Bank of America Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

9 Months Ended

Sep. 30, 2013

NOTE 16 – Fair Value Measurements

Under applicable accounting guidance, 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 based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value. 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, respectively, in the current marketplace. These transfers are considered to be effective as of the beginning of the quarter in which they occur. For more information regarding the fair value hierarchy and how the Corporation measures fair value, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K. The Corporation accounts for certain financial instruments under the fair value option. For additional information, see Note 17 – Fair Value Option.

Valuation Processes and Techniques

The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of models by personnel who are independent of the front office, and periodic reassessments of models to ensure that they are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are conducted on a daily basis by personnel who are independent of the front office. A price verification group, which is also independent of the front office, utilizes available market information including executed trades, market prices and market-observable valuation model inputs to ensure that fair values are reasonably estimated. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are escalated through a management review process.

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 the nine months ended September 30, 2013, there were no changes to the valuation techniques that had, or are expected to have, a material impact on the Corporation's consolidated financial position or results of operations.

Level 1, 2 and 3 Valuation Techniques

Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

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, or 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 used 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. 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 calculations 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 determined using models that rely on estimates of prepayment rates, the resultant weighted-average lives of the MSRs and the option-adjusted spread (OAS) levels. For more information on MSRs, see Note 19 – Mortgage Servicing Rights.

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.

Private Equity Investments

Private equity investments consist of direct investments and fund investments which are initially valued at their transaction price. Thereafter, the fair value of direct investments is based on an assessment of each individual investment using methodologies that include publicly-traded comparables derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, entry level multiples and discounted cash flow analyses, and are subject to appropriate discounts for lack of liquidity or marketability. After initial recognition, the fair value of fund investments is based on the Corporation's proportionate interest in the fund's capital as reported by the respective fund managers.

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 and Short-term Borrowings

The fair values of deposits and short-term borrowings 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 spreads in the valuation of these liabilities. The credit risk is determined by reference to observable credit spreads in the secondary cash market.

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 between these inputs. The Corporation also considers the impact of its own credit spreads 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.

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 September 30, 2013 and December 31, 2012, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.



	September 30, 2013
	Fair Value Measurements
(Dollars in millions)	Level 1 ⁽¹⁾		Level 2 ⁽¹⁾		Level 3		Netting Adjustments ⁽²⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	102,899	$	—	$	—		$	102,899
Trading account assets:
U.S. government and agency securities	46,478		12,772		—		—			59,250
Corporate securities, trading loans and other	974		29,513		3,780		—			34,267
Equity securities	31,911		16,051		338		—			48,300
Non-U.S. sovereign debt	32,134		11,603		388		—			44,125
Mortgage trading loans and ABS	—		10,744		4,520		—			15,264
Total trading account assets	111,497		80,683		9,026		—			201,206
Derivative assets ⁽³⁾	4,329		977,921		7,527		(936,616		)	53,161
AFS debt securities:
U.S. Treasury securities and agency securities	514		2,457		—		—			2,971
Mortgage-backed securities:
Agency	—		169,025		—		—			169,025
Agency-collateralized mortgage obligations	—		27,335		—		—			27,335
Non-agency residential	—		6,929		—		—			6,929
Commercial	—		2,827		—		—			2,827
Non-U.S. securities	2,467		3,668		105		—			6,240
Corporate/Agency bonds	—		1,162		8		—			1,170
Other taxable securities	20		9,132		4,013		—			13,165
Tax-exempt securities	—		4,417		817		—			5,234
Total AFS debt securities	3,001		226,952		4,943		—			234,896
Other debt securities carried at fair value:
Mortgage-backed securities:
Agency	—		18,626		—		—			18,626
Agency-collateralized mortgage obligations	—		563		—		—			563
Commercial	—		758		—		—			758
Non-U.S. securities	9,740		1,766		—		—			11,506
Total other debt securities carried at fair value	9,740		21,713		—		—			31,453
Loans and leases	—		7,180		3,016		—			10,196
Mortgage servicing rights	—		—		5,058		—			5,058
Loans held-for-sale	—		7,304		913		—			8,217
Other assets	14,009		2,317		1,878		—			18,204
Total assets	$	142,576	$	1,426,969	$	32,361	$	(936,616	)	$	665,290
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	1,916	$	—	$	—		$	1,916
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		61,917		—		—			61,917
Trading account liabilities:
U.S. government and agency securities	24,046		349		—		—			24,395
Equity securities	23,256		3,604		—		—			26,860
Non-U.S. sovereign debt	22,119		1,502		—		—			23,621
Corporate securities and other	529		7,259		49		—			7,837
Total trading account liabilities	69,950		12,714		49		—			82,713
Derivative liabilities ⁽³⁾	5,167		962,675		6,759		(930,033		)	44,568
Short-term borrowings	—		2,844		—		—			2,844
Accrued expenses and other liabilities	8,627		964		31		—			9,622
Long-term debt	—		45,338		2,063		—			47,401
Total liabilities	$	83,744	$	1,088,368	$	8,902	$	(930,033	)	$	250,981


⁽¹⁾	During the nine months ended September 30, 2013, $500 million of other assets were transferred from Level 1 to Level 2 primarily due to a restriction that became effective for a private equity investment.


⁽²⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽³⁾	For further disaggregation of derivative assets and liabilities, see Note 3 – Derivatives.



