Derivative Instruments

9 Months Ended

Sep. 30, 2011

Derivative Instruments [Abstract]

Derivative Instruments

Note 12    Derivative Instruments

The Company recognizes all derivatives in the consolidated balance sheet at fair value as other assets or liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a hedge of the fair value of a recognized asset or liability (“fair value hedge”); a hedge of a forecasted transaction or the variability of cash flows to be paid related to a recognized asset or liability (“cash flow hedge”); a hedge of the volatility of an investment in foreign operations driven by changes in foreign currency exchange rates (“net investment hedge”); or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations (“free-standing derivative”).

Of the Company’s $53.1 billion of total notional amount of asset and liability management positions at September 30, 2011, $14.9 billion was designated as a fair value, cash flow or net investment hedge. When a derivative is designated as a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).

Fair Value Hedges These derivatives are primarily interest rate swaps that hedge the change in fair value related to interest rate changes of underlying fixed-rate debt and junior subordinated debentures. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings. All fair value hedges were highly effective for the nine months ended September 30, 2011, and the change in fair value attributed to hedge ineffectiveness was not material.

Cash Flow Hedges These derivatives are interest rate swaps that are hedges of the forecasted cash flows from the underlying variable-rate loans and debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until expense from the cash flows of the hedged items is realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts within other comprehensive income (loss) remain. At September 30, 2011, the Company had $510 million (net-of-tax) of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $414 million (net-of-tax) at December 31, 2010. The estimated amounts to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2011 and the next 12 months are losses of $34 million (net-of-tax) and $129 million (net-of-tax), respectively. This includes gains and losses related to hedges that were terminated early for which the forecasted transactions are still probable. All cash flow hedges were highly effective for the nine months ended September 30, 2011, and the change in fair value attributed to hedge ineffectiveness was not material.

Net Investment Hedges The Company uses forward commitments to sell specified amounts of certain foreign currencies to hedge the volatility of its investment in foreign operations driven by fluctuations in foreign currency exchange rates. The ineffectiveness on all net investment hedges was not material for the nine months ended September 30, 2011.

Other Derivative Positions The Company enters into free-standing derivatives to mitigate interest rate risk and for other risk management purposes. These derivatives include forward commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to residential mortgage loans held for sale. The Company also enters into U.S. Treasury futures, options on U.S. Treasury futures contracts, interest rate swaps and forward commitments to buy residential mortgage loans to economically hedge the change in the fair value of the Company’s residential MSRs. In addition, the Company acts as a seller and buyer of interest rate derivatives and foreign exchange contracts for its customers. To mitigate the market and liquidity risk associated with these customer derivatives, the Company enters into similar offsetting positions with broker-dealers. The Company also has derivative contracts that are created through its operations, including commitments to originate mortgage loans held for sale and certain derivative financial guarantee contracts.

For additional information on the Company’s purpose for entering into derivative transactions and its overall risk management strategies, refer to “Management Discussion and Analysis — Use of Derivatives to Manage Interest Rate and Other Risks” which is incorporated by reference into these Notes to Consolidated Financial Statements.

The following table provides information on the fair value of the Company’s derivative positions:

	September 30, 2011						December 31, 2010
	Asset			Liability			Asset			Liability
(Dollars in Millions)	Derivatives			Derivatives			Derivatives			Derivatives
Total fair value of derivative positions	$	2,139		$	2,728		$	1,799		$	2,174
Netting (a)		(361	)		(1,680	)		(280	)		(1,163	)
Total	$	1,778		$	1,048		$	1,519		$	1,011

Note: The fair value of asset and liability derivatives are included in Other assets and Other liabilities on the Consolidated Balance Sheet, respectively.

