Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
3 Months Ended
Mar. 31, 2014
Fair Value Disclosures [Abstract]  
Fair Value Measurements
NOTE 14 – 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 2013 Annual Report on Form 10-K. The Corporation accounts for certain financial instruments under the fair value option. For additional information, see Note 15 – 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 three months ended March 31, 2014, 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 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 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 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 17 – 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

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 spreads in the valuation of these liabilities. The credit risk is determined by reference to observable credit spreads in the secondary cash market.

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, 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 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 March 31, 2014 and December 31, 2013, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.

 
March 31, 2014
 
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
$

 
$
68,091

 
$

 
$

 
$
68,091

Trading account assets:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities (3)
34,181

 
19,819

 

 

 
54,000

Corporate securities, trading loans and other
1,132

 
29,886

 
2,617

 

 
33,635

Equity securities
32,732

 
20,587

 
343

 

 
53,662

Non-U.S. sovereign debt
28,641

 
11,369

 
533

 

 
40,543

Mortgage trading loans and ABS

 
9,822

 
4,287

 

 
14,109

Total trading account assets
96,686

 
91,483

 
7,780

 

 
195,949

Derivative assets (4)
2,094

 
815,234

 
6,908

 
(778,934
)
 
45,302

AFS debt securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
27,293

 
2,274

 

 

 
29,567

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
165,747

 

 

 
165,747

Agency-collateralized mortgage obligations

 
18,572

 

 

 
18,572

Non-agency residential

 
5,258

 

 

 
5,258

Commercial

 
1,734

 

 

 
1,734

Non-U.S. securities
3,738

 
3,384

 

 

 
7,122

Corporate/Agency bonds

 
845

 

 

 
845

Other taxable securities
20

 
11,265

 
3,437

 

 
14,722

Tax-exempt securities

 
5,631

 
783

 

 
6,414

Total AFS debt securities
31,051

 
214,710

 
4,220

 

 
249,981

Other debt securities carried at fair value:
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
4,182

 

 

 

 
4,182

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
16,290

 

 

 
16,290

Agency-collateralized mortgage obligations

 
123

 

 

 
123

Commercial

 
770

 

 

 
770

Non-U.S. securities
12,779

 
1,451

 

 

 
14,230

Total other debt securities carried at fair value
16,961

 
18,634

 

 

 
35,595

Loans and leases

 
8,010

 
3,053

 

 
11,063

Mortgage servicing rights

 

 
4,765

 

 
4,765

Loans held-for-sale

 
5,436

 
736

 

 
6,172

Other assets
15,567

 
2,482

 
1,132

 

 
19,181

Total assets
$
162,359

 
$
1,224,080

 
$
28,594

 
$
(778,934
)
 
$
636,099

Liabilities
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in U.S. offices
$

 
$
1,835

 
$

 
$

 
$
1,835

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

 
34,044

 

 

 
34,044

Trading account liabilities:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
23,733

 
418

 

 

 
24,151

Equity securities
28,675

 
4,170

 

 

 
32,845

Non-U.S. sovereign debt
22,324

 
1,860

 

 

 
24,184

Corporate securities and other
781

 
7,079

 
36

 

 
7,896

Total trading account liabilities
75,513

 
13,527

 
36

 

 
89,076

Derivative liabilities (4)
2,529

 
799,499

 
7,483

 
(772,600
)
 
36,911

Short-term borrowings

 
2,305

 

 

 
2,305

Accrued expenses and other liabilities
11,004

 
1,692

 
8

 

 
12,704

Long-term debt

 
43,732

 
1,841

 

 
45,573

Total liabilities
$
89,046

 
$
896,634

 
$
9,368

 
$
(772,600
)
 
$
222,448

(1) 
During the three months ended March 31, 2014, gross transfers between Level 1 and Level 2 were not significant.
(2) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(3) 
Includes $25.2 billion of government-sponsored enterprise obligations.
(4) 
For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.
 
