Allowance for Credit Losses

3 Months Ended

Mar. 31, 2021

We utilize a minimum of three forward-looking economic scenarios to calculate lifetime ECL when estimating the allowance for credit losses for in scope financial assets and the liability for off-balance sheet credit exposures. The three scenarios are termed the "Consensus Economic Scenarios" and represent a 'most likely outcome' (the "Central scenario") and two less likely 'outer' scenarios, referred to as the "Upside scenario" and the "Downside scenario". Each scenario is assigned a weighting deemed appropriate for the estimation of lifetime ECL, with the majority of the weighting typically placed on the Central Scenario. At management's discretion, changes may be made to the weighting assigned to the three scenarios or additional scenarios may be included in order to consider current economic conditions. As a result of the deterioration of economic conditions and significant economic uncertainty caused by the COVID-19 pandemic, 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.

Updates to Economic Scenarios and Other Changes During the Three Months Ended March 31, 2021 Although economic conditions improved during the first quarter of 2021, the impact of the COVID-19 pandemic continues to create uncertainty about the future economic environment. As a result, we updated our three Consensus Economic Scenarios and our Alternative Downside scenario to reflect management's current view of forecasted economic conditions and utilized the four updated scenarios for estimating lifetime ECL at March 31, 2021. 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 March 31, 2021. The economic assumptions described in this section have been formed specifically for the purpose of calculating ECL.

In the Central scenario, Gross Domestic Product ("GDP") restarts the expansion in 2021 under the assumption that new COVID-19 infections slow down as more people are vaccinated, and the latest stimulus bill boosts near-term economic growth. With a strong economic recovery, the unemployment rate continues on its downward trend, while demand for housing continues to drive the residential housing market to carry its growth momentum in 2021. Commercial real estate prices, however, continue to remain depressed, driven by adjustments induced by the pandemic. In the financial markets, growth in financial asset prices remains moderate, the federal funds rate remains at the current near-zero level for the next two years, and the 10-year U.S. Treasury yield, which has recently experienced some increase, continues to climb modestly.

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 increasing mobility, 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, and overall optimism drives the 10-year U.S. Treasury yield to a level that is significantly higher than in the Central Scenario.

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 an overall erosion of consumer and business sentiments, and the Federal Reserve Board ("FRB") keeps its policy rate at the lowest level for the next two years.

In the Alternative Downside scenario, the U.S. economy re-enters into a recession in the second half of 2021 and stays in for most of 2022. 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 and rising unemployment pushes the commercial real estate market into a severe downturn. In this scenario, financial markets experience a major sell-off and 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 near-zero levels in 2022.

The following table presents the forecasted key macroeconomic variables in our Central scenarios used for estimating lifetime ECL at March 31, 2021 and December 31, 2020:


	For the Quarter Ended
	June 30, 2021			December 31, 2021		June 30, 2022		December 31, 2022
Unemployment rate (quarterly average):
Forecast at March 31, 2021	6.0	%		5.5	%	4.9	%	4.4	%
Forecast at December 31, 2020	6.8			6.2		5.9		5.4
GDP growth rate (year-over-year):
Forecast at March 31, 2021	11.0		(1)	4.3		3.7		3.0
Forecast at December 31, 2020	9.2		(1)	5.3		3.1		1.8

(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 decreased the management judgment allowance on our commercial loan portfolio for risk factors associated with economic uncertainty relating to the impact of COVID-19 that are not fully captured in the models. We also decreased the management judgment allowance on our consumer loan portfolio for risk factors primarily associated with 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 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:


	March 31, 2021		December 31, 2020
	(in millions)
Allowance for credit losses:
Loans	$	853	$	1,015
Securities held-to-maturity(1)	2		2
Other financial assets measured at amortized cost(2)	2		2
Securities available-for-sale(1)	1		1
Total allowance for credit losses	$	858	$	1,020

Liability for off-balance sheet credit exposures	$	155	$	237

(1)See Note 4, "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 three months ended March 31, 2021 and 2020:


	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)


















Three Months Ended March 31, 2021
Allowance for credit losses – beginning of period	$	145	$	375	$	287	$	7	$	(9)	$	22	$	161	$	27	$	1,015


Provision charged (credited) to income	(25)		(53)		(65)		—		(2)		(3)		(1)		4		(145)
Charge-offs	—		(2)		—		—		(1)		—		(18)		(4)		(25)
Recoveries	—		1		—		—		3		2		2		—		8
Net (charge-offs) recoveries	—		(1)		—		—		2		2		(16)		(4)		(17)

Allowance for credit losses – end of period	$	120	$	321	$	222	$	7	$	(9)	$	21	$	144	$	27	$	853

Three Months Ended March 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(1)	(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	51		213		110		1		30		3		95		9		512
Charge-offs	—		(12)		(19)		—		1		(2)		(22)		(2)		(56)
Recoveries	—		2		—		—		2		2		2		—		8
Net (charge-offs) recoveries	—		(10)		(19)		—		3		—		(20)		(2)		(48)

Allowance for credit losses – end of period	$	92	$	382	$	248	$	5	$	(41)	$	16	$	212	$	17	$	931

(1)See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2020 Form 10-K for additional discussion.

The following table summarizes the changes in the liability for off-balance sheet credit exposures during the three months ended March 31, 2021 and 2020:



Three Months Ended March 31,	2021		2020
	(in millions)
Balance at beginning of period	$	237	$	104
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses(1)	—		54
Balance at beginning of period, adjusted	237		158
Provision charged (credited) to income	(82)		213
Balance at end of period	$	155	$	371

(1)See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2020 Form 10-K for additional discussion

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 4, "Securities," and Note 5, "Loans."


	March 31, 2021		December 31, 2020
	(in millions)
Accrued interest receivables:
Loans	$	137	$	140
Securities held-to-maturity	20		23
Other financial assets measured at amortized cost	1		1
Securities available-for-sale	90		100
Total accrued interest receivables	248		264
Allowance for credit losses	2		2
Accrued interest receivables, net	$	246	$	262

During the three months ended March 31, 2021 and 2020, we charged-off accrued interest receivables by reversing interest income for loans of nil and $1 million, respectively.