Annual report pursuant to Section 13 and 15(d)

Fair Value Option

v2.4.0.6
Fair Value Option
12 Months Ended
Dec. 31, 2012
Fair Value Option [Abstract]  
Fair Value, Option
Fair Value Option
Loans and Loan Commitments
The Corporation elects to account for certain consumer and commercial loans and loan commitments that exceeded the Corporation’s single name credit risk concentration guidelines under the fair value option. Lending commitments, both funded and unfunded, are actively managed and monitored 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 (loss). Electing 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, 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 credit derivatives at fair value. Of the changes in fair value for these loans, $1.2 billion was attributable to changes in borrower-specific credit risk.
Loans Held-for-sale
The Corporation elects to account for residential mortgage LHFS, commercial mortgage LHFS and 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 (loss). The changes in fair value of the loans are largely offset by changes in the fair value of the derivatives. Of the changes in fair value for these loans, $425 million was attributable to changes in borrower-specific credit risk. 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 the lower of cost or fair value and the derivatives at fair value. The Corporation has not elected to account for 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 risk-managed on a fair value basis under the fair value option. An immaterial portion of the changes in fair value for these loans was attributable to changes in borrower-specific credit risk.
Other Assets
The Corporation elects to account for certain private equity investments that are not in an investment company under the fair value option as this measurement basis is consistent with applicable accounting guidance for similar investments that are in an investment company. The Corporation also 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 and 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 did not elect to carry other long-term deposits at fair value because they were not hedged using derivatives.
Other Short-term Borrowings
The Corporation elects to account for certain other short-term borrowings under the fair value option because this debt is risk-managed on a fair value basis.
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.
Asset-backed Secured Financings
The Corporation elects to account for certain asset-backed secured financings, which are classified in other 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.
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, 2012 and 2011.
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Option Elections
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31
 
2012
 
2011
(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
Loans reported as trading account assets
$
1,663

 
$
2,879

 
$
(1,216
)
 
$
1,151

 
$
2,371

 
$
(1,220
)
Trading inventory - other
2,170

 
n/a

 
n/a

 
1,173

 
n/a

 
n/a

Consumer and commercial loans
9,002

 
9,576

 
(574
)
 
8,804

 
10,823

 
(2,019
)
Loans held-for-sale
11,659

 
12,676

 
(1,017
)
 
7,630

 
9,673

 
(2,043
)
Securities financing agreements
141,309

 
140,791

 
518

 
121,688

 
121,092

 
596

Other assets
453

 
270

 
183

 
251

 
n/a

 
n/a

Long-term deposits
2,262

 
2,046

 
216

 
3,297

 
3,035

 
262

Asset-backed secured financings
741

 
1,176

 
(435
)
 
650

 
1,271

 
(621
)
Unfunded loan commitments
528

 
n/a

 
n/a

 
1,249

 
n/a

 
n/a

Other short-term borrowings
3,333

 
3,333

 

 
5,908

 
5,909

 
(1
)
Long-term debt (1)
49,161

 
50,792

 
(1,631
)
 
46,239

 
55,854

 
(9,615
)

(1) 
The majority of the difference between the fair value carrying amount and contractual principal outstanding at December 31, 2012 and 2011 relates to the impact of the Corporation’s credit spreads as well as the fair value of the embedded derivative, where applicable.
n/a = not applicable

The table below provides information about where changes in the fair value of assets and liabilities accounted for under the fair value option are included in the Corporation’s Consolidated Statement of Income for 2012, 2011 and 2010.
 
 
 
 
 
 
 
 
Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option
 
 
 
 
 
 
 
 
 
2012
(Dollars in millions)
Trading Account Profits (Losses)
 
Mortgage Banking Income
(Loss)
 
Other
Income
(Loss)
 
Total
Loans reported as trading account assets
$
232

 
$

 
$

 
$
232

Consumer and commercial loans
17

 

 
542

 
559

Loans held-for-sale
75

 
2,116

 
190

 
2,381

Securities financing agreements
(90
)
 

 

 
(90
)
Other assets

 

 
12

 
12

Long-term deposits

 

 
29

 
29

Asset-backed secured financings

 
(180
)
 

 
(180
)
Unfunded loan commitments

 

 
704

 
704

Other short-term borrowings
1

 

 

 
1

Long-term debt (1)
(1,888
)
 

 
(5,107
)
 
(6,995
)
Total
$
(1,653
)
 
$
1,936

 
$
(3,630
)
 
$
(3,347
)
 
 
 
 
 
 
 
 
 
2011
Loans reported as trading account assets
$
73

 
$

 
$

 
$
73

Consumer and commercial loans
15

 

 
(275
)
 
(260
)
Loans held-for-sale
(20
)
 
4,137

 
148

 
4,265

Securities financing agreements
127

 

 

 
127

Other assets

 

 
196

 
196

Long-term deposits

 

 
(77
)
 
(77
)
Asset-backed secured financings

 
(30
)
 

 
(30
)
Unfunded loan commitments

 

 
(429
)
 
(429
)
Other short-term borrowings
261

 

 

 
261

Long-term debt (1)
2,149

 

 
3,320

 
5,469

Total
$
2,605

 
$
4,107

 
$
2,883

 
$
9,595

 
 
 
 
 
 
 
 
 
2010
Loans reported as trading account assets
$
157

 
$

 
$

 
$
157

Commercial loans
2

 

 
82

 
84

Loans held-for-sale

 
9,091

 
493

 
9,584

Securities financing agreements
52

 

 

 
52

Other assets

 

 
107

 
107

Long-term deposits

 

 
(48
)
 
(48
)
Asset-backed secured financings

 
(95
)
 

 
(95
)
Unfunded loan commitments

 

 
23

 
23

Other short-term borrowings
(192
)
 

 

 
(192
)
Long-term debt (1)
(621
)
 

 
18

 
(603
)
Total
$
(602
)
 
$
8,996

 
$
675

 
$
9,069


(1)  
The majority of the net gains (losses) in trading account profits (losses) relate to the embedded derivative in structured liabilities and are offset by gains (losses) on derivatives and securities that hedge these liabilities. The net gains (losses) in other income (loss) relate to the impact on structured liabilities of changes in the Corporation’s credit spread.