(a) Represents netting of derivative asset and liability balances, and related collateral, with the same counterparty subject to master netting agreements. Authoritative accounting guidance permits the netting of derivative receivables and payables when a legally enforceable master netting agreement exists between the Company and a derivative counterparty. A master netting agreement is an agreement between two counterparties who have multiple derivative contracts with each other that provide for the net settlement of contracts through a single payment, in a single currency, in the event of default on or termination of any one contract. At September 30, 2011, the amount of cash and money market investments collateral posted by counterparties that was netted against derivative assets was $111 million and the amount of cash collateral posted by the Company that was netted against derivative liabilities was $1.4 billion. At December 31, 2010, the amount of cash and money market investments collateral posted by counterparties that was netted against derivative assets was $55 million and the amount of cash collateral posted by the Company that was netted against derivative liabilities was $936 million.

The following table summarizes the asset and liability management derivative positions of the Company:

	Asset Derivatives						Liability Derivatives
					Weighted-Average						Weighted-Average
					Remaining						Remaining
	Notional		Fair		Maturity		Notional		Fair		Maturity
(Dollars in Millions)	Value		Value		In Years		Value		Value		In Years
September 30, 2011
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	1,035	$	42		31.17	$	–	$	–		–
Foreign exchange cross-currency swaps		895		52		5.49		447		8		5.49
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		750		1		3.05		11,039		845		3.67
Net investment hedges
Foreign exchange forward contracts		738		15		.08		–		–		–
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		12,832		132		.08		691		4		.05
Sell		2,893		9		.14		9,732		126		.12
Options
Purchased		1,000		–		.06		–		–		–
Written		4,664		79		.14		13		–		.16
Receive fixed/pay floating swaps		2,875		12		10.21		–		–		–
Pay fixed/receive floating swaps		250		4		10.21		–		–		–
Foreign exchange forward contracts		690		23		.09		144		1		.10
Equity contracts		30		2		1.53		31		5		.88
Credit contracts		710		6		2.85		1,611		8		3.05
December 31, 2010
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps		1,800		72		55.75		–		–		–
Foreign exchange cross-currency swaps		891		70		6.17		445		–		6.17
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		–		–		–		4,788		688		5.03
Net investment hedges
Foreign exchange forward contracts		512		3		.08		–		–		–
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		2,879		20		.10		6,312		79		.05
Sell		9,082		207		.07		6,002		51		.09
Options
Purchased		1,600		–		.06		–		–		–
Written		6,321		23		.07		1,348		9		.07
Receive fixed/pay floating swaps		2,250		3		10.22		–		–		–
Foreign exchange forward contracts		158		1		.09		694		6		.09
Equity contracts		61		3		1.60		–		–		–
Credit contracts		650		2		3.22		1,183		7		2.71

The following table summarizes the customer-related derivative positions of the company:

	Asset Derivatives						Liability Derivatives
					Weighted-Average						Weighted-Average
					Remaining						Remaining
	Notional		Fair		Maturity		Notional		Fair		Maturity
(Dollars in Millions)	Value		Value		In Years		Value		Value		In Years
September 30, 2011
Interest rate contracts
Receive fixed/pay floating swaps	$	16,482	$	1,270		5.05	$	239	$	–		2.80
Pay fixed/receive floating swaps		217		1		3.94		16,572		1,241		5.07
Options
Purchased		2,191		5		1.85		100		23		.08
Written		369		23		.20		1,962		5		2.04
Foreign exchange rate contracts
Forwards, spots and swaps (a)		13,166		457		.41		12,357		456		.39
Options
Purchased		144		6		.46		–		–		–
Written		–		–		–		144		6		.46
December 31, 2010
Interest rate contracts
Receive fixed/pay floating swaps		15,730		956		4.64		1,294		21		6.01
Pay fixed/receive floating swaps		1,315		24		6.12		15,769		922		4.68
Options
Purchased		2,024		13		1.98		115		12		.36
Written		472		12		.26		1,667		13		2.35
Foreign exchange rate contracts
Forwards, spots and swaps (a)		7,772		384		.74		7,694		360		.75
Options
Purchased		224		6		.40		–		–		–
Written		–		–		–		224		6		.40

(a) Reflects the net of long and short positions.