December 31, 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
$

 
$
75,614

 
$

 
$

 
$
75,614

Trading account assets:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities (3)
34,222

 
14,625

 

 

 
48,847

Corporate securities, trading loans and other
1,147

 
27,746

 
3,559

 

 
32,452

Equity securities
41,324

 
22,741

 
386

 

 
64,451

Non-U.S. sovereign debt
24,357

 
12,399

 
468

 

 
37,224

Mortgage trading loans and ABS

 
13,388

 
4,631

 

 
18,019

Total trading account assets
101,050

 
90,899

 
9,044

 

 
200,993

Derivative assets (4)
2,374

 
910,602

 
7,277

 
(872,758
)
 
47,495

AFS debt securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
6,591

 
2,363

 

 

 
8,954

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
164,935

 

 

 
164,935

Agency-collateralized mortgage obligations

 
22,492

 

 

 
22,492

Non-agency residential

 
6,239

 

 

 
6,239

Commercial

 
2,480

 

 

 
2,480

Non-U.S. securities
3,698

 
3,415

 
107

 

 
7,220

Corporate/Agency bonds

 
873

 

 

 
873

Other taxable securities
20

 
12,963

 
3,847

 

 
16,830

Tax-exempt securities

 
5,122

 
806

 

 
5,928

Total AFS debt securities
10,309

 
220,882

 
4,760

 

 
235,951

Other debt securities carried at fair value:
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
4,062

 

 

 

 
4,062

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
16,500

 

 

 
16,500

Agency-collateralized mortgage obligations

 
218

 

 

 
218

Commercial

 
749

 

 

 
749

Non-U.S. securities
7,457

 
3,858

 

 

 
11,315

Total other debt securities carried at fair value
11,519

 
21,325

 

 

 
32,844

Loans and leases

 
6,985

 
3,057

 

 
10,042

Mortgage servicing rights

 

 
5,042

 

 
5,042

Loans held-for-sale

 
5,727

 
929

 

 
6,656

Other assets
14,474

 
1,912

 
1,669

 

 
18,055

Total assets
$
139,726

 
$
1,333,946

 
$
31,778

 
$
(872,758
)
 
$
632,692

Liabilities
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in U.S. offices
$

 
$
1,899

 
$

 
$

 
$
1,899

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

 
33,684

 

 

 
33,684

Trading account liabilities:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
26,915

 
348

 

 

 
27,263

Equity securities
23,874

 
3,711

 

 

 
27,585

Non-U.S. sovereign debt
20,755

 
1,387

 

 

 
22,142

Corporate securities and other
518

 
5,926

 
35

 

 
6,479

Total trading account liabilities
72,062

 
11,372

 
35

 

 
83,469

Derivative liabilities (4)
1,968

 
897,107

 
7,301

 
(868,969
)
 
37,407

Short-term borrowings

 
1,520

 

 

 
1,520

Accrued expenses and other liabilities
10,130

 
1,093

 
10

 

 
11,233

Long-term debt

 
45,045

 
1,990

 

 
47,035

Total liabilities
$
84,160

 
$
991,720

 
$
9,336

 
$
(868,969
)
 
$
216,247

(1) 
During 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 that was subsequently sold once the restriction was lifted.
(2) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(3) 
Includes $17.2 billion of government-sponsored enterprise obligations.
(4) 
For further disaggregation of derivative assets and liabilities, see Note 2 – 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 months ended March 31, 2014 and 2013, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.

Level 3 – Fair Value Measurements (1)
 
Three Months Ended March 31, 2014
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
January 1
2014
Gains
(Losses) in
Earnings
Gains
(Losses) in
OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance March 31
2014
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
3,559

$
122

$

$
286

$
(354
)
$

$
(238
)
$
148

$
(906
)
$
2,617

Equity securities
386

19


30

(29
)


7

(70
)
343

Non-U.S. sovereign debt
468

55


23

(6
)

(6
)

(1
)
533

Mortgage trading loans and ABS
4,631

78


366

(552
)

(224
)

(12
)
4,287

Total trading account assets
9,044

274


705

(941
)

(468
)
155

(989
)
7,780

Net derivative assets (2)
(24
)
5


125

(618
)

(101
)
12

26

(575
)
AFS debt securities:
 
 
 
 
 
 
 
 
 
 
Non-U.S. securities
107






(107
)



Other taxable securities
3,847

8

(2
)
47



(463
)


3,437

Tax-exempt securities
806

1

1




(25
)


783

Total AFS debt securities
4,760

9

(1
)
47



(595
)


