Allowance for Credit Losses

12 Months Ended

Dec. 31, 2020

As discussed further in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," beginning January 1, 2020, an allowance for credit losses is recognized based on lifetime ECL for loans, securities held-to-maturity and certain other financial assets measured at amortized cost, and an allowance for credit losses is also recognized for securities available-for-sale. Prior to January 1, 2020, an allowance for credit losses was recognized based on probable incurred losses for loans only while debt securities were assessed for other-than-temporary impairment. In addition, beginning January 1, 2020, the liability for off-balance sheet credit exposures is recognized based on lifetime ECL while, prior to January 1, 2020, it was recognized based on probable incurred losses. The new guidance also requires inclusion of expected recoveries of amounts previously written off, limited to the cumulative amount of prior write-offs, when estimating the allowance for credit losses for in scope financial assets (including collateral-dependent assets). Prior to January 1, 2020, these expected recoveries were not recognized.

Comparative information at January 1, 2020, reflecting the adoption of the new accounting guidance has been included in the tables below where applicable. Credit information at December 31, 2019 and 2018, which is not comparable to 2020 as it does not reflect the adoption of the new accounting guidance, has been retained as previously reported.

Description of Consensus Economic Scenarios Adopted on January 1, 2020 The following discussion summarizes the Central, Upside and Downside scenarios at January 1, 2020. The economic assumptions described in this section have been formed specifically for the purpose of calculating ECL. While macroeconomic assumptions have changed significantly during 2020, the following scenarios are being provided to explain the impact of adopting the Consensus Economic Scenarios on January 1, 2020.

The Central scenario at January 1, 2020 - In the Central scenario, growth was expected to slow down in the United States as the benefits from tax reform waned in 2020. Inflation was forecast to remain around the target of 2 percent, while the unemployment rate was expected to stay at a low level in 2020 before gradually rising towards its long-term trend. The expected paths for FRB policy rates implied three rate cuts in 2020.

The Upside scenario at January 1, 2020 - In the Upside scenario, the economic forecast distribution of risks (as captured by consensus probability distribution of GDP growth) showed a marginal increase in upside risk for the United States in the reasonable and supportable period. Increased confidence, positive resolution of trade disputes and expansionary fiscal policy supported the Upside scenario. In this scenario, GDP growth rose to 4.0 percent in 2020, which drove inflation higher and unemployment to fall further than in the Central scenario. Stronger GDP growth and domestic demand supported stronger equity and housing prices in this scenario.

The Downside scenario at January 1, 2020 - In the Downside scenario, the economic forecast distribution of risks (as captured by consensus probability distribution of GDP growth) showed a marginal increase in the downside risks for the United States in the reasonable and supportable period. In this scenario, the U.S. economy was expected to contract in 2020 before slowly reverting back to the long-run trend. The slowdown in growth was consistent with an escalation of trade tensions with China and other trading partners in this scenario. Additional tariffs and non-tariff barriers on trade were expected to lead to the benefits from corporate tax cuts being offset by a sharp rise in costs for businesses and consumers and a loss of confidence in this scenario, while lower business investment and confidence were expected to affect hiring, with an impact on the unemployment rate and earnings expectations. In the downside scenario, policy interest rates were expected to be cut back below 0.5 percent in order to support growth and inflation.

In conjunction with adopting the new accounting guidance, we performed a review of the methodology used to estimate lifetime ECL and determined that risk associated with the non-homogeneous nature of our commercial loan portfolio and the potential impact of large loan defaults was not fully captured in the models. As a result, we recorded a management judgment allowance for risk factors associated with large loan exposure in our commercial loan portfolio at January 1, 2020.

Description of Economic Scenarios at December 31, 2020 and Other Changes During the Year Ended December 31, 2020

During 2020, economic conditions deteriorated caused by the COVID-19 pandemic and resulted in significant economic uncertainty. As a result, in addition to our three Consensus Economic Scenarios, beginning in the second quarter of 2020 we developed and utilized a fourth scenario for estimating lifetime ECL, referred to as the "Alternative Downside scenario", to reflect the possibility that the adverse impact associated with the deterioration in economic conditions could manifest itself over a far longer period of time. At December 31, 2020, each of the four scenarios were assigned weightings with the majority of the weighting placed on the Central scenario, the second most weighting placed on the Downside scenario and lower equal weights placed on the Upside and Alternative Downside scenarios. This weighting was deemed appropriate for the estimation of lifetime ECL under current conditions. The following discussion summarizes the Central, Upside, Downside and Alternative Downside scenarios at December 31, 2020. The economic assumptions described in this section have been formed specifically for the purpose of calculating ECL.

