Annual report pursuant to Section 13 and 15(d)

Fair Value Option

v3.10.0.1
Fair Value Option
 12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Option Fair Value Option
Loans and Loan Commitments
The Corporation elects to account for certain loans and loan commitments that exceed the Corporation’s single-name credit risk concentration guidelines under the fair value option. Lending commitments are actively managed and, as appropriate, credit risk for these lending relationships may be mitigated through the use of credit derivatives, with the Corporation’s public side credit view and market perspectives determining the size and timing of the hedging activity. These credit derivatives do not meet the requirements for designation as accounting hedges and therefore are carried at fair value with changes in fair value recorded in other income. The fair value option allows the Corporation to carry these loans and loan commitments at fair value, which is more consistent with management’s view of the underlying economics and the manner in which they are managed. In addition, the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at historical cost and the credit derivatives at fair value.
Loans Held-for-sale
The Corporation elects to account for residential mortgage LHFS, commercial mortgage LHFS and certain other LHFS under the fair value option with interest income on these LHFS recorded in other interest income. These loans are actively managed and monitored and, as appropriate, certain market risks of the loans may be mitigated through the use of derivatives. The Corporation has elected not to designate the derivatives as qualifying accounting hedges and therefore they are carried at fair value with changes in fair value recorded in other income. The changes in fair value of the loans are largely offset by changes in the fair value of the derivatives. The fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of cost or fair value and the derivatives at fair value. The Corporation has not elected to account for certain other LHFS under the fair value option primarily because these loans are floating-rate loans that are not hedged using derivative instruments.
Loans Reported as Trading Account Assets
The Corporation elects to account for certain loans that are held for the purpose of trading and are risk-managed on a fair value basis under the fair value option.
Other Assets
The Corporation elects to account for certain long-term fixed-rate margin loans that are hedged with derivatives under the fair value option. Election of the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at historical cost and the derivatives at fair value.
Securities Financing Agreements
The Corporation elects to account for certain securities financing agreements, including resale and repurchase agreements, under the fair value option based on the tenor of the agreements, which reflects the magnitude of the interest rate risk. The majority of securities financing agreements collateralized by U.S. government securities are not accounted for under the fair value option as these contracts are generally short-dated and therefore the interest rate risk is not significant.
Long-term Deposits
The Corporation elects to account for certain long-term fixed-rate and rate-linked deposits that are hedged with derivatives that do not qualify for hedge accounting under the fair value option. Election of the fair value option allows the Corporation to reduce
the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at historical cost and the derivatives at fair value. The Corporation has not elected to carry other long-term deposits at fair value because they are not hedged using derivatives.
Short-term Borrowings
The Corporation elects to account for certain short-term borrowings, primarily short-term structured liabilities, under the fair value option because this debt is risk-managed on a fair value basis.
The Corporation elects to account for certain asset-backed secured financings, which are also classified in short-term borrowings, under the fair value option. Election of the fair value option allows the Corporation to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the asset-backed secured financings at historical cost and the corresponding mortgage LHFS securing these financings at fair value.
Long-term Debt
The Corporation elects to account for certain long-term debt, primarily structured liabilities, under the fair value option. This long-term debt is either risk-managed on a fair value basis or the related hedges do not qualify for hedge accounting.
Fair Value Option Elections
The table below provides information about the fair value carrying amount and the contractual principal outstanding of assets and liabilities accounted for under the fair value option at December 31, 2018 and 2017.
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Option Elections
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
December 31, 2017
(Dollars in millions)
Fair Value Carrying Amount
 
Contractual Principal Outstanding
 
Fair Value Carrying Amount Less Unpaid Principal
 
Fair Value Carrying Amount
 
Contractual Principal Outstanding
 
Fair Value Carrying Amount Less Unpaid Principal
Federal funds sold and securities borrowed or purchased under agreements to resell
$
56,399

 
$
56,376

 
$
23

 
$
52,906

 
$
52,907

 
$
(1
)
Loans reported as trading account assets (1)
6,195

 
13,088

 
(6,893
)
 