4,220

Loans and leases (3, 4)
3,057

32



(3
)
689

(723
)
6

(5
)
3,053

Mortgage servicing rights (4)
5,042

(290
)


(20
)
265

(232
)


4,765

Loans held-for-sale (3)
929

12



(3
)

(201
)

(1
)
736

Other assets (5)
1,669

(60
)


(269
)

(208
)


1,132

Trading account liabilities – Corporate securities and other
(35
)
1


3

(7
)



2

(36
)
Accrued expenses and other liabilities (3)
(10
)
1







1

(8
)
Long-term debt (3)
(1,990
)
(67
)

46


(9
)
119

(144
)
204

(1,841
)
(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 $6.9 billion and derivative liabilities of $7.5 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 and certain long-term fixed-rate margin loans that are accounted for under the fair value option.

During the three months ended March 31, 2014, the transfers into Level 3 included $155 million of trading account assets and $144 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased availability of third-party prices for certain corporate loans and securities, primarily municipal bonds. 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 March 31, 2014, the transfers out of Level 3 included $989 million of trading account assets and $204 million of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and availability of third-party prices for certain corporate loans and securities. 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 March 31, 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 March 31
2013
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
3,726

$
88

$

$
805

$
(966
)
$

$
(140
)
$
218

$
(124
)
$
3,607

Equity securities
545

42


29

(109
)


8

(18
)
497

Non-U.S. sovereign debt
353

51


15

(1
)



(1
)
417

Mortgage trading loans and ABS
4,935

162


653

(643
)

(631
)
5

(1
)
4,480

Total trading account assets
9,559

343


1,502

(1,719
)

(771
)
231

(144
)
9,001

Net derivative assets (2)
1,468

293


179

(466
)

(660
)
52

197

1,063

AFS debt securities:
 
 
 
 
 
 
 
 
 
 
Non-agency commercial MBS
10









10

Non-U.S securities



1






1

Corporate/Agency bonds
92


4







96

Other taxable securities
3,928


2

243



(128
)


4,045

Tax-exempt securities
1,061

1

3




(24
)


1,041

Total AFS debt securities
5,091

1

9

244



(152
)


5,193

Loans and leases (3, 4)
2,287

51


71


5

(41
)

(10
)
2,363

Mortgage servicing rights (4)
5,716

434



(183
)
123

(314
)


5,776

Loans held-for-sale (3)
2,733

(39
)


(210
)

(101
)
22


2,405

Other assets (5)
3,129

(448
)

17

(27
)

(42
)


2,629

Trading account liabilities – Corporate securities and other
(64
)


7

(14
)


(8
)
21

(58
)
Accrued expenses and other liabilities (3)
(15
)
29




(586
)
116


1

(455
)
Long-term debt (3)
(2,301
)
11


89

(4
)
(36
)
60

(381
)
207

(2,355
)
(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 $8.0 billion and derivative liabilities of $6.9 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 March 31, 2013, the transfers into Level 3 included $231 million of trading account assets and $381 million 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 securities. 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 March 31, 2013, the transfers out of Level 3 included $144 million of trading account assets, $197 million of net derivative assets and $207 million of long-term debt. Transfers out of Level 3 for trading account assets primarily related to increased market liquidity for certain corporate loans and securities. Transfers out of Level 3 for net derivative assets primarily related to increased price observability (i.e., market comparables for the reference 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.
The table below summarizes 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 months ended March 31, 2014 and 2013. 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 March 31, 2014
(Dollars in millions)
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other (2)
 
Total
Trading account assets:
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
122

 
$

 
$

 
$
122

Equity securities
19

 

 

 
19

Non-U.S. sovereign debt
55

 

 

 
55

Mortgage trading loans and ABS
78

 

 

 
78

Total trading account assets
274

 

 

 
274

Net derivative assets
(168
)
 
173

 

 
5

AFS debt securities:
 
 
 
 
 
 
 
Other taxable securities

 

 
8

 
8

Tax-exempt securities

 

 
1

 
1

Total AFS debt securities

 

 
9

 
9

Loans and leases (3)

 

 
32

 
32

Mortgage servicing rights
(5
)
 
(285
)
 

 
(290
)
Loans held-for-sale (3)

 

 
12

 
12

Other assets

 
(36
)
 
(24
)
 
(60
)
Trading account liabilities – Corporate securities and other
1

 

 