	December 31, 2012
	Fair Value Measurements
(Dollars in millions)	Level 1 ⁽¹⁾		Level 2 ⁽¹⁾		Level 3		Netting Adjustments ⁽²⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	98,670	$	—	$	—		$	98,670
Trading account assets:
U.S. government and agency securities	57,655		29,319		—		—			86,974
Corporate securities, trading loans and other	1,292		32,882		3,726		—			37,900
Equity securities	28,144		14,626		545		—			43,315
Non-U.S. sovereign debt	29,254		13,139		353		—			42,746
Mortgage trading loans and ABS	—		11,905		4,935		—			16,840
Total trading account assets	116,345		101,871		9,559		—			227,775
Derivative assets ⁽³⁾	2,997		1,372,398		8,073		(1,329,971		)	53,497
AFS debt securities:
U.S. Treasury securities and agency securities	21,514		2,958		—		—			24,472
Mortgage-backed securities:
Agency	—		188,149		—		—			188,149
Agency-collateralized mortgage obligations	—		37,538		—		—			37,538
Non-agency residential	—		9,494		—		—			9,494
Non-agency commercial	—		3,914		10		—			3,924
Non-U.S. securities	2,637		2,981		—		—			5,618
Corporate/Agency bonds	—		1,358		92		—			1,450
Other taxable securities	20		8,180		3,928		—			12,128
Tax-exempt securities	—		3,072		1,061		—			4,133
Total AFS debt securities	24,171		257,644		5,091		—			286,906
Other debt securities carried at fair value:
U.S. Treasury securities and agency securities	491		—		—		—			491
Mortgage-backed securities:
Agency	—		13,073		—		—			13,073
Agency-collateralized mortgage obligations	—		929		—		—			929
Non-U.S. securities	9,151		300		—		—			9,451
Total other debt securities carried at fair value	9,642		14,302		—		—			23,944
Loans and leases	—		6,715		2,287		—			9,002
Mortgage servicing rights	—		—		5,716		—			5,716
Loans held-for-sale	—		8,926		2,733		—			11,659
Other assets	18,535		4,826		3,129		—			26,490
Total assets	$	171,690	$	1,865,352	$	36,588	$	(1,329,971	)	$	743,659
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	2,262	$	—	$	—		$	2,262
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		42,639		—		—			42,639
Trading account liabilities:
U.S. government and agency securities	22,351		1,079		—		—			23,430
Equity securities	19,852		2,640		—		—			22,492
Non-U.S. sovereign debt	18,875		1,369		—		—			20,244
Corporate securities and other	487		6,870		64		—			7,421
Total trading account liabilities	61,565		11,958		64		—			73,587
Derivative liabilities ⁽³⁾	2,859		1,355,309		6,605		(1,318,757		)	46,016
Short-term borrowings	—		4,074		—		—			4,074
Accrued expenses and other liabilities	15,457		1,122		15		—			16,594
Long-term debt	—		46,860		2,301		—			49,161
Total liabilities	$	79,881	$	1,464,224	$	8,985	$	(1,318,757	)	$	234,333

⁽¹⁾

During 2012, $2.0 billion and $350 million of assets and liabilities were transferred from Level 1 to Level 2, and $785 million and $40 million of assets and liabilities were transferred from Level 2 to Level 1. Of the asset transfers from Level 1 to Level 2, $940 million was due to a restriction that became effective for a private equity investment during 2012, while $535 million of the transfers from Level 2 to Level 1 was due to the lapse of this restriction during 2012. The remaining transfers were the result of additional information associated with certain equities, derivative contracts and private equity investments.


⁽²⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽³⁾	For further disaggregation of derivative assets and liabilities, see Note 3 – Derivatives.

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 the three and nine months ended September 30, 2013 and 2012, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.



Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended September 30, 2013
										Gross
(Dollars in millions)	Balance July 1 2013			Gains (Losses) in Earnings			Gains (Losses) in OCI			Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2013
Trading account assets:
Corporate securities, trading loans and other	$	2,763		$	133		$	—		$	2,002	$	(892	)	$	22		$	(205	)	$	187		$	(230	)	$	3,780
Equity securities	464			4			—			20		(16		)	—			(100		)	8			(42		)	338
Non-U.S. sovereign debt	401			11			—			3		(14		)	—			(10		)	—			(3		)	388
Mortgage trading loans and ABS	4,685			(7		)	—			350		(443		)	—			(74		)	13			(4		)	4,520
Total trading account assets	8,313			141			—			2,375		(1,365		)	22			(389		)	208			(279		)	9,026
Net derivative assets ⁽²⁾	1,173			(499		)	—			126		(102		)	—			(147		)	116			101			768
AFS debt securities:
Non-U.S. securities	—			5			—			—		—			—			—			100			—			105
Corporate/Agency bonds	8			—			—			—		—			—			—			—			—			8
Other taxable securities	4,157			2			(2		)	215		—			—			(359		)	—			—			4,013
Tax-exempt securities	877			2			1			—		—			—			(63		)	—			—			817
Total AFS debt securities	5,042			9			(1		)	215		—			—			(422		)	100			—			4,943
Loans and leases ^{(3, 4)}	1,901			(20		)	—			—		—			1,247			(119		)	12			(5		)	3,016
Mortgage servicing rights ⁽⁴⁾	5,827			71			—			—		(729		)	129			(240		)	—			—			5,058
Loans held-for-sale ⁽³⁾	2,153			40			—			—		—			3			(1,283		)	—			—			913
Other assets ⁽⁵⁾	1,700			3			—			1		(35		)	—			(30		)	239			—			1,878
Trading account liabilities – Corporate securities and other	(55		)	1			—			6		(9		)	—			—			—			8			(49		)
Accrued expenses and other liabilities ⁽³⁾	(230		)	8			—			—		—			—			189			—			2			(31		)
Long-term debt ⁽³⁾	(1,890		)	(62		)	—			47		—			(47		)	46			(485		)	328			(2,063		)


⁽¹⁾	Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.


⁽²⁾	Net derivatives include derivative assets of $7.5 billion and derivative liabilities of $6.8 billion.


⁽³⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁴⁾	Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.


⁽⁵⁾	Other assets is primarily comprised of private equity investments.

During the three months ended September 30, 2013, the transfers into Level 3 included $208 million of trading account assets, $116 million of net derivative assets, $100 million of AFS debt securities, $239 million of other assets and $485 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased third-party prices available for certain corporate loans. Transfers into Level 3 for net derivative assets were primarily due to decreased price observability (i.e., market comparables for the referenced instruments) for certain complex interest rate derivative transactions. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability. Transfers into Level 3 for other assets were primarily due to a lack of independent pricing data for certain receivables. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these 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.

During the three months ended September 30, 2013, the transfers out of Level 3 included $279 million of trading account assets, $101 million of net derivative assets and $328 million of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and third-party prices available for certain corporate loans and securities. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability (i.e., market comparables for the referenced instruments) for certain options. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.



Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended September 30, 2012
										Gross
(Dollars in millions)	Balance July 1 2012			Gains (Losses) in Earnings			Gains (Losses) in OCI			Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2012
Trading account assets:
Corporate securities, trading loans and other	$	4,459		$	69		$	—		$	750	$	(848	)	$	—		$	(101	)	$	158		$	(314	)	$	4,173
Equity securities	597			15			—			43		(12		)	—			(9		)	5			(66		)	573
Non-U.S. sovereign debt	389			7			—			30		(112		)	—			(4		)	—			(7		)	303
Mortgage trading loans and ABS	4,818			111			—			380		(279		)	—			(124		)	3			(3		)	4,906
Total trading account assets	10,263			202			—			1,203		(1,251		)	—			(238		)	166			(390		)	9,955
Net derivative assets ⁽²⁾	4,601			(256		)	—			78		(211		)	—			(918		)	(350		)	16			2,960
AFS debt securities:
Mortgage-backed securities:
Non-agency residential	1			—			—			—		—			—			—			—			—			1
Non-agency commercial	24			—			—			—		—			—			(1		)	—			—			23
Corporate/Agency bonds	93			—			—			—		—			—			—			—			—			93
Other taxable securities	4,558			—			28			600		—			—			(65		)	—			—			5,121
Tax-exempt securities	1,140			7			(7		)	—		(63		)	—			(16		)	—			—			1,061
Total AFS debt securities	5,816			7			21			600		(63		)	—			(82		)	—			—			6,299
Loans and leases ^{(3, 4)}	1,635			69			—			317		(150		)	—			(65		)	450			(3		)	2,253
Mortgage servicing rights ⁽⁴⁾	5,708			(360		)	—			—		(15		)	100			(346		)	—			—			5,087
Loans held-for-sale ⁽³⁾	2,741			86			—			596		(19		)	—			(104		)	13			—			3,313
Other assets ⁽⁵⁾	3,136			24			—			40		(183		)	—			(39		)	—			—			2,978
Trading account liabilities – Corporate securities and other	(143		)	4			—			17		(45		)	—			—			—			2			(165		)
Short-term borrowings ⁽³⁾	—			—			—			—		—			(232		)	—			—			—			(232		)
Accrued expenses and other liabilities ⁽³⁾	(2		)	—			—			—		—			(7		)	—			—			—			(9		)
Long-term debt ⁽³⁾	(2,388		)	(91		)	—			70		—			(115		)	391			(531		)	374			(2,290		)


⁽¹⁾	Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.


⁽²⁾	Net derivatives include derivative assets of $10.0 billion and derivative liabilities of $7.0 billion.


⁽³⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁴⁾	Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.


⁽⁵⁾	Other assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.

During the three months ended September 30, 2012, the transfers into Level 3 included $166 million of trading account assets, $350 million of net derivative assets, $450 million of loans and leases, and $531 million of long-term debt. Transfers into Level 3 for trading account assets primarily related to decreased market liquidity for certain corporate loans. Transfers into Level 3 for net derivative assets primarily related to decreased price observability for certain long-dated equity derivative liabilities due to a lack of independent pricing. Transfers into Level 3 for loans and leases were driven by updated information related to certain commercial loans. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these 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.

During the three months ended September 30, 2012, the transfers out of Level 3 included $390 million of trading account assets and $374 million of long-term debt. Transfers out of Level 3 for trading account assets primarily related to increased price observability for certain corporate loans due to improved liquidity in the secondary markets. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.



Level 3 – Fair Value Measurements ⁽¹⁾
	Nine Months Ended September 30, 2013
									Gross
(Dollars in millions)	Balance January 1 2013			Gains (Losses) in Earnings			Gains (Losses) in OCI		Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2013
Trading account assets:
Corporate securities, trading loans and other	$	3,726		$	256		$	—	$	3,519	$	(2,817	)	$	22		$	(444	)	$	629		$	(1,111	)	$	3,780
Equity securities	545			54			—		77		(160		)	—			(100		)	45			(123		)	338
Non-U.S. sovereign debt	353			56			—		29		(15		)	—			(32		)	1			(4		)	388
Mortgage trading loans and ABS	4,935			165			—		1,981		(1,777		)	—			(775		)	18			(27		)	4,520
Total trading account assets	9,559			531			—		5,606		(4,769		)	22			(1,351		)	693			(1,265		)	9,026
Net derivative assets ⁽²⁾	1,468			186			—		509		(762		)	—			(1,190		)	(46		)	603			768
AFS debt securities:
Commercial MBS	10			—			—		—		—			—			(10		)	—			—			—
Non-U.S. securities	—			5			—		1		(1		)	—			—			100			—			105
Corporate/Agency bonds	92			—			4		—		—			—			—			—			(88		)	8
Other taxable securities	3,928			5			10		825		—			—			(750		)	—			(5		)	4,013
Tax-exempt securities	1,061			3			15		—		—			—			(94		)	—			(168		)	817
Total AFS debt securities	5,091			13			29		826		(1		)	—			(854		)	100			(261		)	4,943
Loans and leases ^{(3, 4)}	2,287			80			—		71		—			1,252			(665		)	12			(21		)	3,016
Mortgage servicing rights ⁽⁴⁾	5,716			1,531			—		—		(1,774		)	399			(814		)	—			—			5,058
Loans held-for-sale ⁽³⁾	2,733			20			—		8		(390		)	3			(1,492		)	34			(3		)	913
Other assets ⁽⁵⁾	3,129			(324		)	—		43		(218		)	—			(936		)	239			(55		)	1,878
Trading account liabilities – Corporate securities and other	(64		)	7			—		24		(40		)	(5		)	—			(9		)	38			(49		)
Accrued expenses and other liabilities ⁽³⁾	(15		)	30			—		—		—			(751		)	703			(1		)	3			(31		)
Long-term debt ⁽³⁾	(2,301		)	41			—		306		(4		)	(149		)	172			(1,017		)	889			(2,063		)


⁽¹⁾	Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.


⁽²⁾	Net derivatives include derivative assets of $7.5 billion and derivative liabilities of $6.8 billion.


