Allowance for Credit Losses

9 Months Ended

Sep. 30, 2022

We utilize a minimum of four 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. Three of the 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." The fourth scenario, referred to as the "Alternative Downside scenario," is designed to consider severe downside risks with more extreme economic outcomes than those captured by the Consensus Economic Scenarios. 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 four scenarios or additional scenarios may be included in order to consider current economic conditions.

Updates to Economic Scenarios and Other Changes During the Nine Months Ended September 30, 2022 During the first half of 2022, in addition to the continued economic uncertainty caused by the coronavirus ("COVID-19") pandemic, the impacts of inflation and the Russia-Ukraine war, created further uncertainty about the future economic environment. As a result, in addition to updating our three Consensus Economic Scenarios and our Alternative Downside scenario, beginning in the first quarter of 2022, we developed and utilized a fifth scenario for estimating lifetime ECL, referred to as the "Alternative Downside 2 scenario," to reflect the possibility that the Russia-Ukraine war could last for a prolonged period. At June 30, 2022, each of the five scenarios were assigned weightings with the majority of the weighting placed on the Central scenario, the second most weighting placed on the Downside scenario, lower equal weights placed on the Alternative Downside and Alternative Downside 2 scenarios, and the lowest weighting placed on the Upside scenario. This weighting was deemed appropriate for the estimation of lifetime ECL at that time.

During the third quarter of 2022, uncertainties about the future economic environment, especially around inflation, energy prices and interest rates as well as the Russia-Ukraine war, remained elevated. However, as the prevailing range of economic forecasts adequately reflect these heightened economic uncertainties, management determined that the additional fifth scenario, the Alternative Downside 2 scenario, was no longer needed to reflect management's incremental downside view. As a result, we updated our 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 September 30, 2022. 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, the third most weighting placed on the Alternative Downside scenario, and the lowest weighting placed on the Upside scenario. 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 September 30, 2022. The economic assumptions described in this section have been formed specifically for the purpose of calculating ECL.

In the Central scenario, U.S. Gross Domestic Product ("GDP") grows modestly in 2022 and further decelerates in 2023, under the assumption that economic growth slows as impacts from prevailing economic risks, including those from high inflation and interest rates, start to impact consumer spending. With modest economic growth, the unemployment rate upticks, but remains near historic lows, while slowing demand for housing, combined with limited supply, continues to drive residential housing prices forward, albeit at a slower pace, and commercial real estate prices also continue to appreciate. In the financial markets, growth in financial asset prices remains modest, the Federal Reserve Board ("FRB") continues to tackle inflation by raising its policy rate aggressively, and the 10-year U.S. Treasury yield remains elevated.

In the Upside scenario, the economy is assumed to grow at a faster pace than in the Central scenario. As a result, the unemployment rate falls lower than in the Central scenario, and both commercial and residential real estate prices grow at faster rates than in the Central scenario. In this scenario, the equity price index climbs with strong momentum, and overall optimism allows the FRB to raise its policy rate faster than currently anticipated, which consequently drives the 10-year U.S. Treasury yield to a level that is higher than in the Central scenario.

In the Downside scenario, the economy enters into a recession, with the unemployment rate reversing its downward trend and remaining at a higher level. The residential housing market slowly loses its momentum due to weakness in the labor market, and the commercial real estate market suffers a heavier deceleration than the residential housing market. In this scenario, the equity price index goes through a moderate price correction by mid-2023, driven by an overall erosion of consumer and business sentiments, which also results in a lower 10-year U.S. Treasury yield than in the Central scenario, and the federal funds rate lowers once disinflation starts in the face of economic slowdown.

In the Alternative Downside scenario, the Russia-Ukraine war worsens significantly and persistent inflationary pressures accompanied by higher interest rates lead the U.S. economy into a deep recession in late 2022, followed by a very anemic recovery starting in mid-2024. An extended period of economic contraction keeps the unemployment rate at an elevated level, which pressures residential housing prices to depreciate substantially, while at the same time, contracting corporate activities

and rising unemployment pushes the commercial real estate market into a downturn. In this scenario, financial markets experience a major sell-off and volatility in the financial markets remains extremely high over the next year, widening corporate credit spreads substantially, and flight to safe haven assets pushes the 10-year U.S. Treasury yield lower.

The following table presents the forecasted key macroeconomic variables in our Central scenarios used for estimating lifetime ECL at September 30, 2022, June 30, 2022 and December 31, 2021:


	For the Quarter Ended
	December 31, 2022		June 30, 2023		December 31, 2023
Unemployment rate (quarterly average):
Forecast at September 30, 2022	3.7	%	4.0	%	4.1	%
Forecast at June 30, 2022	3.5		3.5		3.5
Forecast at December 31, 2021	4.0		3.8		3.7
GDP growth rate (year-over-year):
Forecast at September 30, 2022	0.1		0.8		0.7
Forecast at June 30, 2022	1.5		1.8		2.0
Forecast at December 31, 2021	2.8		2.3		2.5

