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

Annual report pursuant to Section 13 and 15(d)

Fair Value Option

Fair Value Option

12 Months Ended

Dec. 31, 2019

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. 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. 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. 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 following tables provide 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, 2019 and 2018, and 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 2019, 2018 and 2017.




Fair Value Option Elections

	December 31, 2019							December 31, 2018
(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	$	50,364	$	50,318	$	46		$	56,399	$	56,376	$	23
Loans reported as trading account assets ⁽¹⁾	6,989		14,703		(7,714		)	6,195		13,088		(6,893		)
Trading inventory – other	19,574		n/a		n/a			13,778		n/a		n/a
Consumer and commercial loans	8,335		8,372		(37		)	4,349		4,399		(50		)
Loans held-for-sale ⁽¹⁾	3,709		4,879		(1,170		)	2,942		4,749		(1,807		)
Other assets	4		n/a		n/a			3		n/a		n/a
Long-term deposits	508		496		12			492		454		38
Federal funds purchased and securities loaned or sold under agreements to repurchase	16,008		16,029		(21		)	28,875		28,881		(6		)
Short-term borrowings	3,941		3,930		11			1,648		1,648		—
Unfunded loan commitments	90		n/a		n/a			169		n/a		n/a
Long-term debt ⁽²⁾	34,975		35,730		(755		)	27,689		29,198		(1,509		)


⁽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 $34.6 billion and $27.3 billion, and contractual principal outstanding of $35.3 billion and $28.8 billion at December 31, 2019 and 2018.

n/a = not applicable




Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option

	Market making and similar activities			Other Income			Total
(Dollars in millions)	2019
Loans reported as trading account assets	$	203		$	—		$	203
Trading inventory – other ⁽¹⁾	5,795			—			5,795
Consumer and commercial loans	92			12			104
Loans held-for-sale ⁽²⁾	—			98			98
Long-term debt ⁽³⁾	(1,098		)	(78		)	(1,176		)
Other ⁽⁴⁾	(15		)	52			37
Total ⁽⁵⁾	$	4,977		$	84		$	5,061

	2018
Loans reported as trading account assets	$	8		$	—		$	8
Trading inventory – other ⁽¹⁾	1,750			—			1,750
Consumer and commercial loans	(422		)	(53		)	(475		)
Loans held-for-sale ⁽²⁾	1			24			25
Long-term debt ⁽³⁾	2,157			(93		)	2,064
Other ⁽⁴⁾	8			(31		)	(23		)
Total ⁽⁵⁾	$	3,502		$	(153	)	$	3,349

	2017
Loans reported as trading account assets	$	318		$	—		$	318
Trading inventory – other ⁽¹⁾	3,821			—			3,821
Consumer and commercial loans	(9		)	35			26
Loans held-for-sale ⁽²⁾	—			298			298
Long-term debt ⁽³⁾	(1,044		)	(146		)	(1,190		)
Other ⁽⁴⁾	(93		)	49			(44		)
Total ⁽⁵⁾	$	2,993		$	236		$	3,229


⁽¹⁾	The gains in market making and similar activities are primarily offset by losses on trading liabilities that hedge these assets.


⁽²⁾	Includes the value of IRLCs on funded loans, including those sold during the period.

⁽³⁾

The net gains (losses) in market making and similar activities relate to the embedded derivatives in structured liabilities and are typically offset by (losses) gains on derivatives and securities that hedge these liabilities. For the cumulative impact of changes in the Corporation’s own credit spreads and the amount recognized in accumulated OCI, see Note 15 – Accumulated Other Comprehensive Income (Loss). For more information on how the Corporation’s own credit spread is determined, see Note 21 – Fair Value Measurements.


⁽⁴⁾	Includes gains (losses) on federal funds sold and securities borrowed or purchased under agreements to resell, long-term deposits, federal funds purchased and securities loaned or sold under agreements to repurchase, short-term borrowings and unfunded loan commitments.

⁽⁵⁾

Gains (losses) related to borrower-specific credit risk were $194 million, $(148) million and $38 million in 2019, 2018 and 2017, respectively.

- Definition

The entire disclosure for a company's election to apply the fair value option for measurement and reporting of eligible financial assets and liabilities (as defined), as well as certain other eligible items (as defined) included in the statement of financial position, whether such option is elected for a single eligible item or a group of similar eligible items and is in addition to other disclosures concerning fair value which the company may be required to provide. Such disclosure might be expected to include: (1) for items included in the statement of financial position: (a) the reasons for electing a fair value option for each eligible item or group of similar eligible items; (b) if the fair value option is elected for some but not all eligible items within a group of similar eligible items: (i) a description of those similar items and the reasons for partial election and (ii) information of how the group of similar items relates to individual balance sheet line items; (c) for each line item in the statement of financial position that includes an item or items for which the fair value option has been elected: (i) information of how each line item in the statement of financial position relates to major categories of assets and liabilities presented in accordance with other fair value disclosures and (ii) the aggregate carrying amount of ineligible items included in each line item in the balance sheet, if any; (d) the difference between the aggregate fair value and the aggregate unpaid principal balance (assuming contractual principal amounts and fair value option elected) of: (i) loans and long-term receivables (other than securities otherwise reported at fair value) and (ii) long-term debt instruments; (e) for loans held as assets for which the fair value option has been elected: (i) the aggregate fair value of loans that are 90 days or more past due, (ii) if the policy is to recognize interest income separately from other changes in fair value, the aggregate fair value of loans in nonaccrual status, and (iii) the difference between the aggregate fair value and the aggregate unpaid principal balance for loans that are 90 days or more past due, in nonaccrual status, or both; (f) for investments that would have been accounted for under the equity method if the entity had not chosen to apply the fair value option, the information required for such investments, if material either individually or in the aggregate; (2) for items included in the income statement: (a) the amounts of gains and losses from fair value changes included in earnings and in which line in the income statement those gains and losses are reported whether or not combined with gains and losses from items required to be accounted for at fair value; (b) a description of how interest and dividends are measured and where they are reported in the income statement; (c) for loans and other receivables held as assets: (i) the estimated amount of gains or losses included in earnings attributable to changes in instrument-specific credit risk and (ii) how the gains or losses attributable to changes in instrument-specific credit risk were determined; (d) for liabilities with fair values that have been significantly affected during the reporting period by changes in the instrument-specific credit risk: (i) the estimated amount of gains and losses from fair value changes included in earnings that are attributable to changes in the instrument-specific credit risk, (ii) qualitative information about the reasons for those changes, and (iii) how the gains and losses attributable to changes in instrument-specific credit risk were determined; and (3) certain other disclosures as required or determined to be provided.

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