ⁽²⁾
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 ⁽⁵⁾	0 to 14 years	5 years
					Weighted-average life, variable rate ⁽⁵⁾	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 ⁽³⁾	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 ⁽³⁾	Equity correlation	15% to 100%	63%
				Industry standard derivative pricing ⁽³⁾	Long-dated equity volatilities	4% to 84%	22%
Commodity derivatives	$	(3	)	Discounted cash flow, Industry standard derivative pricing ⁽³⁾	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⁽⁴⁾	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⁾	For loans and securities, structured liabilities and net derivative assets, the weighted average is calculated based upon the absolute fair value of the instruments.

⁽²⁾

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 153: 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.


⁽³⁾	Includes models such as Monte Carlo simulation and Black-Scholes.


⁽⁴⁾	Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.


⁽⁵⁾	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

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.

Uncertainty of Fair Value Measurements from Unobservable Inputs

Loans and Securities

A significant increase in market yields, default rates, loss severities or duration would have resulted in a significantly lower fair value for long positions. Short positions would have been impacted in a directionally opposite way. The impact of changes in prepayment speeds would have resulted in 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 have resulted in a significantly higher fair value for long positions, and short positions would have been impacted in a directionally opposite way.

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 have resulted 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 resulted in 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 have resulted in a significantly higher fair value. Net short protection positions would have been 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 have resulted 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 have resulted in a significantly lower fair value. A significant decrease in duration would have resulted in a significantly higher fair value.

Sensitivity of Fair Value Measurements for 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 $64 million or $133 million, while a 10 percent or 20 percent increase in prepayment rates could result in a decrease in fair value of $59 million or $115 million. A 100 bp or 200 bp decrease in OAS levels could result in an increase in fair value of $63 million or $131 million, while a 100 bp or 200 bp increase in OAS levels could result in a decrease in fair value of $59 million or $115 million. These sensitivities are hypothetical and actual amounts may vary materially.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 2018, 2017 and 2016.




Assets Measured at Fair Value on a Nonrecurring Basis

	December 31, 2018					December 31, 2017
(Dollars in millions)	Level 2		Level 3			Level 2			Level 3
Assets
Loans held-for-sale	$	274	$	—		$	—		$	2
Loans and leases ⁽¹⁾	—		474			—			894
Foreclosed properties ^{(2, 3)}	—		42			—			83
Other assets	331		14			425			—

			Gains (Losses)
			2018			2017			2016
Assets
Loans held-for-sale			$	(18	)	$	(6	)	$	(54	)
Loans and leases ⁽¹⁾			(202		)	(336		)	(458		)
Foreclosed properties			(24		)	(41		)	(41		)
Other assets			(64		)	(124		)	(74		)


⁽¹⁾	Includes $83 million, $135 million and $150 million of losses on loans that were written down to a collateral value of zero during 2018, 2017 and 2016, respectively.


⁽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 $488 million and $801 million of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) at December 31, 2018 and 2017.

The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial assets and liabilities at December 31, 2018 and 2017. 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

Inputs

Financial Instrument

Fair Value

Valuation

Technique

Significant Unobservable

Inputs

Ranges of

Inputs

Weighted

Average ⁽¹⁾

(Dollars in millions)

December 31, 2018

Loans and leases backed by residential real estate assets

474

Market comparables

OREO discount

13% to 59%

Costs to sell

8% to 26%

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%

⁽¹⁾ The weighted average is calculated based upon the fair value of the loans.

- 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