Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value Measurements
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 more 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 three months ended March 31, 2013, there were no changes to the valuation techniques that had, or are expected to have, a material impact on its 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 March 31, 2013 and December 31, 2012, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.

 
March 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
$

 
$
94,673

 
$

 
$

 
$
94,673

Trading account assets:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
47,957

 
24,921

 

 

 
72,878

Corporate securities, trading loans and other
1,702

 
33,874

 
3,607

 

 
39,183

Equity securities
31,398

 
13,968

 
497

 

 
45,863

Non-U.S. sovereign debt
33,681

 
14,536

 
417

 

 
48,634

Mortgage trading loans and ABS

 
11,990

 
4,480

 

 
16,470

Total trading account assets
114,738

 
99,289

 
9,001

 

 
223,028

Derivative assets (3)
5,078

 
1,201,709

 
8,011

 
(1,162,551
)
 
52,247

AFS debt securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and agency securities
14,639

 
2,800

 

 

 
17,439

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
174,268

 

 

 
174,268

Agency-collateralized mortgage obligations

 
34,761

 

 

 
34,761

Non-agency residential

 
8,877

 

 

 
8,877

Non-agency commercial

 
3,824

 
10

 

 
3,834

Non-U.S. securities
2,699

 
2,950

 
1

 

 
5,650

Corporate/Agency bonds

 
1,289

 
96

 

 
1,385

Other taxable securities
20

 
6,989

 
4,045

 

 
11,054

Tax-exempt securities

 
3,541

 
1,041

 

 
4,582

Total AFS debt securities
17,358

 
239,299

 
5,193

 

 
261,850

Other debt securities carried at fair value:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and agency securities
3,861

 

 

 

 
3,861

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
29,178

 

 

 
29,178

Agency-collateralized mortgage obligations

 
958

 

 

 
958

Non-agency commercial

 
103

 

 

 
103

Non-U.S. securities
8,872

 
310

 

 

 
9,182

Total other debt securities carried at fair value
12,733

 
30,549

 

 

 
43,282

Loans and leases

 
6,457

 
2,363

 

 
8,820

Mortgage servicing rights

 

 
5,776

 

 
5,776

Loans held-for-sale

 
11,482

 
2,405

 

 
13,887

Other assets
15,578

 
5,036

 
2,629

 

 
23,243

Total assets
$
165,485

 
$
1,688,494

 
$
35,378

 
$
(1,162,551
)
 
$
726,806

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

 
$
2,130

 
$

 
$

 
$
2,130

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

 
47,842

 

 

 
47,842

Trading account liabilities:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
25,292

 
472

 

 

 
25,764

Equity securities
21,786

 
2,963

 

 

 
24,749

Non-U.S. sovereign debt
27,945

 
1,432

 

 

 
29,377

Corporate securities and other
574

 
10,025

 
58

 

 
10,657

Total trading account liabilities
75,597

 
14,892

 
58

 

 
90,547

Derivative liabilities (3)
3,888

 
1,184,636

 
6,948

 
(1,147,647
)
 
47,825

Short-term borrowings

 
3,168

 

 

 
3,168

Accrued expenses and other liabilities
12,016

 
1,814

 
455

 

 
14,285

Long-term debt

 
50,006

 
2,355

 

 
52,361

Total liabilities
$
91,501

 
$
1,304,488

 
$
9,816

 
$
(1,147,647
)
 
$
258,158

(1) 
During the three months ended March 31, 2013, $500 million of 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 months ended March 31, 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 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 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 March 31, 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 March 31
2012
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$
6,880

$
93

$

$
675

$
(1,065
)
$

$
(189
)
$
59

$
(452
)
$
6,001

Equity securities
544

15


79

(109
)

(10
)
8

(2
)
525

Non-U.S. sovereign debt
342

24


273

(81
)



(12
)
546

Mortgage trading loans and ABS
3,689

99


184

(455
)

(89
)
742

(158
)
4,012

Total trading account assets
11,455

231


1,211

(1,710
)

(288
)
809

(624
)
11,084

Net derivative assets (2)
5,866

(837
)

359

(321
)

(634
)
106

(352
)
4,187

AFS debt securities:
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Agency
37