⁽³⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁴⁾	Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.


⁽⁵⁾	Other assets is primarily comprised of private equity investments.

During the nine months ended September 30, 2013, the transfers into Level 3 included $693 million of trading account assets, $46 million of net derivative assets, $100 million of AFS debt securities, $239 million of other assets and $1.0 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased third-party prices available for certain corporate loans and securities. Transfers into Level 3 for net derivative assets were primarily due to decreased price observability (i.e., market comparables for the referenced instruments) for certain complex interest rate derivative transactions and updated information related to certain total return swaps. Transfers into Level 3 for AFS debt securities were primarily due to decreased price observability. Transfers into Level 3 for other assets were primarily due to a lack of independent pricing data for certain receivables. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these 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.

During the nine months ended September 30, 2013, the transfers out of Level 3 included $1.3 billion of trading account assets, $603 million of net derivative assets, $261 million of AFS debt securities and $889 million of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and third-party prices available for certain corporate loans and securities. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability (i.e., market comparables for the referenced instruments) for certain options. Transfers out of Level 3 for AFS debt securities were primarily due to increased market liquidity. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.



Level 3 – Fair Value Measurements ⁽¹⁾
	Nine Months Ended September 30, 2012
									Gross
(Dollars in millions)	Balance January 1 2012			Gains (Losses) in Earnings			Gains (Losses) in OCI		Purchases			Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2012
Trading account assets:
Corporate securities, trading loans and other ⁽²⁾	$	6,880		$	192		$	—	$	1,995		$	(3,498	)	$	—		$	(846	)	$	315		$	(865	)	$	4,173
Equity securities	544			24			—		167			(159		)	—			27			38			(68		)	573
Non-U.S. sovereign debt	342			5			—		338			(359		)	—			(4		)	—			(19		)	303
Mortgage trading loans and ABS ⁽²⁾	3,689			194			—		1,747			(915		)	—			(386		)	745			(168		)	4,906
Total trading account assets	11,455			415			—		4,247			(4,931		)	—			(1,209		)	1,098			(1,120		)	9,955
Net derivative assets ⁽³⁾	5,866			17			—		791			(833		)	—			(2,228		)	(283		)	(370		)	2,960
AFS debt securities:
Mortgage-backed securities:
Agency	37			—			—		—			—			—			(4		)	—			(33		)	—
Non-agency residential	860			(69		)	19		—			(305		)	—			(2		)	—			(502		)	1
Non-agency commercial	40			—			—		—			(11		)	—			(6		)	—			—			23
Corporate/Agency bonds	162			(2		)	—		(2		)	—			—			(38		)	—			(27		)	93
Other taxable securities	4,265			7			51		1,558			—			—			(551		)	—			(209		)	5,121
Tax-exempt securities	2,648			61			18		—			(132		)	—			(1,534		)	—			—			1,061
Total AFS debt securities	8,012			(3		)	88		1,556			(448		)	—			(2,135		)	—			(771		)	6,299
Loans and leases ^{(4, 5)}	2,744			284			—		317			(1,308		)	—			(229		)	450			(5		)	2,253
Mortgage servicing rights ⁽⁵⁾	7,378			(1,297		)	—		—			(113		)	268			(1,149		)	—			—			5,087
Loans held-for-sale ⁽⁴⁾	3,387			265			—		606			(40		)	—			(330		)	57			(632		)	3,313
Other assets ⁽⁶⁾	4,235			(110		)	—		89			(950		)	—			(275		)	—			(11		)	2,978
Trading account liabilities – Corporate securities and other	(114		)	4			—		72			(114		)	—			—			(65		)	52			(165		)
Short-term borrowings ⁽⁴⁾	—			—			—		—			—			(232		)	—			—			—			(232		)
Accrued expenses and other liabilities ⁽⁴⁾	(14		)	4			—		5			—			(7		)	—			—			3			(9		)
Long-term debt ⁽⁴⁾	(2,943		)	(239		)	—		188			(33		)	(253		)	1,099			(1,569		)	1,460			(2,290		)


⁽¹⁾	Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.

⁽²⁾

During the nine months ended September 30, 2012, approximately $900 million was reclassified from Trading account assets - Corporate securities, trading loans and other to Trading account assets - Mortgage trading loans and ABS. In the table above, this reclassification is presented as a sale of Trading account assets - Corporate securities, trading loans and other and a purchase of Trading account assets - Mortgage trading loans and ABS.


⁽³⁾	Net derivatives include derivative assets of $10.0 billion and derivative liabilities of $7.0 billion.


⁽⁴⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁵⁾	Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.


⁽⁶⁾	Other assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.

During the nine months ended September 30, 2012, the transfers into Level 3 included $1.1 billion of trading account assets, $283 million of net derivative assets, $450 million of loans and leases and $1.6 billion of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased market liquidity for certain corporate loans and updated information related to certain CLOs. Transfers into Level 3 for net derivative assets primarily related to decreased price observability for certain long-dated equity derivative liabilities due to a lack of independent pricing. Transfers into Level 3 for loans and leases were driven by updated information related to certain commercial loans. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these 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.

During the nine months ended September 30, 2012, the transfers out of Level 3 included $1.1 billion of trading account assets, $370 million of net derivative assets, $771 million of AFS debt securities, $632 million of LHFS and $1.5 billion of long-term debt. Transfers out of Level 3 for trading account assets primarily related to increased market liquidity for certain corporate and commercial real estate loans. Transfers out of Level 3 for net derivative assets primarily related to increased price observability (i.e., market comparables for the referenced instruments) for certain total return swaps and foreign exchange swaps. Transfers out of Level 3 for AFS debt securities primarily related to increased price observability for certain non-agency RMBS and ABS. Transfers out of Level 3 for LHFS primarily related to increased observable inputs, primarily liquid comparables. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.

The following tables summarize gains (losses) due to changes in fair value, including both realized and unrealized gains (losses), recorded in earnings for Level 3 assets and liabilities during the three and nine months ended September 30, 2013 and 2012. These amounts include gains (losses) on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.



Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings
	Three Months Ended September 30, 2013
(Dollars in millions)	Equity Investment Income (Loss)		Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other Income (Loss)			Total
Trading account assets:
Corporate securities, trading loans and other	$	—	$	133		$	—		$	—		$	133
Equity securities	—		4			—			—			4
Non-U.S. sovereign debt	—		11			—			—			11
Mortgage trading loans and ABS	—		(7		)	—			—			(7		)
Total trading account assets	—		141			—			—			141
Net derivative assets	—		(727		)	228			—			(499		)
AFS debt securities:
Non-U.S. securities	—		—			—			5			5
Other taxable securities	—		—			—			2			2
Tax-exempt securities	—		—			—			2			2
Total AFS debt securities	—		—			—			9			9
Loans and leases ⁽²⁾	—		—			(38		)	18			(20		)
Mortgage servicing rights	—		—			71			—			71
Loans held-for-sale ⁽²⁾	—		—			—			40			40
Other assets	16		—			—			(13		)	3
Trading account liabilities – Corporate securities and other	—		1			—			—			1
Accrued expenses and other liabilities ⁽²⁾	—		—			8			—			8
Long-term debt ⁽²⁾	—		(31		)	—			(31		)	(62		)
Total	$	16	$	(616	)	$	269		$	23		$	(308	)

	Three Months Ended September 30, 2012
Trading account assets:
Corporate securities, trading loans and other	$	—	$	69		$	—		$	—		$	69
Equity securities	—		15			—			—			15
Non-U.S. sovereign debt	—		7			—			—			7
Mortgage trading loans and ABS	—		111			—			—			111
Total trading account assets	—		202			—			—			202
Net derivative assets	—		(1,214		)	958			—			(256		)
AFS debt securities – Tax-exempt securities	—		—			—			7			7
Loans and leases ⁽²⁾	—		—			—			69			69
Mortgage servicing rights	—		—			(360		)	—			(360		)
Loans held-for-sale ⁽²⁾	—		—			10			76			86
Other assets	39		—			(15		)	—			24
Trading account liabilities – Corporate securities and other	—		4			—			—			4
Long-term debt ⁽²⁾	—		(45		)	—			(46		)	(91		)
Total	$	39	$	(1,053	)	$	593		$	106		$	(315	)


⁽¹⁾	Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.


⁽²⁾	Amounts represent instruments that are accounted for under the fair value option.



Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings
	Nine Months Ended September 30, 2013
(Dollars in millions)	Equity Investment Income (Loss)		Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other Income (Loss)			Total
Trading account assets:
Corporate securities, trading loans and other	$	—	$	256		$	—		$	—		$	256
Equity securities	—		54			—			—			54
Non-U.S. sovereign debt	—		56			—			—			56
Mortgage trading loans and ABS	—		165			—			—			165
Total trading account assets	—		531			—			—			531
Net derivative assets	—		(581		)	767			—			186
AFS debt securities:
Non-U.S. securities	—		—			—			5			5
Other taxable securities	—		—			—			5			5
Tax-exempt securities	—		—			—			3			3
Total AFS debt securities	—		—			—			13			13
Loans and leases ⁽²⁾	—		—			(38		)	118			80
Mortgage servicing rights	—		—			1,531			—			1,531
Loans held-for-sale ⁽²⁾	—		—			2			18			20
Other assets	52		—			124			(500		)	(324		)
Trading account liabilities – Corporate securities and other	—		7			—			—			7
Accrued expenses and other liabilities ⁽²⁾	—		—			30			—			30
Long-term debt ⁽²⁾	—		49			—			(8		)	41
Total	$	52	$	6		$	2,416		$	(359	)	$	2,115

	Nine Months Ended September 30, 2012
Trading account assets:
Corporate securities, trading loans and other	$	—	$	192		$	—		$	—		$	192
Equity securities	—		24			—			—			24
Non-U.S. sovereign debt	—		5			—			—			5
Mortgage trading loans and ABS	—		194			—			—			194
Total trading account assets	—		415			—			—			415
Net derivative assets	—		(2,358		)	2,375			—			17
AFS debt securities:
Non-agency residential MBS	—		—			—			(69		)	(69		)
Corporate/Agency bonds	—		—			—			(2		)	(2		)
Other taxable securities	—		—			—			7			7
Tax-exempt securities	—		—			—			61			61
Total AFS debt securities	—		—			—			(3		)	(3		)
Loans and leases ⁽²⁾	—		—			—			284			284
Mortgage servicing rights	—		—			(1,297		)	—			(1,297		)
Loans held-for-sale ⁽²⁾	—		—			105			160			265
Other assets	28		—			(57		)	(81		)	(110		)
Trading account liabilities – Corporate securities and other	—		4			—			—			4
Accrued expenses and other liabilities ⁽²⁾	—		—			—			4			4
Long-term debt ⁽²⁾	—		(104		)	—			(135		)	(239		)
Total	$	28	$	(2,043	)	$	1,126		$	229		$	(660	)


⁽¹⁾	Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.


⁽²⁾	Amounts represent instruments that are accounted for under the fair value option.

The following tables summarize changes in unrealized gains (losses) recorded in earnings during the three and nine months ended September 30, 2013 and 2012 for Level 3 assets and liabilities that were still held at September 30, 2013 and 2012. These amounts include changes in fair value on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.



