| Fair Value Measurements |
Fair Value Measurements
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 and conducts a review of 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 become 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 more information, see Note 22 – 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 2019, there were no significant 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, and 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 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, interest rates, 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, 2019 and 2018, including financial instruments that the Corporation accounts for under the fair value option, are summarized in the following tables.
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December 31, 2019 |
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Fair Value Measurements |
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(Dollars in millions) |
Level 1 |
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Level 2 |
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Level 3 |
|
Netting Adjustments (1)
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Assets/Liabilities at Fair Value |
Assets |
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|
|
|
|
|
|
|
|
|
|
|
|
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Time deposits placed and other short-term investments |
$ |
1,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,000 |
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Federal funds sold and securities borrowed or purchased under agreements to resell |
— |
|
|
50,364 |
|
|
— |
|
|
— |
|
|
50,364 |
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Trading account assets: |
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|
|
|
|
|
|
|
|
|
|
|
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U.S. Treasury and agency securities (2)
|
49,517 |
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|
4,157 |
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|
— |
|
|
— |
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|
53,674 |
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Corporate securities, trading loans and other |
— |
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|
25,226 |
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|
1,507 |
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|
— |
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|
26,733 |
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Equity securities |
53,597 |
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|
32,619 |
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|
239 |
|
|
— |
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|
86,455 |
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Non-U.S. sovereign debt |
3,965 |
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|
23,854 |
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|
482 |
|
|
— |
|
|
28,301 |
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Mortgage trading loans, MBS and ABS: |
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|
|
|
|
|
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U.S. government-sponsored agency guaranteed (2)
|
— |
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|
24,324 |
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|
— |
|
|
— |
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|
24,324 |
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Mortgage trading loans, ABS and other MBS |
— |
|
|
8,786 |
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|
1,553 |
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|
— |
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|
10,339 |
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Total trading account assets (3)
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107,079 |
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|
118,966 |
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|
3,781 |
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|
— |
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|
229,826 |
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Derivative assets |
14,079 |
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|
328,442 |
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|
2,226 |
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(304,262 |
) |
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40,485 |
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AFS debt securities: |
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U.S. Treasury and agency securities |
67,332 |
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|
1,196 |
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|
— |
|
|
— |
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|
68,528 |
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Mortgage-backed securities: |
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Agency |
— |
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122,528 |
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— |
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— |
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122,528 |
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Agency-collateralized mortgage obligations |
— |
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4,641 |
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— |
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— |
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4,641 |
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Non-agency residential |
— |
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|
653 |
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|
424 |
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|
— |
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|
1,077 |
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Commercial |
— |
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15,021 |
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|
— |
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|
— |
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|
15,021 |
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Non-U.S. securities |
— |
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11,989 |
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2 |
|
|
— |
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|
11,991 |
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Other taxable securities |
— |
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|
3,876 |
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|
65 |
|
|
— |
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|
3,941 |
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Tax-exempt securities |
— |
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|
17,804 |
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|
108 |
|
|
— |
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|
17,912 |
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Total AFS debt securities |
67,332 |
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|
177,708 |
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|
599 |