(4
)


33

Non-agency residential
860

(69
)
19


(293
)



(488
)
29

Non-agency commercial
40






(2
)


38

Corporate/Agency bonds
162

(2
)

(2
)




(27
)
131

Other taxable securities
4,265

7

17

362



(418
)

(58
)
4,175

Tax-exempt securities
2,648

26

18


(35
)

(762
)


1,895

Total AFS debt securities
8,012

(38
)
54

360

(328
)

(1,186
)

(573
)
6,301

Loans and leases (3, 4)
2,744

164





(117
)

(9
)
2,782

Mortgage servicing rights (4)
7,378

655




77

(521
)


7,589

Loans held-for-sale (3)
3,387

169


4



(97
)
31

(632
)
2,862

Other assets (5)
4,235

(32
)

43

(581
)

(167
)

(11
)
3,487

Trading account liabilities – Corporate securities and other
(114
)


48

(27
)


(65
)
34

(124
)
Accrued expenses and other liabilities (3)
(14
)
3


5





3

(3
)
Long-term debt (3)
(2,943
)
(241
)

76

(33
)
(65
)
433

(532
)
805

(2,500
)
(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 $11.3 billion and derivative liabilities of $7.1 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, 2012, the transfers into Level 3 included $809 million of trading account assets, $106 million of net derivative assets and $532 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of updated information related to certain CLOs. Transfers into Level 3 for net derivative assets primarily related to decreased market activity (i.e., executed trades) for certain structured rate derivatives. 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, 2012, the transfers out of Level 3 included $624 million of trading account assets, $352 million of net derivative assets, $573 million of AFS debt securities, $632 million of LHFS and $805 million 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. 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 months ended March 31, 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 March 31, 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
$

 
$
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 (2)

 

 

 
51

 
51

Mortgage servicing rights

 

 
434

 

 
434

Loans held-for-sale (2)

 

 
4

 
(43
)
 
(39
)
Other assets
2

 

 
(3
)
 
(447
)
 
(448
)
Accrued expenses and other liabilities (2)

 

 
29

 

 
29

Long-term debt (2)

 
22

 

 
(11
)
 
11

Total
$
2

 
$
251

 
$
871

 
$
(449
)
 
$
675

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2012
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
93

 
$

 
$

 
$
93

Equity securities

 
15

 

 

 
15

Non-U.S. sovereign debt

 
24

 

 

 
24

Mortgage trading loans and ABS

 
99

 

 

 
99

Total trading account assets

 
231

 

 

 
231

Net derivative assets

 
(1,373
)
 
536

 

 
(837
)
AFS debt securities:
 
 
 
 
 
 
 
 
 
Non-agency residential MBS

 

 

 
(69
)
 
(69
)
Corporate/Agency bonds

 

 

 
(2
)
 
(2
)
Other taxable securities

 

 

 
7

 
7

Tax-exempt securities

 

 

 
26

 
26

Total AFS debt securities

 

 

 
(38
)
 
(38
)
Loans and leases (2)

 

 

 
164

 
164

Mortgage servicing rights

 

 
655

 

 
655

Loans held-for-sale (2)

 

 
90

 
79

 
169

Other assets
10

 

 
(8
)
 
(34
)
 
(32
)
Accrued expenses and other liabilities (2)

 

 

 
3

 
3

Long-term debt (2)

 
(139
)
 

 
(102
)
 
(241
)
Total
$
10

 
$
(1,281
)
 
$
1,273

 
$
72

 
$
74

(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 months ended March 31, 2013 and 2012 for Level 3 assets and liabilities that were still held at March 31, 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 March 31, 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

 
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 (2)

 

 

 
43

 
43

Mortgage servicing rights

 

 
336

 

 
336

Loans held-for-sale (2)

 

 
10

 
(52
)
 
(42
)
Other assets
(15
)
 

 
12

 
(447
)
 
(450
)
Accrued expenses and other liabilities (2)

 

 
25

 

 
25

Long-term debt (2)

 
21

 

 
(11
)
 
10

Total
$
(15
)
 
$
73

 
$
629

 
$
(467
)
 
$
220

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2012
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other
$

 
$
56

 
$

 
$

 
$
56

Equity securities

 
11

 

