Certain loans are pledged as collateral for access to the Federal Reserve's discount window. As of December 31, 2020 and December 31, 2019, the loans pledged as collateral totaled $8.07 billion and $6.75 billion, respectively.

We generally place loans on non-accrual status once principal or interest payments are 90 days contractually past due, or earlier if management determines that full collection is not probable. Loans 90 days past due, but considered both well-secured and in the process of collection, may be excluded from non-accrual status. When we place a loan on non-accrual status, the accrual of interest is discontinued and previously recorded but unpaid interest is reversed and generally charged against interest income. For loans on non-accrual status, income is recognized on a cash basis after recovery of principal, if and when interest payments are received. Loans may be removed from non-accrual status when repayment is reasonably assured and performance under the terms of the loan has been demonstrated. As of December 31, 2020 and December 31, 2019, we had no loans on non-accrual status. As of December 31, 2020, we had one loan with principal or interest payments 30 days or more contractually past due, that was subsequently paid in January 2021. As of December 31, 2019, we had no loans with principal or interest payments 30 days or more contractually past due.

We sold $353 million of leveraged loans in 2020. We recorded a charge-off against the allowance for these loans prior to the sale of these loans of $41 million in 2020.

In certain circumstances, we restructure troubled loans by granting concessions to borrowers experiencing financial difficulty. Once restructured, the loans are generally considered impaired until their maturity, regardless of whether the borrowers perform under the modified terms of the loans. There were no loans modified in troubled debt restructurings during the years ended December 31, 2020 and 2019.

Allowance for Credit Losses

We recognize an allowance for credit losses in accordance with ASC 326 for financial assets held at amortized cost and off-balance sheet commitments. Further discussion of our adoption of ASC 326 on January 1, 2020, including the impact on our consolidated financial statements, is provided in Note 1. For additional discussion on the allowance for credit losses for investment securities, please refer to Note 3.

When the allowance is recorded, a provision for credit loss expense is recognized in net income. The allowance for credit losses for financial assets (excluding investment securities, as discussed in Note 3) represents the portion of the amortized cost basis, including accrued interest for financial assets

held at amortized cost, which management does not expect to recover due to expected credit losses and is presented on the statement of condition as an offset to the amortized cost basis. The accrued interest balance is presented separately on the statement of condition within accrued interest and fees receivable. The allowance for off-balance sheet commitments is presented within other liabilities. Loans are charged off to the allowance for credit losses in the reporting period in which either an event occurs that confirms the existence of a loss on a loan, including a sale of a loan below its carrying value, or a portion of a loan is determined to be uncollectible.

The allowance for credit losses may be determined using various methods, including discounted cash flow methods, loss-rate methods, probability-of-default methods, and other quantitative or qualitative methods as determined by us. The method used to estimate expected credit losses may vary depending on the type of financial asset, our ability to predict the timing of cash flows, and the information available to us.

The allowance for credit losses as reported in our consolidated statement of condition is adjusted by provision for credit losses, which is reported in earnings, and reduced by the charge-off of principal amounts, net of recoveries.

We measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic exist. Each reporting period, we assess whether the assets in the pool continue to display similar risk characteristics.

For a financial asset that does not share risk characteristics with other assets, expected credit losses are measured based on the difference between the discounted value of the expected future cash flows, utilizing the effective interest rate and the amortized cost basis of the asset. As of December 31, 2020, we had 5 loans for $77 million in the commercial and financial segment that no longer met the similar risk characteristics of their collective pool. We recorded an allowance for credit losses of $6 million as of December 31, 2020 on these loans.

When the asset is collateral dependent, which means when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are measured as the difference between the amortized cost basis of the asset and the fair value of the collateral, adjusted for the estimated costs to sell.

Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, factors and forecasts then prevailing may result in significant

changes in the allowance for credit losses in those future periods.

We estimate credit losses over the contractual life of the financial asset, while factoring in prepayment activity, where supported by data, over a three year reasonable and supportable forecast period. We utilize a baseline, upside and downside scenario which are applied based on a probability weighting, in order to better reflect management’s expectation of expected credit losses given existing market conditions and the changes in the economic environment. The multiple scenarios are based on a three year horizon (or less depending on contractual maturity) and then revert linearly over a two year period to a ten-year historical average thereafter. The contractual term excludes expected extensions, renewals and modifications, but includes prepayment assumptions where applicable.

As part of our allowance methodology, we establish qualitative reserves to address any risks inherent in our portfolio that are not addressed through our quantitative reserve assessment. These factors may relate to, among other things, legislation changes or new regulation, credit concentration, loan markets, scenario weighting and overall model limitations. The qualitative adjustments are applied to our portfolio of financial instruments under the existing governance structure and are inherently judgmental.