Level 3 – Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date
	Three Months Ended September 30, 2013
(Dollars in millions)	Equity Investment Income (Loss)		Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other Income (Loss)			Total
Trading account assets:
Corporate securities, trading loans and other	$	—	$	(6	)	$	—		$	—		$	(6	)
Equity securities	—		4			—			—			4
Non-U.S. sovereign debt	—		5			—			—			5
Mortgage trading loans and ABS	—		(55		)	—			—			(55		)
Total trading account assets	—		(52		)	—			—			(52		)
Net derivative assets	—		(754		)	91			—			(663		)
Loans and leases ⁽²⁾	—		—			(35		)	27			(8		)
Mortgage servicing rights	—		—			(14		)	—			(14		)
Loans held-for-sale ⁽²⁾	—		—			—			35			35
Other assets	17		—			11			(13		)	15
Long-term debt ⁽²⁾	—		(31		)	—			(31		)	(62		)
Total	$	17	$	(837	)	$	53		$	18		$	(749	)

	Three Months Ended September 30, 2012
Trading account assets:
Corporate securities, trading loans and other	$	—	$	36		$	—		$	—		$	36
Equity securities	—		13			—			—			13
Non-U.S. sovereign debt	—		8			—			—			8
Mortgage trading loans and ABS	—		89			—			—			89
Total trading account assets	—		146			—			—			146
Net derivative assets	—		(1,202		)	566			—			(636		)
Loans and leases ⁽²⁾	—		—			—			76			76
Mortgage servicing rights	—		—			(552		)	—			(552		)
Loans held-for-sale ⁽²⁾	—		—			15			68			83
Other assets	115		—			(14		)	4			105
Accrued expenses and other liabilities ⁽²⁾	—		—			—			(2		)	(2		)
Long-term debt ⁽²⁾	—		(46		)	—			(46		)	(92		)
Total	$	115	$	(1,102	)	$	15		$	100		$	(872	)


⁽¹⁾	Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.


⁽²⁾	Amounts represent instruments that are accounted for under the fair value option.



Level 3 – Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date
	Nine Months Ended September 30, 2013
(Dollars in millions)	Equity Investment Income (Loss)		Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other Income (Loss)			Total
Trading account assets:
Corporate securities, trading loans and other	$	—	$	48		$	—		$	—		$	48
Equity securities	—		26			—			—			26
Non-U.S. sovereign debt	—		70			—			—			70
Mortgage trading loans and ABS	—		5			—			—			5
Total trading account assets	—		149			—			—			149
Net derivative assets	—		(853		)	92			—			(761		)
Loans and leases ⁽²⁾	—		—			(35		)	133			98
Mortgage servicing rights	—		—			1,276			—			1,276
Loans held-for-sale ⁽²⁾	—		—			6			25			31
Other assets	23		—			159			(51		)	131
Long-term debt ⁽²⁾	—		6			—			(9		)	(3		)
Total	$	23	$	(698	)	$	1,498		$	98		$	921

	Nine Months Ended September 30, 2012
Trading account assets:
Corporate securities, trading loans and other	$	—	$	95		$	—		$	—		$	95
Equity securities	—		24			—			—			24
Non-U.S. sovereign debt	—		16			—			—			16
Mortgage trading loans and ABS	—		119			—			—			119
Total trading account assets	—		254			—			—			254
Net derivative assets	—		(2,526		)	627			—			(1,899		)
Loans and leases ⁽²⁾	—		—			—			172			172
Mortgage servicing rights	—		—			(1,804		)	—			(1,804		)
Loans held-for-sale ⁽²⁾	—		—			65			127			192
Other assets	90		—			(54		)	(95		)	(59		)
Trading account liabilities – Corporate securities and other	—		3			—			—			3
Long-term debt ⁽²⁾	—		(105		)	—			(134		)	(239		)
Total	$	90	$	(2,374	)	$	(1,166	)	$	70		$	(3,380	)


⁽¹⁾	Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.


⁽²⁾	Amounts represent instruments that are accounted for under the fair value option.

The following tables present information about significant unobservable inputs related to the Corporation's material categories of Level 3 financial assets and liabilities at September 30, 2013 and December 31, 2012.



Quantitative Information about Level 3 Fair Value Measurements at September 30, 2013
(Dollars in millions)					Inputs
Financial Instrument	Fair Value			Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Loans and Securities ⁽¹⁾
Instruments backed by residential real estate assets	$	3,331		Discounted cash flow, Market comparables	Yield	2% to 25%	7	%
Trading account assets – Mortgage trading loans and ABS	356				Prepayment speed	0% to 35% CPR	9	%
Loans and leases	2,366				Default rate	0% to 20% CDR	7	%
Loans held-for-sale	609				Loss severity	0% to 85%	37	%
Commercial loans, debt securities and other	$	11,973		Discounted cash flow, Market comparables	Yield	0% to 45%	3	%
Trading account assets – Corporate securities, trading loans and other	3,686				Enterprise value/EBITDA multiple	0x to 19x	6	x
Trading account assets – Mortgage trading loans and ABS	4,164				Prepayment speed	5% to 40%	20	%
AFS debt securities – Other taxable securities	3,169				Default rate	1% to 5%	4	%
Loans and leases	650				Loss severity	25% to 40%	35	%
Loans held-for-sale	304
Auction rate securities	$	1,755		Discounted cash flow, Market comparables	Projected tender price/Re-financing level	50% to 100%	95	%
Trading account assets – Corporate securities, trading loans and other	94				Projected tender price/Re-financing level
AFS debt securities – Other taxable securities	844
AFS debt securities – Tax-exempt securities	817
Structured liabilities
Long-term debt	$	(2,063	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	18% to 98%	66	%
					Long-dated volatilities	4% to 69%	25	%

Net derivatives assets
Credit derivatives	$	1,300		Discounted cash flow, Stochastic recovery correlation model	Yield	4% to 25%	16	%
					Credit spreads	29 bps to 183 bps	170 bps
					Upfront points	0 points to 100 points	63 points
					Spread to index	-1,731 bps to 1,681 bps	207 bps
					Credit correlation	21% to 73%	45	%
					Prepayment speed	3% to 40% CPR	14	%
					Default rate	1% to 5% CDR	3	%
					Loss severity	20% to 42%	35	%
Equity derivatives	$	(918	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	18% to 98%	66	%
					Long-dated volatilities	4% to 69%	25	%

Commodity derivatives	$	11		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$3/MMBtu to $12/MMBtu	$7/MMBtu
					Correlation	47% to 94%	81	%
					Volatilities	9% to 84%	29	%
Interest rate derivatives	$	375		Industry standard derivative pricing⁽³⁾	Correlation (IR/IR)	24% to 99%	61	%
					Correlation (FX/IR)	-65% to 50%	-2	%
					Long-dated inflation volatilities	0% to 2%	1	%
Total net derivative assets	$	768

⁽¹⁾

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 237: Trading account assets – Corporate securities, trading loans and other of $3.8 billion, Trading account assets – Mortgage trading loans and ABS of $4.5 billion, AFS debt securities – Other taxable securities of $4.0 billion, AFS debt securities – Tax-exempt securities of $817 million, Loans and leases of $3.0 billion and LHFS of $913 million.