The table below shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses) reclassified from other comprehensive income (loss) into earnings (net-of-tax):

	Three Months Ended September 30,												Nine Months Ended September 30,
							Gains (Losses)
							Reclassified												Gains (Losses)
	Gains (Losses)						from Other												Reclassified
	Recognized in Other						Comprehensive						Gains (Losses) Recognized in						from Other
	Comprehensive						Income (Loss)						Other Comprehensive						Comprehensive Income (Loss)
	Income (Loss)						into Earnings						Income (Loss)						into Earnings
Dollars in Millions)	2011			2010			2011			2010			2011			2010			2011			2010
Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps (a)	$	(120	)	$	(111	)	$	(34	)	$	(34	)	$	(199	)	$	(317	)	$	(103	)	$	(113	)
Net investment hedges
Foreign exchange forward contracts		(57	)		(53	)		–			–			(104	)		(36	)		–			–

Note: Ineffectiveness on cash flow and net investment hedges was not material for the three months and nine months ended September 30, 2011 and 2010.

(a) Gains (Losses) reclassified from other comprehensive income (loss) into interest income on loans and interest expense on long-term debt.

The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-related positions:

			Gains (Losses) Recognized in Earnings
	Location of		Three Months Ended September 30,						Nine Months Ended September 30,
	Gains (Losses)
(Dollars in Millions)	Recognized in Earnings		2011			2010			2011			2010
Asset and Liability Management Positions
Fair value hedges (a)
Interest rate contracts		Other noninterest income	$	1		$	20		$	25		$	(64	)
Foreign exchange cross-currency swaps		Other noninterest income		(111	)		80			(13	)		(151	)
Other economic hedges
Interest rate contracts
Futures and forwards		Mortgage banking revenue		17			286			(7	)		555
Purchased and written options		Mortgage banking revenue		181			183			323			374
Receive fixed/pay floating swaps		Mortgage banking revenue		377			–			479			–
Pay fixed/receive floating swaps		Mortgage banking revenue		4			–			4			–
Foreign exchange forward contracts		Commercial products revenue		(48	)		(14	)		(66	)		(5	)
Equity contracts		Compensation expense		1			1			2			3
Credit contracts		Other noninterest income/expense		4			–			2			–
Customer-Related Positions
Interest rate contracts
Receive fixed/pay floating swaps		Other noninterest income		366			213			352			567
Pay fixed/receive floating swaps		Other noninterest income		(376	)		(216	)		(365	)		(565	)
Purchased and written options		Other noninterest income		–			1			–			1
Foreign exchange rate contracts
Forwards, spots and swaps		Commercial products revenue		14			13			41			34
Purchased and written options		Commercial products revenue		–			1			–			1

(a) Gains (Losses) on items hedged by interest rate contracts and foreign exchange forward contracts, included in noninterest income (expense), were $(3) million and $117 million for the three months ended September 30, 2011, respectively, and $(18) million and $(80) million for the three months ended September 30, 2010, respectively. Gains (Losses) on items hedged by interest rate contracts and foreign exchange forward contracts, included in noninterest income (expense), were $(27) million and $20 million for the nine months ended September 30, 2011, respectively, and $65 million and $150 million for the nine months ended September 30, 2010, respectively. The ineffective portion was immaterial for the three months and nine months ended September 30, 2011 and 2010.

Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk based on its assessment of the probability of counterparty default and includes that within the fair value of the derivative. The Company manages counterparty credit risk through diversification of its derivative positions among various counterparties, by entering into master netting agreements where possible and by requiring collateral agreements which allow the Company to call for immediate, full collateral coverage when credit-rating thresholds are triggered by counterparties.

The Company’s collateral agreements are bilateral and, therefore, contain provisions that require collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on certain net liability thresholds and contingent upon the Company’s credit rating from two of the nationally recognized statistical rating organizations. If the Company’s credit rating were to fall below credit ratings thresholds established in the collateral agreements, the counterparties to the derivatives could request immediate full collateral coverage for derivatives in net liability positions. The aggregate fair value of all derivatives under collateral agreements that were in a net liability position at September 30, 2011, was $2.0 billion. At September 30, 2011, the Company had $1.4 billion of cash posted as collateral against this net liability position.