Derivative Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

 Note 13   Derivative Instruments

In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value in other assets or in other liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a fair value hedge, cash flow hedge, 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”). 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 interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying available-for-sale investment securities and fixed-rate debt. 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.

Cash Flow Hedges These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its 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 the cash flows of the hedged items are 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 remain within other comprehensive income (loss). At September 30, 2023, the Company had $533 million (net-of-tax) of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $114 million (net-of-tax) of realized and unrealized losses at December 31, 2022. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the next 12 months is a loss of $182 million (net-of-tax). All cash flow hedges were highly effective for the three months ended September 30, 2023.

Net Investment Hedges The Company uses forward commitments to sell specified amounts of certain foreign currencies, and non-derivative debt instruments, to hedge the volatility of its net investment in foreign operations driven by fluctuations in foreign currency exchange rates. The carrying amount of non-derivative debt instruments designated as net investment hedges was $1.2 billion at September 30, 2023 and $1.3 billion at December 31, 2022.

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 to-be-announced securities (“TBAs”) and other commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to mortgage loans held for sale (“MLHFS”) and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, swaptions, forward commitments to buy TBAs, U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to economically hedge the change in the fair value of the Company’s MSRs. The Company enters into foreign currency forwards to economically hedge remeasurement gains and losses the Company recognizes on foreign currency denominated assets and liabilities. The Company also enters into interest rate swaps as economic hedges of fair value option elected deposits. In addition, the Company acts as a seller and buyer of interest rate, foreign exchange and commodity contracts for its customers. The Company mitigates the market and liquidity risk associated with these customer derivatives by entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure to earnings from these customer-related positions. The Company’s customer derivatives and related hedges are monitored and reviewed by the Company’s Market Risk Committee, which establishes policies for market risk management, including exposure limits for each portfolio. The Company also has derivative contracts that are created through its operations, including certain unfunded mortgage loan commitments and swap agreements related to the sale of a portion of its Class B common and preferred shares of Visa Inc. Refer to Note 15 for further information on these swap agreements. The Company uses credit derivatives to economically hedge the credit risk on its derivative positions and loan portfolios.

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

	September 30, 2023						December 31, 2022
	Notional Value		Fair Value				Notional Value		Fair Value
(Dollars in Millions)			Assets		Liabilities				Assets		Liabilities
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	9,550	$	—	$	—	$	17,400	$	—	$	9
Pay fixed/receive floating swaps		19,264		—		—		5,542		—		—
Cash flow hedges
Interest rate contracts
Receive fixed/pay floating swaps		23,700		—		—		14,300		—		—
Net investment hedges
Foreign exchange forward contracts		824		5		1		778		—		—
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		2,945		4		15		3,546		10		18
Sell		4,851		26		7		7,522		20		38
Options
Purchased		7,385		329		—		11,434		346		—
Written		3,707		12		100		7,849		7		148
Receive fixed/pay floating swaps		5,055		—		1		9,215		—		3
Pay fixed/receive floating swaps		4,595		—		—		9,616		—		—
Foreign exchange forward contracts		622		2		1		962		2		6
Equity contracts		209		—		7		361		—		10
Credit contracts		1,425		—		—		330		—		—
Other (a)		2,767		11		121		1,908		11		190
Total	$	86,899	$	389	$	253	$	90,763	$	396	$	422

(a) Includes derivative liability swap agreements related to the sale of a portion of the Company’s Class B common and preferred shares of Visa Inc. The Visa swap agreements had a total notional value and fair value of $2.0 billion and $119 million at September 30, 2023, respectively, compared to $1.8 billion and $190 million at December 31, 2022, respectively. In addition, includes short-term underwriting purchase and sale commitments with total notional values of $671 million at September 30, 2023, and $13 million at December 31, 2022.

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

	September 30, 2023						December 31, 2022
	Notional Value		Fair Value				Notional Value		Fair Value
(Dollars in Millions)			Assets		Liabilities				Assets		Liabilities
Interest rate contracts
Receive fixed/pay floating swaps	$	354,783	$	146	$	7,358	$	301,690	$	309	$	5,689
Pay fixed/receive floating swaps		326,646		2,763		116		316,133		2,323		206
Other (a)		82,379		13		50		40,261		3		16
Options
Purchased		112,927		1,583		—		103,489		1,794		5
Written		107,595		1		1,622		99,923		6		1,779
Futures
Buy		—		—		—		3,623		—		4
Sell		—		—		—		2,376		8		—
Foreign exchange rate contracts
Forwards, spots and swaps		114,004		2,523		2,202		134,666		3,010		2,548
Options
Purchased		806		29		—		954		22		—
Written		806		—		29		954		—		22
Commodity contracts
Swaps		2,063		61		56		—		—		—
Options
Purchased		2,811		128		128		—		—		—
Credit contracts		13,769		1		7		10,765		1		8
Total	$	1,118,589	$	7,248	$	11,568	$	1,014,834	$	7,476	$	10,277

(a) Primarily represents floating rate interest rate swaps that pay based on differentials between specified interest rate indexes.