|
|
— |
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|
245,639 |
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Other debt securities carried at fair value: |
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U.S. Treasury and agency securities |
3 |
|
|
— |
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|
— |
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— |
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|
3 |
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Agency MBS |
— |
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3,003 |
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— |
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— |
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|
3,003 |
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Non-agency residential MBS |
— |
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|
1,035 |
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|
299 |
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|
— |
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|
1,334 |
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Non-U.S. and other securities |
400 |
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|
6,088 |
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|
— |
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|
— |
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|
6,488 |
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Total other debt securities carried at fair value |
403 |
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|
10,126 |
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|
299 |
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|
— |
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|
10,828 |
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Loans and leases |
— |
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|
7,642 |
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|
693 |
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— |
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|
8,335 |
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Loans held-for-sale |
— |
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|
3,334 |
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|
375 |
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— |
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|
3,709 |
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Other assets (4)
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11,782 |
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|
1,376 |
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|
2,360 |
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|
— |
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|
15,518 |
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Total assets (5)
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$ |
201,675 |
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$ |
697,958 |
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$ |
10,333 |
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$ |
(304,262 |
) |
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$ |
605,704 |
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Liabilities |
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Interest-bearing deposits in U.S. offices |
$ |
— |
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|
$ |
508 |
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$ |
— |
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|
$ |
— |
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|
$ |
508 |
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Federal funds purchased and securities loaned or sold under agreements to repurchase |
— |
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|
16,008 |
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|
— |
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|
— |
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|
16,008 |
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Trading account liabilities: |
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U.S. Treasury and agency securities |
13,140 |
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|
282 |
|
|
— |
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|
— |
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|
13,422 |
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Equity securities |
38,148 |
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|
4,144 |
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2 |
|
|
— |
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|
42,294 |
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Non-U.S. sovereign debt |
10,751 |
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|
11,310 |
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|
— |
|
|
— |
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|
22,061 |
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Corporate securities and other |
— |
|
|
5,478 |
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|
15 |
|
|
— |
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|
5,493 |
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Total trading account liabilities |
62,039 |
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|
21,214 |
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|
17 |
|
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— |
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|
83,270 |
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Derivative liabilities |
11,904 |
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|
320,479 |
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|
4,764 |
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(298,918 |
) |
|
38,229 |
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Short-term borrowings |
— |
|
|
3,941 |
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|
— |
|
|
— |
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|
3,941 |
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Accrued expenses and other liabilities |
13,927 |
|
|
1,507 |
|
|
— |
|
|
— |
|
|
15,434 |
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Long-term debt |
— |
|
|
33,826 |
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|
1,149 |
|
|
— |
|
|
34,975 |
|
Total liabilities (5)
|
$ |
87,870 |
|
|
$ |
397,483 |
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|
$ |
5,930 |
|
|
$ |
(298,918 |
) |
|
$ |
192,365 |
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(1) |
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties. |
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(2) |
Includes $26.7 billion of GSE obligations.
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(3) |
Includes securities with a fair value of $14.7 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.
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(4) |
Includes MSRs of $1.5 billion which are classified as Level 3 assets.
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(5) |
Total recurring Level 3 assets were 0.42 percent of total consolidated assets, and total recurring Level 3 liabilities were 0.27 percent of total consolidated liabilities.