 
1

Accrued expenses and other liabilities (3)

 

 
1

 
1

Long-term debt (3)
(53
)
 

 
(14
)
 
(67
)
Total
$
49

 
$
(148
)
 
$
16

 
$
(83
)
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2013
Trading account assets:
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
88

 
$

 
$

 
$
88

Equity securities
42

 

 

 
42

Non-U.S. sovereign debt
51

 

 

 
51

Mortgage trading loans and ABS
162

 

 

 
162

Total trading account assets
343

 

 

 
343

Net derivative assets
(114
)
 
407

 

 
293

AFS debt securities – Tax-exempt securities

 

 
1

 
1

Loans and leases (3)

 

 
51

 
51

Mortgage servicing rights

 
434

 

 
434

Loans held-for-sale (3)

 
4

 
(43
)
 
(39
)
Other assets

 
(3
)
 
(445
)
 
(448
)
Accrued expenses and other liabilities (3)

 
29

 

 
29

Long-term debt (3)
22

 

 
(11
)
 
11

Total
$
251

 
$
871

 
$
(447
)
 
$
675

(1) 
Mortgage banking income (loss) does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts included are primarily recorded in other income (loss). Equity investment losses of $23 million and gains of $2 million recorded on other assets were also included for the three months ended March 31, 2014 and 2013.
(3) 
Amounts represent instruments that are accounted for under the fair value option.
The table below summarizes changes in unrealized gains (losses) recorded in earnings during the three months ended March 31, 2014 and 2013 for Level 3 assets and liabilities that were still held at March 31, 2014 and 2013. 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 March 31, 2014
(Dollars in millions)
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other (2)
 
Total
Trading account assets:
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
111

 
$

 
$

 
$
111

Equity securities
17

 

 

 
17

Non-U.S. sovereign debt
55

 

 

 
55

Mortgage trading loans and ABS
16

 

 

 
16

Total trading account assets
199

 

 

 
199

Net derivative assets
(212
)
 
44

 

 
(168
)
Loans and leases (3)

 

 
28

 
28

Mortgage servicing rights
(5
)
 
(468
)
 

 
(473
)
Loans held-for-sale (3)

 

 
4

 
4

Other assets

 
(28
)
 
6

 
(22
)
Trading account liabilities – Corporate securities and other
1

 

 

 
1

Accrued expenses and other liabilities (3)

 

 
1

 
1

Long-term debt (3)
(53
)
 

 
(14
)
 
(67
)
Total
$
(70
)
 
$
(452
)
 
$
25

 
$
(497
)
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2013
Trading account assets:
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
48

 
$

 
$

 
$
48

Equity securities
33

 

 

 
33

Non-U.S. sovereign debt
51

 

 

 
51

Mortgage trading loans and ABS
89

 

 

 
89

Total trading account assets
221

 

 

 
221

Net derivative assets
(169
)
 
246

 

 
77

Loans and leases (3)

 

 
43

 
43

Mortgage servicing rights

 
336

 

 
336

Loans held-for-sale (3)

 
10

 
(52
)
 
(42
)
Other assets

 
12

 
(462
)
 
(450
)
Accrued expenses and other liabilities (3)

 
25

 

 
25

Long-term debt (3)
21

 

 
(11
)
 
10

Total
$
73

 
$
629

 
$
(482
)
 
$
220

(1) 
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts included are primarily recorded in other income (loss). Equity investment gains of $9 million and losses of $15 million recorded on other assets were also included for the three months ended March 31, 2014 and 2013.
(3) 
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 March 31, 2014 and December 31, 2013.

Quantitative Information about Level 3 Fair Value Measurements at March 31, 2014
 
(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
$
3,864

Discounted cash flow, Market comparables
Yield
1% to 25%
6
 %
Trading account assets – Mortgage trading loans and ABS
326

Prepayment speed
0% to 35% CPR
9
 %
Loans and leases
2,802

Default rate
1% to 15% CDR
6
 %
Loans held-for-sale
736

Loss severity
21% to 80%
33
 %
Commercial loans, debt securities and other
$
10,027

Discounted cash flow, Market comparables
Yield
0% to 40%
4
 %
Trading account assets – Corporate securities, trading loans and other
2,488