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) Recognized in Other Comprehensive Income (Loss)						Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings						Gains (Losses) Recognized in Other Comprehensive Income (Loss)						Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings
(Dollars in Millions)	2023			2022			2023			2022			2023			2022			2023			2022
Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts	$	(259	)	$	(173	)	$	(20	)	$	(6	)	$	(453	)	$	(100	)	$	(34	)	$	(22	)
Net investment hedges
Foreign exchange forward contracts		15			37			—			—			6			63			—			—
Non-derivative debt instruments		24			56			—			—			7			139			—			—

Note: The Company does not exclude components from effectiveness testing for cash flow and net investment hedges.

The table below shows the effect of fair value and cash flow hedge accounting on the Consolidated Statement of Income:

	Three Months Ended September 30												Nine Months Ended September 30
	Interest Income						Interest Expense						Interest Income						Interest Expense
(Dollars in Millions)	2023			2022			2023			2022			2023			2022			2023			2022
Total amount of income and expense line items presented in the Consolidated Statement of Income in which the effects of fair value or cash flow hedges are recorded	$	7,754		$	4,728		$	3,518		$	901		$	22,244		$	11,971		$	8,959		$	1,536
Asset and Liability Management Positions
Fair value hedges
Interest rate contract derivatives		428			180			(359	)		457			584			511			(230	)		491
Hedged items		(431	)		(179	)		359			(460	)		(589	)		(510	)		232			(495	)
Cash flow hedges
Interest rate contract derivatives		(21	)		—			7			8			(21	)		—			25			29

Note: The Company does not exclude components from effectiveness testing for fair value and cash flow hedges. The Company reclassified losses of $7 million and $25 million into earnings during the three and nine months ended September 30, 2023, respectively, as a result of realized cash flows on discontinued cash flow hedges, compared with $8 million and $29 million during the three and nine months ended September 30, 2022, respectively. No amounts were reclassified into earnings on discontinued cash flow hedges because it is probable the original hedged forecasted cash flows will not occur.

The table below shows cumulative hedging adjustments and the carrying amount of assets and liabilities designated in fair value hedges:

	Carrying Amount of the Hedged Assets and Liabilities				Cumulative Hedging Adjustment (a)
(Dollars in Millions)	September 30, 2023		December 31, 2022		September 30, 2023			December 31, 2022
Line Item in the Consolidated Balance Sheet
Available-for-sale investment securities (b)	$	10,222	$	4,937	$	(1,017	)	$	(552	)
Long-term debt		9,176		17,190		(327	)		(142	)

(a) The cumulative hedging adjustment related to discontinued hedging relationships on available-for-sale investment securities and long-term debt was $(362) million and $(18) million, respectively, at September 30, 2023, compared with $(392) million and $399 million at December 31, 2022, respectively.

(b) Includes amounts related to available-for-sale investment securities currently designated as the hedged item in a fair value hedge using the portfolio layer method. At September 30, 2023, the amortized cost of the closed portfolios used in these hedging relationships was $5.8 billion, of which $5.1 billion was designated as hedged. At September 30, 2023, the cumulative amount of basis adjustments associated with these hedging relationships was $(95) million.

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

	Location of Gains (Losses) Recognized in Earnings		Three Months Ended September 30						Nine Months Ended  September 30
(Dollars in Millions)			2023			2022			2023			2022
Asset and Liability Management Positions
Other economic hedges
Interest rate contracts
Futures and forwards		Mortgage banking revenue	$	18		$	142		$	56		$	439
Purchased and written options		Mortgage banking revenue		74			(28	)		89			(69	)
Swaps		Mortgage banking revenue/Other noninterest income/Interest expense		(241	)		(118	)		(221	)		(569	)
Foreign exchange forward contracts		Other noninterest income		8			12			(5	)		13
Equity contracts		Compensation expense		(1	)		(1	)		(4	)		(4	)
Credit contracts		Commercial products revenue		3			—			3			—
Other		Other noninterest income		1			(154	)		—			(154	)
Customer-Related Positions
Interest rate contracts
Swaps		Commercial products revenue		103			26			198			73
Purchased and written options		Commercial products revenue		7			6			7			10
Futures		Commercial products revenue		—			7			(1	)		31
Foreign exchange rate contracts
Forwards, spots and swaps		Commercial products revenue		19			40			118			75
Purchased and written options		Commercial products revenue		—			—			—			1
Commodity contracts
Swaps		Commercial products revenue		3			—			5			—
Credit contracts		Commercial products revenue		—			(1	)		(1	)		21

Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk using a credit valuation adjustment and includes it 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 derivative positions that are centrally cleared through clearinghouses, by entering into master netting arrangements and, where possible, by requiring collateral arrangements. A master netting arrangement allows two counterparties, who have multiple derivative contracts with each other, the ability to net settle amounts under all contracts, including any related collateral, through a single payment and in a single currency. Collateral arrangements generally require the counterparty to deliver collateral (typically cash or U.S. Treasury and agency securities) equal to the Company’s net derivative receivable, subject to minimum transfer and credit rating requirements.

The Company’s collateral arrangements are predominately bilateral and, therefore, contain provisions that require collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on net liability thresholds and may be 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 arrangements, the counterparties to the derivatives could request immediate additional collateral coverage up to and including full collateral coverage for derivatives in a net liability position. The aggregate fair value of all derivatives under collateral arrangements that were in a net liability position at September 30, 2023, was $3.5 billion. At September 30, 2023, the Company had $3.0 billion of cash posted as collateral against this net liability position.