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December 31, 2018 |
|
Fair Value Measurements |
|
|
|
|
(Dollars in millions) |
Level 1 |
|
Level 2 |
|
Level 3 |
|
Netting Adjustments (1)
|
|
Assets/Liabilities at Fair Value |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Time deposits placed and other short-term investments |
$ |
1,214 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,214 |
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Federal funds sold and securities borrowed or purchased under agreements to resell |
— |
|
|
56,399 |
|
|
— |
|
|
— |
|
|
56,399 |
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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 (2)
|
— |
|
|
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 |
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|
3,466 |
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(285,121 |
) |
|
43,725 |
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AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
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U.S. Treasury and agency securities |
53,663 |
|
|
1,260 |
|
|
— |
|
|
— |
|
|
54,923 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
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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 |
|
Non-agency residential MBS |
— |
|
|
1,434 |
|
|
172 |
|
|
— |
|
|
1,606 |
|
Non-U.S. and other securities |
490 |
|
|
5,357 |
|
|
— |
|
|
— |
|
|
5,847 |
|
Total other debt securities carried at fair value |
1,772 |
|
|
6,791 |
|
|
172 |
|
|
— |
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|
8,735 |
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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 |
|
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|
|
|
|
|
|
|
|
|
|
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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 |
— |
|
|
26,872 |
|
|
817 |
|
|
— |
|
|
27,689 |
|
Total liabilities (5)
|
$ |
77,112 |
|
|
$ |
382,424 |
|
|
$ |
5,236 |
|
|
$ |
(279,882 |
) |
|
$ |
184,890 |
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 – Fair Value Measurements (1)
|
|
|
|
|
Balance
January 1
|
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 |
Change in Unrealized Gains (Losses) in Net Income Related to Financial Instruments Still Held (2)
|
|
(Dollars in millions)
|
Purchases |
Sales |
Issuances |
Settlements |
Year Ended December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
$ |
1,558 |
|
$ |
105 |
|
$ |
— |
|
$ |
534 |
|
$ |
(390 |
) |
$ |
18 |
|
$ |
(578 |
) |
$ |
699 |
|
$ |
(439 |
) |
$ |
1,507 |
|
$ |
29 |
|
Equity securities |
276 |
|
(12 |
) |
— |
|
38 |
|
(87 |
) |
— |
|
(9 |
) |
79 |
|
(46 |
) |
239 |
|
(18 |
) |
Non-U.S. sovereign debt |
465 |
|
46 |
|
(12 |
) |
1 |
|
— |
|
— |
|
(51 |
) |
39 |
|
(6 |
) |
482 |
|
47 |
|
Mortgage trading loans, ABS and other MBS |
1,635 |
|
99 |
|
(2 |
) |
662 |
|
(899 |
) |
— |
|
(175 |
) |
738 |
|
(505 |
) |
1,553 |
|
26 |
|
Total trading account assets |
3,934 |
|
238 |
|
(14 |
) |
1,235 |
|
(1,376 |
) |
18 |
|
(813 |
) |
1,555 |
|
(996 |
) |
3,781 |
|
84 |
|
Net derivative assets (liabilities) (4,5)
|
(935 |
) |
(37 |
) |
— |
|
298 |
|
(837 |
) |
— |
|
(97 |
) |
147 |
|
(1,077 |
) |
(2,538 |
) |
228 |
|
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency residential MBS |
597 |
|
13 |
|
64 |
|
— |
|
(73 |
) |
— |
|
(40 |
) |
206 |
|
(343 |
) |
424 |
|
— |
|
Non-U.S. securities |
2 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
2 |
|
— |
|
Other taxable securities |
7 |
|
2 |
|
— |
|
— |
|
— |
|
— |
|
(5 |
) |
61 |
|
— |
|
65 |
|
— |
|
Tax-exempt securities |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
108 |
|
— |
|
108 |
|
— |
|
Total AFS debt securities |
606 |
|
15 |
|
64 |
|
— |
|
(73 |
) |
— |
|
(45 |
) |
375 |
|
(343 |
) |
599 |
|
— |
|
Other debt securities carried at fair value – Non-agency residential MBS |
172 |
|
36 |
|
— |
|
— |
|
— |
|
— |
|
(17 |
) |
155 |
|
(47 |
) |
299 |
|
38 |
|
Loans and leases (6,7)
|
338 |
|
— |
|
— |
|
230 |
|
(35 |
) |
217 |
|
(57 |
) |
— |
|
— |
|
693 |
|
(1 |
) |
Loans held-for-sale (6,7)
|
542 |
|
48 |
|
(6 |
) |
12 |
|
(71 |
) |
36 |
|
(245 |
) |
59 |
|
— |
|
375 |
|
22 |
|
Other assets (7)
|
2,932 |
|
(81 |
) |
19 |
|
— |
|
(10 |
) |
179 |
|
(683 |
) |
5 |
|
(1 |
) |
2,360 |
|
(267 |
) |
Trading account liabilities – Equity securities |
— |
|
(2 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(2 |
) |
(2 |
) |
|
Trading account liabilities – Corporate securities
and other
|
(18 |
) |
8 |
|
— |
|
(1 |
) |
(3 |
) |
(1 |
) |
— |
|
— |
|
— |
|
(15 |
) |
— |
|
Long-term debt (5,6)
|
(817 |
) |
(59 |
) |
(64 |
) |
— |
|
— |
|
(40 |
) |
180 |
|
(350 |
) |
1 |
|
(1,149 |
) |
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
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 (liabilities) (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 (8)
|
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 (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 market making and similar activities; Net derivative assets (liabilities) - market making and similar activities and other income; Other debt securities carried at fair value - other income; Loans and leases - predominantly other income; Loans held-for-sale - other income; Other assets - primarily other income related to MSRs; Long-term debt - primarily market making and similar activities. |
|
|
(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. Amounts include net unrealized gains (losses) of $3 million and $(105) million related to financial instruments still held at December 31, 2019 and 2018.
|
|
|
(4) |
Net derivative assets (liabilities) include derivative assets of $2.2 billion and $3.5 billion and derivative liabilities of $4.8 billion and $4.4 billion at December 31, 2019 and 2018.
|
|
|
(5) |
Transfers into long-term debt include a $1.4 billion transfer in of Level 3 derivative assets to reflect the Corporation's change to present bifurcated embedded derivatives with their respective host instruments.
|
|
|
(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) |
Transfers out of AFS debt securities and into other assets primarily relate to the reclassification of certain securities. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 – Fair Value Measurements (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
Balance
January 1 |
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 |
Change in Unrealized Gains/(Losses) in Net Income Related to Financial Instruments Still Held (2)
|
Purchases |
Sales |
Issuances |
Settlements |
Year Ended December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
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 (liabilities) (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)
|
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 - market making and similar activities; Net derivative assets (liabilities) - primarily market making and similar activities 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 market making and similar activities. |
|
|
(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. |
|
|
(4) |
Net derivative assets (liabilities) 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.