In the Central scenario, GDP restarts the expansion in 2021 under the assumption that new COVID-19 infections slow down as more people are vaccinated. With the economic recovery, the unemployment rate continues on its downward trend, while low interest rates and demand from people who need more space drives the residential housing market to carry its growth momentum into 2021. In the financial markets, the federal funds rate remains at the lowest level for an extended period of time and the 10-year U.S. Treasury yield slowly climbs.

In the Upside scenario, the economy is expected to grow at a faster pace than in the Central scenario. As a result, the unemployment rate falls faster than in the Central scenario and, with people returning to their normal way of life, the commercial real estate index starts to recover in the second half of 2021. In this scenario, the equity price index climbs with strong momentum, but the 10-year U.S. Treasury yield stays at a low level during the next two years.

In the Downside scenario, the re-opening of the economy is delayed due to a slow vaccine rollout and the economic recovery is quite anemic, with the unemployment rate reversing its downward trend and remaining at a high level. In this scenario, the residential housing market slowly loses its momentum due to weakness in the labor market and the commercial real estate market suffers a heavier blow than the residential housing market. The equity price index in this scenario loses about half of its value by the end of 2022, driven by disappointing corporate earnings, and the FRB keeps its policy rate at the lowest level for the next two years.

In the Alternative Downside scenario, the U.S. economy stays in recession in both 2021 and 2022 under the assumption that the world does not recover from the pandemic in the next two years. An extended period of economic contraction and stagnation keeps the unemployment rate at a very high level, which pressures residential housing prices to fall further, while at the same time, contracting corporate activities pushes the commercial real estate market into a severe downturn. In this scenario, volatility in the financial markets remains extremely high in 2021, widening corporate credit spreads substantially, and flight to safe haven assets pushes the 10-year U.S. Treasury yield to negative territory in 2022.

The following table presents the forecasted key macroeconomic variables in our Central scenarios used for estimating lifetime ECL at December 31, 2020 and January 1, 2020:


	For the Quarter Ended
	June 30, 2021			December 31, 2021
Unemployment rate (quarterly average):
Forecast at December 31, 2020	6.8	%		6.2	%
Forecast at January 1, 2020	3.9			4.0
GDP growth rate (year-over-year):
Forecast at December 31, 2020	9.2		(1)	5.3
Forecast at January 1, 2020	1.9			2.0

(1)Represents the change in forecasted GDP for the quarter ended June 30, 2021 relative to the GDP for the quarter ended June 30, 2020. The GDP year-over-year growth rate for the quarter ended June 30, 2020 was a decline of 9.0 percent.

In addition to the updates to the economic scenarios, we increased the management judgment allowance on our commercial loan portfolio for risk factors associated with higher risk client and industry exposures, large loan exposures and economic uncertainty relating to the impact of COVID-19 that are not fully captured in the models. We also increased the management judgment allowance on our consumer loan portfolio for risk factors associated with economic uncertainty relating to the impact of COVID-19 and forbearance accounts that are not fully captured in the models.

While we believe that the assumptions used in our credit loss models are reasonable within the parameters for which the models have been built and calibrated to operate, the severe projections of macro-economic variables during the current COVID-19 pandemic represent events outside the parameters for which the models have been built. As a result, adjustments to model outputs to reflect consideration of management judgment are used with stringent governance in place to ensure an appropriate lifetime ECL estimate.

The circumstances around the COVID-19 pandemic are evolving and will continue to impact our business and our allowance for credit losses in future periods. The details of how various U.S. Government actions will impact our customers and therefore the impact on our allowance for credit losses remains highly uncertain. We will continue to monitor the COVID-19 situation closely and will continue to adapt our Consensus Economic Scenarios approach as necessary to reflect management's current view of forecasted economic conditions.