Prior to the implementation of ASC 326, we reviewed loans for indicators of impairment. Loans where indicators existed were evaluated individually for impairment at least quarterly. For those loans where no such indicators were identified, the loans were collectively evaluated for impairment. As of December 31, 2019, we had one loan for $25 million in the commercial and financial segment that was individually evaluated for impairment and deemed to be impaired. We recorded a specific reserve of $1 million for this loan.

Credit Quality

Credit quality for financial assets held at amortized cost are continuously monitored by management and is reflected within the allowance for credit losses.

We use an internal risk-rating system to assess our risk of credit loss for each loan. This risk-rating process incorporates the use of risk-rating tools in conjunction with management judgment. Qualitative and quantitative inputs are captured in a systematic manner, and following a formal review and approval process, an internal credit rating based on our credit scale is assigned.

When computing allowance levels, credit loss assumptions are estimated using a model that categorizes asset pools based on loss history,

delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall asset portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.

Credit quality is assessed and monitored by evaluating various attributes in order to enable the earliest possible detection of any concerns with the customer’s credit rating. The results of those evaluations are utilized in underwriting new loans and transactions with counterparties and in our process for estimation of expected credit losses.

In assessing the risk rating assigned to each individual loan, among the factors considered are the borrower's debt capacity, collateral coverage, payment history and delinquency experience, financial flexibility and earnings strength, the expected amounts and source of repayment, the level and nature of contingencies, if any, and the industry and geography in which the borrower operates. These factors are based on an evaluation of historical and current information, and involve subjective assessment and interpretation. Credit counterparties are evaluated and risk-rated on an individual basis at least annually. Management considers the ratings to be current as of December 31, 2020.

Management regularly reviews financial assets in the portfolio to assess credit quality indicators and to determine appropriate loans classification and grading in accordance with applicable bank regulations. Our internal risk rating methodology assigns risk ratings to counterparties ranging from Investment Grade, Speculative, Special Mention, Substandard, Doubtful and Loss.

•Investment Grade. Counterparties with strong credit quality and low expected credit risk and probability of default. Approximately 81% of our loans were rated as investment grade as of December 31, 2020 with external credit ratings, or equivalent, of "BBB-" or better.

•Speculative. Counterparties that have the ability to repay but face significant uncertainties, such as adverse business or financial circumstances that could affect credit risk. Loans to counterparties rated

as speculative account for approximately 19% of our loans as of December 31, 2020, and are concentrated in leveraged loans. Approximately 85% of those leveraged loans have an external credit rating, or equivalent, of "BB" or "B" as of December 31, 2020.

•Special Mention. Counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.

•Substandard. Counterparties with well-defined weakness that jeopardizes repayment with the possibility we will sustain some loss.

•Doubtful. Counterparties with well-defined weakness which make collection or liquidation in full highly questionable and improbable.

•Loss. Counterparties which are uncollectible or have little value.

The following tables present our recorded loans to counterparties by risk rating, as noted above, as of the dates indicated:


December 31, 2020	Commercial and Financial		Commercial Real Estate		Total Loans
(In millions)
Investment grade	$	20,859	$	1,724	$	22,583
Speculative	4,852		372		5,224
Special mention	67		—		67
Substandard	34		—		34
Doubtful	17		—		17

Total(1)	$	25,829	$	2,096	$	27,925


December 31, 2019	Commercial and Financial		Commercial Real Estate		Total Loans
(In millions)
Investment grade	$	19,501	$	1,766	$	21,267
Speculative	5,008		—		5,008
Special mention	25		—		25
Substandard	9		—		9
Total(1)	$	24,543	$	1,766	$	26,309

(1) Loans Include $2,982 million and $3,256 million of overdrafts as of December 31, 2020 and December 31, 2019, respectively. Overdrafts are short-term in nature and do not present a significant credit risk to us.

Financial assets held at amortized cost that are not loans are disaggregated based on product type. This includes our fees receivable balance, which have had no history of credit losses, and are evaluated collectively as a pool.

Securities purchased under a resale agreement and securities-financing within our principal business utilize the collateral maintenance provisions included within ASC 326. An allowance for credit losses is recognized for any remaining exposure based on counterparty type.

The allowance for credit losses for off-balance sheet credit exposures, recorded in accrued expenses and other liabilities in our consolidated statement of condition, represents management’s estimate of credit losses primarily in outstanding letters and lines of credit and other credit-enhancement facilities provided to our clients and outstanding as of the balance sheet date. The allowance is evaluated quarterly by management. Factors considered in evaluating the appropriate level of this allowance are similar to those considered with respect to the allowance for credit losses on financial assets held at amortized cost. Provisions to maintain the allowance at a level considered by us to be appropriate to absorb estimated credit losses in outstanding facilities are recorded in the provision for credit losses in our consolidated statement of income.