⁽²⁾	Includes models such as Monte Carlo simulation and Black-Scholes.


⁽³⁾	Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.

CPR = Constant Prepayment Rate

CDR = Constant Default Rate

EBITDA = Earnings before interest, taxes, depreciation and amortization

MMBtu = Million British thermal units

IR = Interest Rate

FX = Foreign Exchange



Quantitative Information about Level 3 Fair Value Measurements for Loans, Securities and Structured Liabilities at December 31, 2012
(Dollars in millions)					Inputs
Financial Instrument	Fair Value			Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Loans and Securities ⁽¹⁾
Instruments backed by residential real estate assets	$	4,478		Discounted cash flow, Market comparables	Yield	2% to 25%	6	%
Trading account assets – Mortgage trading loans and ABS	459				Prepayment speed	1% to 30% CPR	10	%
Loans and leases	1,286				Default rate	0% to 44% CDR	6	%
Loans held-for-sale	2,733				Loss severity	6% to 85%	43	%
Instruments backed by commercial real estate assets	$	1,910		Discounted cash flow	Yield	5%	n/a
Other assets	1,910			Discounted cash flow	Loss severity	51% to 100%	88	%
Commercial loans, debt securities and other	$	10,778		Discounted cash flow, Market comparables	Yield	0% to 25%	4	%
Trading account assets – Corporate securities, trading loans and other	2,289				Enterprise value/EBITDA multiple	2x to 11x	5x
Trading account assets – Mortgage trading loans and ABS	4,476				Prepayment speed	5% to 30%	20	%
AFS debt securities – Other taxable securities	3,012				Default rate	1% to 5%	4	%
Loans and leases	1,001				Loss severity	25% to 40%	35	%
Auction rate securities	$	3,414		Discounted cash flow, Market comparables	Discount rate	4% to 5%	4	%
Trading account assets – Corporate securities, trading loans and other	1,437				Projected tender price/Re-financing level	50% to 100%	92	%
AFS debt securities – Other taxable securities	916				Projected tender price/Re-financing level
AFS debt securities – Tax-exempt securities	1,061
Structured liabilities
Long-term debt⁽²⁾	$	(2,301	)	Industry standard derivative pricing ⁽³⁾	Equity correlation	30% to 97%	n/m
					Long-dated volatilities	20% to 70%	n/m



Quantitative Information about Level 3 Fair Value Measurements for Net Derivative Assets at December 31, 2012
(Dollars in millions)					Inputs
Financial Instrument	Fair Value			Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs
Net derivatives assets
Credit derivatives	$	2,327		Discounted cash flow, Stochastic recovery correlation model	Yield	2% to 25%
					Credit spreads	58 bps to 615 bps
					Upfront points	25 points to 99 points
					Spread to index	-2,080 bps to 1,972 bps
					Credit correlation	19% to 75%
					Prepayment speed	3% to 30% CPR
					Default rate	0% to 8% CDR
					Loss severity	25% to 42%
Equity derivatives	$	(1,295	)	Industry standard derivative pricing⁽³⁾	Equity correlation	30% to 97%
					Long-dated volatilities	20% to 70%

Commodity derivatives	$	(5	)	Discounted cash flow	Natural gas forward price	$3/MMBtu to $12/MMBtu
Interest rate derivatives	$	441		Industry standard derivative pricing ⁽⁴⁾	Correlation (IR/IR)	15% to 99%
					Correlation (FX/IR)	-65% to 50%
					Long-dated inflation rates	2% to 3%
					Long-dated inflation volatilities	0% to 1%
					Long-dated volatilities (FX)	5% to 36%
					Long-dated swap rates	8% to 10%
Total net derivative assets	$	1,468

⁽¹⁾

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 238: Trading account assets – Corporate securities, trading loans and other of $3.7 billion, Trading account assets – Mortgage trading loans and ABS of $4.9 billion, AFS debt securities – Other taxable securities of $3.9 billion, AFS debt securities – Tax-exempt securities of $1.1 billion, Loans and leases of $2.3 billion, LHFS of $2.7 billion and Other assets of $1.9 billion.


⁽²⁾	For more information on the ranges of inputs for equity correlation and long-dated volatilities, see the qualitative equity derivatives discussion on page 245.


⁽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.

n/a = not applicable

n/m = not meaningful

CPR = Constant Prepayment Rate

CDR = Constant Default Rate

EBITDA = Earnings before interest, taxes, depreciation and amortization

MMBtu = Million British thermal units

IR = Interest Rate

FX = Foreign Exchange

In the tables above, instruments backed by residential and commercial real estate assets include RMBS, CMBS, whole loans, mortgage CDOs and net monoline exposure. Commercial loans, debt securities and other includes 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.

In addition to the instruments in the tables above, the Corporation held $934 million and $1.2 billion of instruments at September 30, 2013 and December 31, 2012 consisting primarily of certain direct private equity investments and private equity funds that were classified as Level 3 and reported within other assets. Valuations of direct private equity investments are based on the most recent company financial information. Inputs generally include market and acquisition comparables, entry level multiples, as well as other variables. The Corporation selects a valuation methodology (e.g., market comparables) for each investment and, in certain instances, multiple inputs are weighted to derive the most representative value. Discounts are applied as appropriate to consider the lack of liquidity and marketability versus publicly-traded companies. For private equity funds, fair value is determined using the net asset value as provided by the individual fund's general partner.

For more information on the inputs and techniques used in the valuation of MSRs, see Note 19 – Mortgage Servicing Rights.

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. At December 31, 2012, weighted averages were disclosed for all loans and securities. At September 30, 2013, weighted averages are disclosed for all loans, securities, structured liabilities and net derivative assets.