 

 
11

Non-U.S. sovereign debt

 
13

 

 

 
13

Mortgage trading loans and ABS

 
53

 

 

 
53

Total trading account assets

 
133

 

 

 
133

Net derivative assets

 
(1,314
)
 
300

 

 
(1,014
)
Loans and leases (2)

 

 

 
163

 
163

Mortgage servicing rights

 

 
470

 

 
470

Loans held-for-sale (2)

 

 
51

 
23

 
74

Other assets
(19
)
 

 
6

 
(34
)
 
(47
)
Accrued expenses and other liabilities (2)

 

 

 
3

 
3

Long-term debt (2)

 
(129
)
 

 
(102
)
 
(231
)
Total
$
(19
)
 
$
(1,310
)
 
$
827

 
$
53

 
$
(449
)
(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 March 31, 2013 and December 31, 2012.

Quantitative Information about Level 3 Fair Value Measurements at March 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
$
3,676

Discounted cash flow, Market comparables
Yield
0% to 25%
6
%
Trading account assets – Mortgage trading loans and ABS
365

Prepayment speed
1% to 35% CPR
10
%
Loans and leases
906

Default rate
0% to 35% CDR
5
%
Loans held-for-sale
2,405

Loss severity
4% to 85%
41
%
Instruments backed by commercial real estate assets
$
1,454

Discounted cash flow
Yield
5%
n/a

Other assets
1,454

Loss severity
51% to 100%
80
%
Commercial loans, debt securities and other
$
11,257

Discounted cash flow, Market comparables
Yield
0% to 33%
4
%
Trading account assets – Corporate securities, trading loans and other
2,471

Enterprise value/EBITDA multiple
1x to 17x
6
x
Trading account assets – Mortgage trading loans and ABS
4,115

Prepayment speed
5% to 40%
19
%
AFS debt securities – Other taxable securities
3,214

Default rate
1% to 5%
4
%
Loans and leases
1,457

Loss severity
25% to 40%
36
%
Auction rate securities
$
3,008

Discounted cash flow, Market comparables
Discount rate
4% to 5%
5
%
Trading account assets – Corporate securities, trading loans and other
1,136

Projected tender price/Re-financing level
50% to 100%
93
%
AFS debt securities – Other taxable securities
831

 
 
AFS debt securities – Tax-exempt securities
1,041

 
 
 
Structured liabilities
 
 
 
 
 
Long-term debt
$
(2,355
)
Industry standard derivative pricing (2)
Equity correlation
30% to 97%
73
%
 
 
Long-dated volatilities
15% to 115%
26
%
 
 
 
 
 
Net derivatives assets
 
 
 
 
 
Credit derivatives
$
1,839

Discounted cash flow, Stochastic recovery correlation model
Yield
3% to 30%
16
%
 
 
Credit spreads
37 bps to 346 bps
200 bps

 
 
Upfront points
12 points to 100 points
71 points

 
 
Spread to index
-1,657 bps to 1,988 bps
400 bps

 
 
Credit correlation
21% to 75%
39
%
 
 
Prepayment speed
4% to 30% CPR
9
%
 
 
Default rate
1% to 5% CDR
3
%
 
 
Loss severity
27% to 50%
37
%
Equity derivatives
$
(1,215
)
Industry standard derivative pricing (2)
Equity correlation
30% to 97%
73
%
 
 
Long-dated volatilities
15% to 115%
26
%
 
 
 
 
 
Commodity derivatives
$
(4
)
Discounted cash flow
Natural gas forward price
$3/MMBtu to $12/MMBtu
$7/MMBtu

Interest rate derivatives
$
443

Industry standard derivative pricing (3)
Correlation (IR/IR)
19% to 99%
69
%
 
 
Correlation (FX/IR)
-65% to 50%
7
%
 
 
Long-dated inflation rates
2% to 3%
2
%
 
 
Long-dated inflation volatilities
0% to 2%
1
%
Total net derivative assets
$
1,063

 
 
 
 

(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 – 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 $1.0 billion, Loans and leases of $2.4 billion, LHFS of $2.4 billion and Other assets of $1.5 billion.
(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.
n/a = not applicable
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)