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 as 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 March 31, 2021, we had nine loans for $212 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 $20 million as of March 31, 2021 on these loans.

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.

For additional information on the allowance for credit losses, refer to pages 150 to 151 in Note 4 to the consolidated financial statements included under item 8, Financial Statements and Supplementary Data, in our 2020 Form 10-K.

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 March 31, 2021.

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 82% of our loans were rated as investment grade as of March 31, 2021 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, financial circumstances that could affect credit risk or economic downturns. Loans to counterparties rated as speculative account for approximately 17% of our loans as of March 31, 2021, and are concentrated in leveraged loans. Approximately 86% of those leveraged loans have an external credit rating, or equivalent, of "BB" or "B" as of March 31, 2021.

•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:


March 31, 2021	Commercial and Financial		Commercial Real Estate		Total Loans
(In millions)
Investment grade	$	24,147	$	1,675	$	25,822
Speculative	5,088		421		5,509
Special mention	111		—		111
Substandard	127		—		127
Doubtful	16		—		16

Total(1)	$	29,489	$	2,096	$	31,585


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

(1) Loans Include $7,463 million and $2,982 million of overdrafts as of March 31, 2021 and December 31, 2020 respectively. Overdrafts are short-term in nature and do not present a significant credit risk to us.

For additional information about credit quality, refer to pages 151 to 154 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2020 Form 10-K.

The following table presents the amortized cost basis, by year of origination and credit quality indicator as of March 31, 2021. 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)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total(1)
Domestic loans:
Commercial and financial:
Risk Rating:
Investment grade	$	4,563	$	58	$	385	$	4	$	162	$	200	$	11,767	$	17,139
Speculative	346		438		822		721		556		42		349		3,274
Special mention	—		—		48		29		34		—		—		111
Substandard	—		—		48		26		—		29		—		103


Total commercial and financing	$	4,909	$	496	$	1,303	$	780	$	752	$	271	$	12,116	$	20,627

Commercial real estate:
Risk Rating:
Investment grade	$	—	$	129	$	383	$	689	$	277	$	197	$	—	$	1,675
Speculative	120		49		166		57		—		29		—		$	421




Total commercial real estate	$	120	$	178	$	549	$	746	$	277	$	226	$	—	$	2,096

Non-U.S. loans:
Commercial and financial:
Risk Rating:
Investment grade	$	2,275	$	—	$	—	$	—	$	—	$	—	$	4,733	$	7,008
Speculative	730		176		348		256		177		63		64		1,814

Substandard	—		—		—		24		—		—		—		24
Doubtful	—		—		—		—		16		—		—		16

Total commercial and financing	$	3,005	$	176	$	348	$	280	$	193	$	63	$	4,797	$	8,862











Total loans	$	8,034	$	850	$	2,200	$	1,806	$	1,222	$	560	$	16,913	$	31,585

(1) Any reserve associated with accrued interest is not material. As of March 31, 2021, accrued interest receivable of $105 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 amortized cost basis, by year of origination and credit quality indicator as of December 31, 2020:


(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


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 periods indicated:


	Three Months Ended March 31, 2021
	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	$	97	$	17	$	8	$	3	$	22	$	1	$	148
Charge-offs	—		—		—		—		—		—		—
Provision	(1)		(5)		6		(1)		(7)		(1)		(9)

Currency translation	(4)		—		—		—		—		—		(4)

Ending balance	$	92	$	12	$	14	$	2	$	15	$	—	$	135

(1) Includes $10 million allowance for credit losses on Fund Finance loans and $2 million on other loans.


	Three Months Ended March 31, 2020
	Commercial and Financial
(In millions)	Leveraged Loans		Other Loans		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	(5)		—		—		—		—		—		(5)
Provision	27		—		2		4		3		—		36



Ending balance	$	83	$	10	$	4	$	4	$	22	$	1	$	124

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 reduced the allowance for credit losses by $13 million, principally through a $9 million reserve release in the provision for credit losses in the first quarter of 2021, versus an increase in the allowance for credit losses of $31 million principally through a $36 million provision for credit losses, in the first quarter of 2020. The reduction in the allowance reflects a shift in management’s economic outlook toward economic expansion and limited negative credit migration within our loan portfolio. Allowance estimates remain subject to continued model and economic uncertainty and management may use qualitative adjustments in the allowance estimates. If future data and forecasts deviate relative to the forecasts utilized to determine our allowance for credit losses as of March 31, 2021, 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.