5,735

 
11,804

 
(6,069
)
Trading inventory – other
13,778

 
n/a

 
n/a

 
12,027

 
n/a

 
n/a

Consumer and commercial loans
4,349

 
4,399

 
(50
)
 
5,710

 
5,744

 
(34
)
Loans held-for-sale (1)
2,942

 
4,749

 
(1,807
)
 
2,156

 
3,717

 
(1,561
)
Other assets
3

 
n/a

 
n/a

 
3

 
n/a

 
n/a

Long-term deposits
492

 
454

 
38

 
449

 
421

 
28

Federal funds purchased and securities loaned or sold under agreements to repurchase
28,875

 
28,881

 
(6
)
 
36,182

 
36,187

 
(5
)
Short-term borrowings
1,648

 
1,648

 
—

 
1,494

 
1,494

 
—

Unfunded loan commitments
169

 
n/a

 
n/a

 
120

 
n/a

 
n/a

Long-term debt (2)
27,637

 
29,147

 
(1,510
)
 
31,786

 
31,512

 
274


(1) 
A significant portion of the loans reported as trading account assets and LHFS are distressed loans that were purchased at a deep discount to par, and the remainder are loans with a fair value near contractual principal outstanding.
(2) 
Includes structured liabilities with a fair value of $27.3 billion and $31.4 billion, and contractual principal outstanding of $28.8 billion and $31.1 billion at December 31, 2018 and 2017.
n/a = not applicable
The following tables provide information about where changes in the fair value of assets and liabilities accounted for under the fair value option are included in the Consolidated Statement of Income for 2018, 2017 and 2016.
 
 
 
 
 
 
Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option
 
 
 
 
 
 
 
Trading Account Profits
 
Other
Income
 
Total
(Dollars in millions)
2018
Loans reported as trading account assets (1)
$
8

 
$
—

 
$
8

Trading inventory – other (2)
1,750

 
—

 
1,750

Consumer and commercial loans (1)
(422
)
 
(53
)
 
(475
)
Loans held-for-sale (1, 3)
1

 
24

 
25

Unfunded loan commitments
—

 
(49
)
 
(49
)
Long-term debt (4, 5)
2,157

 
(93
)
 
2,064

Other (6)
8

 
18

 
26

Total
$
3,502


$
(153
)

$
3,349

 
 
 
 
 
 
 
2017
Loans reported as trading account assets (1)
$
318

 
$
—

 
$
318

Trading inventory – other (2)
3,821

 
—

 
3,821

Consumer and commercial loans (1)
(9
)
 
35

 
26

Loans held-for-sale (1, 3)
—

 
298

 
298

Unfunded loan commitments
—

 
36

 
36

Long-term debt (4, 5)
(1,044
)
 
(146
)
 
(1,190
)
Other (6)
(93
)
 
13

 
(80
)
Total
$
2,993

 
$
236

 
$
3,229

 
 
 
 
 
 
 
2016
Loans reported as trading account assets (1)
$
301

 
$
—

 
$
301

Trading inventory – other (2)
57

 
—

 
57

Consumer and commercial loans (1)
49

 
(37
)
 
12

Loans held-for-sale (1, 3)
11

 
524

 
535

Unfunded loan commitments
—

 
487

 
487

Long-term debt (4, 5)
(489
)
 
(97
)
 
(586
)
Other (6)
(85
)
 
53

 
(32
)
Total
$
(156
)
 
$
930

 
$
774


(1) Gains (losses) related to borrower-specific credit risk were not significant.
(2) 
The gains in trading account profits are primarily offset by losses on trading liabilities that hedge these assets.
(3) 
Includes the value of IRLCs on funded loans, including those sold during the period.
(4) 
The majority of the net gains (losses) in trading account profits relate to the embedded derivatives in structured liabilities and are offset by gains (losses) on derivatives and securities that hedge these liabilities.
(5) 
For the cumulative impact of changes in the Corporation’s own credit spreads and the amount recognized in accumulated OCI, see . For more information on how the Corporation’s own credit spread is determined, see .
(6) 
Includes gains (losses) on federal funds sold and securities borrowed or purchased under agreements to resell, other assets, long-term deposits, federal funds purchased and securities loaned or sold under agreements to repurchase and short-term borrowings.