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, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2019 |
|
|
|
|
|
|
(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 |
$ |
1,407 |
|
Discounted cash flow, Market comparables |
Yield |
0% to 25% |
6% |
Trading account assets – Mortgage trading loans, ABS and other MBS |
332 |
|
Prepayment speed |
1% to 27% CPR |
17% CPR |
Loans and leases |
281 |
|
Default rate |
0% to 3% CDR |
1% CDR |
Loans held-for-sale |
4 |
|
Loss severity |
0% to 47% |
14% |
AFS debt securities, primarily non-agency residential |
491 |
|
Price |
$0 to $160 |
$94 |
Other debt securities carried at fair value - Non-agency residential |
299 |
|
|
|
|
Instruments backed by commercial real estate assets |
$ |
303 |
|
Discounted cash flow |
Yield |
0% to 30% |
14% |
Trading account assets – Corporate securities, trading loans and other |
201 |
|
Price |
$0 to $100 |
$55 |
Trading account assets – Mortgage trading loans, ABS and other MBS |
85 |
|
|
|
|
Loans held-for-sale |
17 |
|
|
|
|
Commercial loans, debt securities and other |
$ |
3,798 |
|
Discounted cash flow, Market comparables |
Yield |
1% to 20% |
6% |
Trading account assets – Corporate securities, trading loans and other |
1,306 |
|
Prepayment speed |
10% to 20% |
13% |
Trading account assets – Non-U.S. sovereign debt |
482 |
|
Default rate |
3% to 4% |
4% |
Trading account assets – Mortgage trading loans, ABS and other MBS |
1,136 |
|
Loss severity |
35% to 40% |
38% |
AFS debt securities – Other taxable securities |
108 |
|
Price |
$0 to $142 |
$72 |
Loans and leases |
412 |
|
Long-dated equity volatilities |
35% |
n/a |
Loans held-for-sale |
354 |
|
|
|
|
Other assets, primarily auction rate securities |
$ |
815 |
|
Discounted cash flow, Market comparables |
Price |
$10 to $100 |
$96 |
|
|
|
|
|
|
|
|
|
|
MSRs |
$ |
1,545 |
|
Discounted cash flow |
Weighted-average life, fixed rate (5)
|
0 to 14 years |
5 years |
|
|
Weighted-average life, variable rate (5)
|
0 to 9 years |
3 years |
|
|
Option-adjusted spread, fixed rate |
7% to 14% |
9% |
|
|
Option-adjusted spread, variable rate |
9% to 15% |
11% |
Structured liabilities |
|
|
|
|
|
Long-term debt |
$ |
(1,149 |
) |
Discounted cash flow, Market comparables, Industry standard derivative pricing (3)
|
Yield |
2% to 6% |
5% |
|
|
Equity correlation |
9% to 100% |
63% |
|
|
Long-dated equity volatilities |
4% to 101% |
32% |
|
|
Price |
$0 to $116 |
$74 |
|
|
Natural gas forward price |
$1/MMBtu to $5/MMBtu |
$3/MMBtu |
Net derivative assets (liabilities) |
|
|
|
|
|
Credit derivatives |
$ |
13 |
|
Discounted cash flow, Stochastic recovery correlation model |
Yield |
5% |
n/a |
|
|
Upfront points |
0 to 100 points |
63 points |
|
|
Prepayment speed |
15% to 100% CPR |
22% CPR |
|
|
Default rate |
1% to 4% CDR |
2% CDR |
|
|
Loss severity |
35% |
n/a |
|
|
Price |
$0 to $104 |
$73 |
Equity derivatives |
$ |
(1,081 |
) |
Industry standard derivative pricing (3)
|
Equity correlation |
9% to 100% |
63% |
|
|
Long-dated equity volatilities |
4% to 101% |
32% |
Commodity derivatives |
$ |
(1,357 |
) |
Discounted cash flow, Industry standard derivative pricing (3)
|
Natural gas forward price |
$1/MMBtu to $5/MMBtu |
$3/MMBtu |
|
|
Correlation |
30% to 69% |
68% |
|
|
Volatilities |
14% to 54% |
27% |
Interest rate derivatives |
$ |
(113 |
) |
Industry standard derivative pricing (4)
|
Correlation (IR/IR) |
15% to 94% |
52% |
|
|
Correlation (FX/IR) |
0% to 46% |
2% |
|
|
Long-dated inflation rates |
-23% to 56% |
16% |
|
|
Long-dated inflation volatilities |
0% to 1% |
1% |
Total net derivative assets (liabilities) |
$ |
(2,538 |
) |
|
|
|
|
|
|
(1) |
For loans and securities, structured liabilities and net derivative assets (liabilities), 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 147: Trading account assets – Corporate securities, trading loans and other of $1.5 billion, Trading account assets – Non-U.S. sovereign debt of $482 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.6 billion, AFS debt securities of $599 million, Other debt securities carried at fair value - Non-agency residential of $299 million, Other assets, including MSRs, of $2.4 billion, Loans and leases of $693 million and LHFS of $375 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, 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% CPR |