For credit derivatives, the range of credit spreads represented positions with varying levels of default risk to the underlying instruments. The lower end of the credit spread range typically represented shorter-dated instruments and those with better perceived credit risk. The higher end of the range represented longer-dated instruments and those referencing debt issuances that were more likely to be impaired or nonperforming. At December 31, 2012, the majority of inputs were concentrated in the lower end of the range. Similarly, the spread to index could vary significantly based on the risk of the instrument. The spread will be positive for instruments that have a higher risk of default than the index (which is based on a weighted average of its components) and negative for instruments that have a lower risk of default than the index. At December 31, 2012, inputs were distributed evenly throughout the range for spread to index. In addition, for yield and credit correlation, the majority of the inputs were concentrated in the center of the range. Inputs were concentrated in the middle to lower end of the range for upfront points. The range for loss severity reflected exposures that were concentrated in the middle to upper end of the range while the ranges for prepayment speed and default rates reflected exposures that were concentrated in the lower end of the range.

For equity derivatives at December 31, 2012, including those embedded in long-term debt, the range for equity correlation represented exposure primarily concentrated toward the upper end of the range. The range for long-dated volatilities represented exposure primarily concentrated toward the lower end of the range.

For interest rate derivatives, the diversity in the portfolio was reflected in wide ranges of inputs because the variety of currencies and tenors of the transactions required the use of numerous foreign exchange and interest rate curves. Since foreign exchange and interest rate correlations were measured between curves and across the various tenors on the same curve, the range of potential values could include both negative and positive values. For the correlation (IR/IR) range, the exposure represented the valuation of interest rate correlations on less liquid pairings and was concentrated at the upper end of the range at December 31, 2012. For the correlation (FX/IR) range, the exposure was the sensitivity to a broad mix of interest rate and foreign exchange correlations and was distributed evenly throughout the range at December 31, 2012. For long-dated inflation rates and volatilities as well as long-dated volatilities (FX), the inputs were concentrated in the middle of the range.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

For instruments backed by residential real estate assets, commercial real estate assets, and commercial loans, debt securities and other, a significant increase in market yields, default rates or loss severities would result in a significantly lower fair value for long positions. Short positions would be impacted in a directionally opposite way. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

For closed-end auction rate securities (ARS), a significant increase in discount rates would result in a significantly lower fair value. For student loan and municipal ARS, a significant increase in projected tender price/refinancing levels would result in a significantly higher fair value.

Structured Liabilities and Derivatives

For credit derivatives, a significant increase in market yield, including spreads to indices, upfront points (i.e., a single upfront payment made by a protection buyer at inception), credit spreads, default rates or loss severities would result 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 differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

Structured credit derivatives, which include tranched portfolio CDS and derivatives with derivative product company (DPC) and monoline counterparties, are impacted by credit correlation, including default and wrong-way 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 result in a significantly higher fair value. Net short protection positions would be impacted in a directionally opposite way. Wrong-way correlation is a parameter that describes the probability that as exposure to a counterparty increases, the credit quality of the counterparty decreases. A significantly higher degree of wrong-way correlation between a DPC counterparty and underlying derivative exposure would result in a significantly lower fair value.

For equity derivatives, equity-linked long-term debt (structured liabilities) and interest rate derivatives, a significant change in long-dated rates and volatilities and correlation inputs (e.g., the degree of correlation between an equity security and an index, between two different interest rates, or between interest rates and foreign exchange rates) would result in a significant impact to the fair value; however, the magnitude and direction of the impact depends on whether the Corporation is long or short the exposure.

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. These assets primarily include LHFS, certain loans and leases, and foreclosed properties. The amounts below represent only balances measured at fair value during the three and nine months ended September 30, 2013 and 2012, and still held as of the reporting date.



Assets Measured at Fair Value on a Nonrecurring Basis
	September 30, 2013				Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013
(Dollars in millions)	Level 2		Level 3		Gains (Losses)
Assets
Loans held-for-sale	$	4,266	$	274	$	1		$	(66	)
Loans and leases ⁽¹⁾	23		5,114		(281		)	(985		)
Foreclosed properties ⁽²⁾	17		1,293		21			23
Other assets	78		10		(7		)	(15		)

	September 30, 2012				Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Assets
Loans held-for-sale	$	3,551	$	1,006	$	—		$	(6	)
Loans and leases ⁽¹⁾	16		8,576		(1,548		)	(3,422		)
Foreclosed properties ⁽²⁾	64		1,436		(20		)	(68		)
Other assets	32		111		(11		)	(13		)


⁽¹⁾	Losses represent charge-offs on real estate-secured loans.


⁽²⁾	Amounts are included in other assets on the Consolidated Balance Sheet and represent the fair value of, and related losses on foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.

The table below presents information about significant unobservable inputs related to the Corporation's nonrecurring Level 3 financial assets and liabilities at September 30, 2013 and December 31, 2012.



Quantitative Information about Nonrecurring Level 3 Fair Value Measurements at September 30, 2013
(Dollars in millions)				Inputs
Financial Instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Instruments backed by residential real estate assets	$	5,114	Market comparables	OREO discount	0% to 19%	9	%
Loans and leases	5,114		Market comparables	Cost to sell	8%	n/a



Quantitative Information about Nonrecurring Level 3 Fair Value Measurements at December 31, 2012
Instruments backed by residential real estate assets	$	9,932	Discounted cash flow, Market comparables	Yield	3% to 5%	3	%
Loans held-for-sale	748			Prepayment speed	3% to 30%	15	%
Loans and leases	9,184			Default rate	0% to 55%	7	%
				Loss severity	6% to 66%	48	%
				OREO discount	0% to 28%	15	%
				Cost to sell	8%	n/a
Instruments backed by commercial real estate assets	$	388	Discounted cash flow	Yield	4% to 13%	6	%
Loans held-for-sale	388		Discounted cash flow	Loss severity	24% to 88%	53	%

n/a = not applicable

Instruments backed by residential real estate assets represent residential mortgages where the loan has been written down to the fair value of the underlying collateral or, in the case of LHFS, are carried at the lower of cost or fair value.

In addition to the instruments disclosed in the table above, the Corporation holds foreclosed residential properties where the fair value is based on unadjusted third-party appraisals or broker price opinions. Appraisals are conducted every 90 days. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.

- 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