The following table presents the amortized cost basis, by year of origination and credit quality indicator as of December 31, 2020. For origination years before the fifth annual period, we present the aggregate amortized cost basis of loans. For purchased loans, the date of issuance is used to determine the year of origination, not the date of acquisition. For modified, extended or renewed lending arrangements, we evaluate whether a credit event has occurred which would consider the loan to be a new arrangement.


(In millions)	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total(1)
Domestic loans:
Commercial and financial:
Risk Rating:
Investment grade	$	1,894	$	388	$	4	$	167	$	200	$	—	$	12,836	$	15,489
Speculative	432		942		822		610		43		—		597		3,446
Special mention	—		28		—		39		—		—		—		67
Substandard	—		5		—		—		29		—		—		34
Doubtful	—		—		—		—		—		—		—		—

Total commercial and financing	$	2,326	$	1,363	$	826	$	816	$	272	$	—	$	13,433	$	19,036

Commercial real estate:
Risk Rating:
Investment grade	$	178	$	383	$	688	$	277	$	197	$	—	$	—	$	1,723
Speculative	120		166		58		—		—		29		—		373




Total commercial real estate	$	298	$	549	$	746	$	277	$	197	$	29	$	—	$	2,096

Non-U.S. loans:
Commercial and financial:
Risk Rating:
Investment grade	$	1,028	$	—	$	—	$	—	$	—	$	—	$	4,343	$	5,371
Speculative	283		401		346		162		26		66		121		1,405


Doubtful	—		—		—		17		—		—		—		17

Total commercial and financing	$	1,311	$	401	$	346	$	179	$	26	$	66	$	4,464	$	6,793











Total loans	$	3,935	$	2,313	$	1,918	$	1,272	$	495	$	95	$	17,897	$	27,925

(1) Any reserve associated with accrued interest is not material. As of December 31, 2020, accrued interest receivable of $72 million included in the amortized cost basis of loans has been excluded from the amortized cost basis within this table.

The following table presents the activity in the allowance for credit losses by portfolio and class for the year ended December 31, 2020:


	Year End December 31, 2020
	Commercial and Financial
(In millions)	Leveraged Loans		Other Loans(1)		Commercial Real Estate		Held-to-Maturity Securities		Off-Balance Sheet Commitments		All Other		Total
Allowance for credit losses:
Beginning balance	$	61	$	10	$	2	$	—	$	19	$	1	$	93
Charge-offs(2)	(41)		—		—		—		—		—		(41)
Provision	70		7		6		3		2		—		88

FX translation	7		—		—		—		1		—		8

Ending balance	$	97	$	17	$	8	$	3	$	22	$	1	$	148

(1) Includes $13 million allowance for credit losses on Fund Finance loans and $4 million on other loans.

(2) Related to the sale of leveraged loans in 2020.

Loans are reviewed on a regular basis, and any provisions for credit losses that are recorded reflect management's estimate of the amount necessary to maintain the allowance for loan losses at a level considered appropriate to absorb estimated credit losses in the loan portfolio. We recorded $88 million provision for credit losses in 2020, which reflected both downward credit migration within our loan portfolio and revision in management’s economic outlook reflecting the impact of the COVID-19 pandemic. Allowance estimates remain subject to continued model and economic uncertainty and management may use qualitative adjustments. If future data and forecasts deviate relative to the forecasts utilized to determine our allowance for credit losses as of December 31, 2020, or if credit risk migration is higher or lower than forecasted for reasons independent of the economic forecast, our allowance for credit losses will also change.

Allowance for Loan Losses under Incurred Loss Methodology for the years ended December 31, 2019 and December 31, 2018

On-Balance Sheet Credit Exposures

Factors considered in evaluating the appropriate level of the allowance for each segment of our loan portfolio under the incurred loss model included loss experience, the probability of default reflected in our internal risk rating of the counterparty's creditworthiness, then-current economic conditions and adverse situations that may affect the borrower’s ability to repay, the estimated value of the underlying collateral, if any, the performance of individual credits in relation to contract terms, and other relevant factors.

Loans were charged off to the allowance for loan losses in the reporting period in which either an event occurred that confirmed the existence of a loss on a loan, including a sale of a loan below its carrying value, or a portion of a loan was determined to be uncollectible. In addition, any impaired loan that was determined to be collateral-dependent was reduced to an amount equal to the fair value of the collateral less costs to sell. A loan was identified as collateral-dependent when management determined that it was probable that the underlying collateral would be the sole source of repayment. Recoveries were recorded on a cash basis as adjustments to the allowance.

The following table presents activity in the allowance for loan losses for the periods indicated under the incurred loss methodology:





(In millions)	Year Ended December 31, 2019		Year Ended December 31, 2018
Allowance for loan losses:
Beginning balance	$	67	$	54
Provision for credit losses(1)	10		15
Charge-offs(1)	(3)		(2)


Ending balance	$	74	$	67

(1) The provisions and charge offs for credit losses were primarily attributable to exposure to purchased leveraged loans to non-investment grade loans.