Loans and leases |
338 |
|
Default rate |
0% to 3% CDR |
1% CDR |
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 (liabilities) |
|
|
|
|
|
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% CPR |
|
|
Default rate |
1% to 4% CDR |
2% CDR |
|
|
Loss severity |
35% |
n/a |
|
|
Price |
$0 to $138 |
$93 |
Equity derivatives |
$ |
(348 |
) |
Industry standard derivative pricing (3)
|
Equity correlation |
11% to 100% |
67% |
|
|
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 (liabilities) |
$ |
(935 |
) |
|
|
|
|
|
|
(1) |
For loans and securities, structured liabilities and net derivative assets (liabilities), 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 148: 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
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 result 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.
Nonrecurring Fair Value
The Corporation holds certain assets that are measured at fair value only in certain situations (e.g., the impairment of an asset), 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 2019, 2018 and 2017. In the tables below, other assets includes the measurement of the Corporation's merchant services equity method investment on which the Corporation recorded an impairment charge of $2.1 billion during 2019. For more information, see Note 13 – Commitments and Contingencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured at Fair Value on a Nonrecurring Basis |
|
|
|
December 31, 2019 |
December 31, 2018 |
(Dollars in millions)
|
Level 2 |
|
Level 3 |
Level 2 |
|
Level 3 |
Assets |
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
$ |
53 |
|
|
$ |
102 |
|
$ |
274 |
|
|
$ |
— |
|
Loans and leases (1)
|
— |
|
|
257 |
|
— |
|
|
474 |
|
Foreclosed properties (2, 3)
|
— |
|
|
17 |
|
— |
|
|
42 |
|
Other assets |
178 |
|
|
646 |
|
331 |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) |
|
|
|
2019 |
2018 |
|
2017 |
Assets |
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
|
$ |
(14 |
) |
$ |
(18 |
) |
|
$ |
(6 |
) |
Loans and leases (1)
|
|
|
(81 |
) |
(202 |
) |
|
(336 |
) |
Foreclosed properties |
|
|
(9 |
) |
(24 |
) |
|
(41 |
) |
Other assets |
|
|
(2,145 |
) |
(64 |
) |
|
(124 |
) |
|
|
(1) |
Includes $36 million, $83 million and $135 million of losses on loans that were written down to a collateral value of zero during 2019, 2018 and 2017, 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 $260 million and $488 million of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) at December 31, 2019 and 2018.
|
The table below presents information about significant unobservable inputs at December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019 |
Loans held-for-sale |
$ |
102 |
|
Discounted cash flow |
Price |
$85 to $97 |
$88 |
Loans and leases (2)
|
257 |
|
Market comparables |
OREO discount |
13% to 59% |
24 |
% |
|
|
|
Costs to sell |
8% to 26% |
9 |
% |
Other assets (3)
|
640 |
|
Discounted cash flow |
Customer attrition |
0% to 19% |
5 |
% |
|
|
|
Costs to service |
11% to 19% |
15 |
% |
|
December 31, 2018 |
Loans and leases (2)
|
$ |
474 |
|
Market comparables |
OREO discount |
13% to 59% |
25 |
% |
|
|
|
Costs to sell |
8% to 26% |
9 |
% |
|
|
(1) |
The weighted average is calculated based upon the fair value of the loans. |
|
|
(2) |
Represents residential mortgages where the loan has been written down to the fair value of the underlying collateral. |
(3)
The fair value of the merchant services joint venture was measured using a discounted cash flow method in which the two primary drivers of fair value were the customer attrition rate and certain costs to service the customers. The weighted averages are calculated based on variations of the attrition rates and costs to service the customers.
|