Enterprise value/EBITDA multiple
1x to 31x
8x

Trading account assets – Non-U.S. sovereign debt
533

Prepayment speed
5% to 40%
19
 %
Trading account assets – Mortgage trading loans and ABS
3,961

Default rate
1% to 5%
4
 %
AFS debt securities – Other taxable securities
2,794

Loss severity
25% to 42%
36
 %
Loans and leases
251

Duration
0 years to 5 years
4 years

Auction rate securities
$
1,555

Discounted cash flow, Market comparables
Projected tender price/Refinancing level
60% to 100%
96
 %
Trading account assets – Corporate securities, trading loans and other
129

 
 
AFS debt securities – Other taxable securities
643

 
 
 
AFS debt securities – Tax-exempt securities
783

 
 
 
Structured liabilities
 
 
 
 
 
Long-term debt
$
(1,841
)
Industry standard derivative pricing (2, 3)
Equity correlation
22% to 98%
68
 %
 
 
Long-dated equity volatilities
6% to 58%
22
 %
 
 
Long-dated volatilities (IR)
0% to 2%
1
 %
Net derivatives assets
 
 
 
 
 
Credit derivatives
$
529

Discounted cash flow, Stochastic recovery correlation model
Yield
0% to 25%
15
 %
 
 
Upfront points
1 point to 100 points
61 points

 
 
Spread to index
0 bps to 475 bps
97 bps

 
 
Credit correlation
24% to 99%
51
 %
 
 
Prepayment speed
3% to 40% CPR
14
 %
 
 
Default rate
1% to 5% CDR
3
 %
 
 
Loss severity
20% to 42%
35
 %
Equity derivatives
$
(1,782
)
Industry standard derivative pricing (2)
Equity correlation
22% to 98%
68
%
 
 
Long-dated equity volatilities
6% to 58%
22
%
Commodity derivatives
$
48

Discounted cash flow, Industry standard derivative pricing (2)
Natural gas forward price
$3/MMBtu to $8/MMBtu
$5/MMBtu

 
 
Correlation
47% to 89%
81
 %
 
 
Volatilities
11% to 111%
29
 %
Interest rate derivatives
$
630

Industry standard derivative pricing (3)
Correlation (IR/IR)
20% to 99%
60
 %
 
 
Correlation (FX/IR)
-30% to 40%
-5
 %
 
 
Long-dated inflation rates
0% to 3%
2
 %
 
 
Long-dated inflation volatilities
0% to 2%
1
 %
Total net derivative assets
$
(575
)
 
 
 
 

(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 213: Trading account assets – Corporate securities, trading loans and other of $2.6 billion, Trading account assets – Non-U.S. sovereign debt of $533 million, Trading account assets – Mortgage trading loans and ABS of $4.3 billion, AFS debt securities – Other taxable securities of $3.4 billion, AFS debt securities – Tax-exempt securities of $783 million, Loans and leases of $3.1 billion and LHFS of $736 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 at December 31, 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
$
3,443

Discounted cash flow, Market comparables
Yield
2% to 25%
6
 %
Trading account assets – Mortgage trading loans and ABS
363

Prepayment speed
0% to 35% CPR
9
 %
Loans and leases
2,151

Default rate
1% to 20% CDR
6
 %
Loans held-for-sale
929

Loss severity
21% to 80%
35
 %
Commercial loans, debt securities and other
$
12,135

Discounted cash flow, Market comparables
Yield
0% to 45%
5
 %
Trading account assets – Corporate securities, trading loans and other
3,462

Enterprise value/EBITDA multiple
0x to 24x
7x

Trading account assets – Non-U.S. sovereign debt
468

Prepayment speed
5% to 40%
19
 %
Trading account assets – Mortgage trading loans and ABS
4,268

Default rate
1% to 5%
4
 %
AFS debt securities – Other taxable securities
3,031

Loss severity
25% to 42%
36
 %
Loans and leases
906

Duration
1 year to 5 years
4 years

Auction rate securities
$
1,719

Discounted cash flow, Market comparables
Project tender price/Refinancing level
60% to 100%
96
 %
Trading account assets – Corporate securities, trading loans and other
97

 
 
AFS debt securities – Other taxable securities
816

 
 
 
AFS debt securities – Tax-exempt securities
806

 
 
 
Structured liabilities
 
 
 
 
 