Allowance for Credit Losses / Liability for Off-Balance Sheet Credit Exposures The following table summarizes our allowance for credit losses and the liability for off-balance sheet credit exposures:


	December 31, 2020		January 1, 2020		December 31, 2019
	(in millions)
Allowance for credit losses:
Loans	$	1,015	$	467	$	637
Securities held-to-maturity(1)	2		2		—
Other financial assets measured at amortized cost(2)	2		3		—
Securities available-for-sale(1)	1		3		—
Total allowance for credit losses	$	1,020	$	475	$	637

Liability for off-balance sheet credit exposures	$	237	$	158	$	104

(1)See Note 5, "Securities," for additional information regarding the allowance for credit losses associated with our security portfolios.

(2)Primarily includes accrued interest receivables and customer acceptances.

The following table summarizes the changes in the allowance for credit losses on loans by product or line of business during the years ended December 31, 2020, 2019 and 2018:


	Commercial Loans								Consumer Loans
	Real Estate, including Construction		Business and Corporate Banking		Global Banking		Other Comm'l		Residential Mortgages		Home Equity Mortgages		Credit Cards		Other Consumer		Total Loans
	(in millions)


















Year Ended December 31, 2020
Allowance for credit losses – beginning of period	$	153	$	239	$	106	$	9	$	12	$	6	$	105	$	7	$	637
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses	(112)		(60)		51		(5)		(86)		7		32		3		(170)
Allowance for credit losses – beginning of period, adjusted	41		179		157		4		(74)		13		137		10		467
Provision charged (credited) to income	116		274		149		2		55		6		107		27		736
Charge-offs	(12)		(90)		(20)		—		(2)		(3)		(90)		(11)		(228)
Recoveries	—		12		1		1		12		6		7		1		40
Net (charge-offs) recoveries	(12)		(78)		(19)		1		10		3		(83)		(10)		(188)

Allowance for credit losses – end of period	$	145	$	375	$	287	$	7	$	(9)	$	22	$	161	$	27	$	1,015

Year Ended December 31, 2019
Allowance for credit losses – beginning of period	$	116	$	219	$	108	$	15	$	13	$	7	$	58	$	5	$	541
Provision charged (credited) to income	37		62		1		(6)		(3)		(2)		101		5		195
Charge-offs	—		(45)		(3)		—		(8)		(4)		(60)		(5)		(125)
Recoveries	—		3		—		—		10		5		6		2		26
Net (charge-offs) recoveries	—		(42)		(3)		—		2		1		(54)		(3)		(99)

Allowance for credit losses – end of period	$	153	$	239	$	106	$	9	$	12	$	6	$	105	$	7	$	637










Year Ended December 31, 2018
Allowance for credit losses – beginning of period	$	82	$	244	$	264	$	18	$	25	$	11	$	32	$	5	$	681
Provision charged (credited) to income	34		(31)		(109)		(3)		(18)		(3)		55		2		(73)
Charge-offs	—		(41)		(48)		—		(7)		(7)		(35)		(4)		(142)
Recoveries	—		47		1		—		13		6		6		2		75
Net (charge-offs) recoveries	—		6		(47)		—		6		(1)		(29)		(2)		$	(67)

Allowance for credit losses – end of period	$	116	$	219	$	108	$	15	$	13	$	7	$	58	$	5	$	541

The following table summarizes the changes in the liability for off-balance sheet credit exposures during the years ended December 31, 2020, 2019 and 2018:



Year Ended December 31,	2020		2019		2018
	(in millions)
Balance at beginning of period	$	104	$	96	$	106
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses	54		—		—
Balance at beginning of period, adjusted	158		96		106
Provision charged (credited) to income	79		8		(10)
Balance at end of period	$	237	$	104	$	96

Accrued Interest Receivables The following table summarizes accrued interest receivables associated with financial assets carried at amortized cost and securities available-for-sale along with the related allowance for credit losses, which are reported net in other assets on the consolidated balance sheet. These accrued interest receivables are excluded from the amortized cost basis disclosures presented elsewhere in these financial statements, including Note 5, "Securities," and Note 6, "Loans."


	December 31, 2020
	(in millions)
Accrued interest receivables:
Loans	$	140
Securities held-to-maturity	23
Other financial assets measured at amortized cost	1
Securities available-for-sale	100
Total accrued interest receivables	264
Allowance for credit losses	2
Accrued interest receivables, net	$	262

During 2020, we charged-off accrued interest receivables by reversing interest income for loans of $7 million.