In addition to the updates to the economic scenarios, during the three months ended September 30, 2022, we decreased the management judgment allowance on our commercial loan portfolio for risk factors associated with higher risk industry exposures, supply chain disruptions and energy price uncertainty that are not fully captured in the models. As current economic forecasts more accurately reflect these risks and, therefore, they are adequately captured in the modeled results, we decreased the management judgment allowance associated with these risks. In the year-to-date period, we increased the management judgment allowance on our commercial loan portfolio for risk factors primarily associated with large loan exposures, which was partially offset by a decrease for risk factors primarily associated with supply chain disruptions. In the year-to-date period, we also increased the management judgment allowance on our consumer loan portfolio for risk factors associated with economic uncertainty, including inflation, 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 COVID-19 pandemic and subsequent recovery 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 impacts of higher inflation, increased energy prices and rising interest rates as well as the continuing impacts of the Russia-Ukraine war and the COVID-19 pandemic on economic conditions will continue to evolve and impact our business and our allowance for credit losses in future periods, the extent of which remains uncertain. We will continue to monitor these situations closely and will continue to adapt our 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:


	September 30, 2022		December 31, 2021
	(in millions)
Allowance for credit losses:
Loans	$	551	$	447
Securities held-to-maturity(1)	—		1
Other financial assets measured at amortized cost(2)	1		1
Securities available-for-sale(1)	—		1
Total allowance for credit losses	$	552	$	450

Liability for off-balance sheet credit exposures	$	100	$	103

(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 three and nine months ended September 30, 2022 and 2021:


	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 September 30, 2022
Allowance for credit losses – beginning of period	$	162	$	218	$	118	$	1	$	6	$	7	$	22	$	—	$	534
Provision charged (credited) to income	27		(11)		2		—		2		(2)		(2)		—		16
Charge-offs	—		(2)		—		—		—		—		—		—		(2)
Recoveries	—		1		—		—		1		1		—		—		3
Net (charge-offs) recoveries	—		(1)		—		—		1		1		—		—		1

Allowance for credit losses – end of period	$	189	$	206	$	120	$	1	$	9	$	6	$	20	$	—	$	551

Three Months Ended September 30, 2021
Allowance for credit losses – beginning of period	$	117	$	284	$	131	$	6	$	(6)	$	15	$	—	$	—	$	547
Provision charged (credited) to income(1)	(2)		(38)		(9)		(2)		(9)		(2)		(1)		(1)		(64)
Charge-offs(1)	—		(13)		—		—		—		(3)		—		—		(16)
Recoveries	—		1		—		—		4		1		1		1		8
Net (charge-offs) recoveries	—		(12)		—		—		4		(2)		1		1		(8)

Allowance for credit losses – end of period	$	115	$	234	$	122	$	4	$	(11)	$	11	$	—	$	—	$	475

Nine Months Ended September 30, 2022
Allowance for credit losses – beginning of period	$	73	$	243	$	100	$	4	$	8	$	5	$	14	$	—	$	447


Provision charged (credited) to income	116		(29)		29		(3)		(3)		(1)		2		(1)		110
Charge-offs	—		(11)		(9)		—		(1)		(1)		—		—		(22)
Recoveries	—		3		—		—		5		3		4		1		16
Net (charge-offs) recoveries	—		(8)		(9)		—		4		2		4		1		(6)

Allowance for credit losses – end of period	$	189	$	206	$	120	$	1	$	9	$	6	$	20	$	—	$	551

Nine Months Ended September 30, 2021
Allowance for credit losses – beginning of period	$	145	$	375	$	287	$	7	$	(9)	$	22	$	161	$	27	$	1,015


Provision charged (credited) to income(1)	(30)		(115)		(153)		(3)		(3)		(10)		(78)		(18)		(410)
Charge-offs(1)	—		(29)		(12)		—		(10)		(5)		(88)		(11)		(155)
Recoveries	—		3		—		—		11		4		5		2		25
Net (charge-offs) recoveries	—		(26)		(12)		—		1		(1)		(83)		(9)		(130)

Allowance for credit losses – end of period	$	115	$	234	$	122	$	4	$	(11)	$	11	$	—	$	—	$	475

(1)For loans that are transferred to held for sale, the existing allowance for credit losses at the time of transfer is recognized as a charge-off to the extent fair value is less than amortized cost and attributable to credit. Any remaining allowance for credit losses is released as a reduction to the provision for credit losses.

During the second quarter of 2021, we made the decision to exit our mass market retail banking business which resulted in the transfer of certain loans to held for sale. As a result of transferring these loans to held for sale, we recognized $56 million of the existing allowance for credit losses on consumer loans as charge-offs, primarily related to non-performing credit cards, and released $100 million of the existing allowance for credit losses on consumer loans as reductions to the provision for credit losses, primarily related to credit cards. The existing commercial allowance for credit losses on the retail business banking loan portfolio transferred to held for sale was not material. See Note 3, "Branch Assets and Liabilities Held for Sale."

During the third quarter of 2021, we transferred certain commercial real estate loans to held for sale and, as a result, we released $24 million of the existing allowance for credit losses as a reduction to the provision for credit losses.

The following table summarizes the changes in the liability for off-balance sheet credit exposures during the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(in millions)
Balance at beginning of period	$	89	$	128	$	103	$	237


Provision charged (credited) to income	11		(18)		(3)		(127)
Balance at end of period	$	100	$	110	$	100	$	110

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."


	September 30, 2022		December 31, 2021
	(in millions)
Accrued interest receivables:
Loans	$	173	$	109
Securities held-to-maturity	19		13
Other financial assets measured at amortized cost	25		1
Securities available-for-sale	79		82
Total accrued interest receivables	296		205
Allowance for credit losses	—		1
Accrued interest receivables, net	$	296	$	204

During the three and nine months ended September 30, 2022, we charged-off accrued interest receivables by reversing interest income for loans of nil and $1 million, respectively, compared with $1 million and $3 million during the three and nine months ended September 30, 2021, respectively.