Long-term debt 
$
(1,990
)
Industry standard derivative pricing (2, 3)
Equity correlation
18% to 98%
70
 %
 
 
Long-dated equity volatilities
4% to 63%
27
 %
 
 
Long-dated volatilities (IR)
0% to 2%
1
 %
Net derivatives assets
 
 
 
 
 
Credit derivatives
$
1,008

Discounted cash flow, Stochastic recovery correlation model
Yield
3% to 25%
14
 %
 
 
Upfront points
0 points to 100 points
63 points

 
 
Spread to index
-1,407 bps to 1,741 bps
91 bps

 
 
Credit correlation
14% to 99%
47
 %
 
 
Prepayment speed
3% to 40% CPR
13
 %
 
 
Default rate
1% to 5% CDR
3
 %
 
 
Loss severity
20% to 42%
35
 %
Equity derivatives
$
(1,596
)
Industry standard derivative pricing (2)
Equity correlation
18% to 98%
70
 %
 
 
Long-dated equity volatilities
4% to 63%
27
 %
Commodity derivatives
$
6

Discounted cash flow, Industry standard derivative pricing (2)
Natural gas forward price
$3/MMBtu to $11/MMBtu
$6/MMBtu

 
 
Correlation
47% to 89%
81
 %
 
 
Volatilities
9% to 109%
30
 %
Interest rate derivatives
$
558

Industry standard derivative pricing (3)
Correlation (IR/IR)
24% to 99%
60
 %
 
 
Correlation (FX/IR)
-30% to 40%
-4
 %
 
 
Long-dated inflation rates
0% to 3%
2
 %
 
 
Long-dated inflation volatilities
0% to 2%
1
 %
Total net derivative assets
$
(24
)
 
 
 
 

(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 214: Trading account assets – Corporate securities, trading loans and other of $3.6 billion, Trading account assets – Non-U.S. sovereign debt of $468 million, Trading account assets – Mortgage trading loans and ABS of $4.6 billion, AFS debt securities – Other taxable securities of $3.8 billion, AFS debt securities – Tax-exempt securities of $806 million, Loans and leases of $3.1 billion and LHFS of $929 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


In the tables above, instruments backed by residential real estate assets include RMBS, 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.

In addition to the instruments in the tables above, the Corporation held $504 million and $767 million of instruments at March 31, 2014 and December 31, 2013 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.

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. At March 31, 2014 and December 31, 2013, weighted averages are disclosed for all loans, securities, structured liabilities and net derivative assets.

For more information on the inputs and techniques used in the valuation of MSRs, see Note 17 – Mortgage Servicing Rights.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

For instruments backed by residential real estate assets and commercial loans, debt securities and other, a significant increase in market yields, default rates, loss severities or duration 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 auction rate securities, 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), 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, interest rate derivatives and structured liabilities, 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 months ended March 31, 2014 and 2013, and still held as of the reporting date.

Assets Measured at Fair Value on a Nonrecurring Basis
 
March 31, 2014
 
Three Months Ended March 31, 2014
(Dollars in millions)
Level 2
 
Level 3
 
Gains (Losses)
Assets
 
 
 
 
 
Loans held-for-sale
$
4,325

 
$
104

 
$
(3
)
Loans and leases
17

 
1,733

 
(330
)
Foreclosed properties (1)
4

 
1,179

 
(14
)
Other assets
77

 

 

 
 
 
 
 
 
 
March 31, 2013
 
Three Months Ended March 31, 2013
Assets
 
 
 
 
 
Loans held-for-sale
$
3,902

 
$
795

 
$
(96
)
Loans and leases
20

 
3,619

 
(640
)
Foreclosed properties (1)
48

 
1,981

 
(19
)
Other assets
65

 
12

 
(6
)

(1) 
Amounts are included in other assets on the Consolidated Balance Sheet and represent 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 March 31, 2014 and December 31, 2013.

Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
 
 
 
 
March 31, 2014
(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
$
1,733

Market comparables
OREO discount
0% to 25%
10
%
Loans and leases
1,733

Cost to sell
8%
n/a

 
December 31, 2013
Instruments backed by residential real estate assets
$
5,240

Market comparables
OREO discount
0% to 19%
8
%
Loans and leases
5,240

Cost to sell
8%
n/a


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. 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 generally 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.