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Loans and Allowance for Credit Losses
 12 Months Ended
Dec. 31, 2021
Receivables [Abstract]  
Loans and Allowance for Credit Losses Loans and Allowance for Credit Losses
Loans are generally recorded at their principal amount outstanding, net of the allowance for credit losses, unearned income, and any net unamortized deferred loan origination fees. Loans that are classified as held-for-sale are measured at lower of cost or fair value on an individual basis.
Interest income related to loans is recognized in our consolidated statement of income using the interest method, or on a basis approximating a level rate of return over the term of the loan. Fees received for providing loan commitments and letters of credit that we anticipate will result in loans typically are deferred and amortized to interest income over the term of the related loan, beginning with the initial borrowing. Fees on commitments and letters of credit are amortized to software and processing fees over the commitment period when funding is not known or expected.
The following table presents our recorded investment in loans, by segment, as of the dates indicated:
(In millions)December 31, 2021December 31, 2020
Domestic(1):
Commercial and financial:
Fund Finance(2)
$12,396 $11,531 
Leveraged loans3,106 2,923 
Overdrafts1,796 1,894 
Other(3)
2,262 2,688 
Commercial real estate2,554 2,096 
Total domestic22,114 21,132 
Foreign(1):
Commercial and financial:
Fund Finance(2)
7,778 4,432 
Leveraged loans1,328 1,242 
Overdrafts1,312 1,088 
Other(3)
— 31 
Total foreign10,418 6,793 
Total loans(2)
32,532 27,925 
Allowance for credit losses(87)(122)
Loans, net of allowance$32,445 $27,803 
(1) Domestic and foreign categorization is based on the borrower’s country of domicile.
(2) Fund finance loans include primarily $9,147 million private equity capital call finance loans, $6,397 million loans to real money funds, $2,913 million collateralized loan obligations in loan form and $1,387 million loans to business development companies as of December 31, 2021, compared to $8,380 million private equity capital call finance loans, $6,391 million loans to real money funds, and $821 million loans to business development companies as of December 31, 2020.
(3) Includes $1,784 million securities finance loans, $455 million loans to municipalities and $23 million other loans as of December 31, 2021 and $1,911 million securities finance loans, $754 million loans to municipalities and $54 million other loans as of December 31, 2020.
We segregate our loans into two segments: commercial and financial loans and commercial real estate loans. We further classify commercial and financial loans as fund finance loans, leveraged loans, overdrafts and other loans. Fund finance loans are composed of revolving credit lines providing liquidity and leverage to mutual fund and private equity fund clients, as well as collateralized loan obligations in loan form. These classifications reflect their risk characteristics, their initial measurement attributes and the methods we use to monitor and assess credit risk.
Certain loans are pledged as collateral for access to the Federal Reserve's discount window. As of December 31, 2021 and December 31, 2020, the loans pledged as collateral totaled $10.80 billion and $8.07 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 both December 31, 2021 and December 31, 2020, we had no loans on non-accrual status.
We purchased $2,913 million of collateralized loan obligations in loan form, which were all investment grade as of December 31, 2021.
We sold $181 million of leveraged loans in 2021, of which $8 million remained unsettled and was held for sale as of December 31, 2021. We recorded a charge-off against the allowance for these loans prior to the sale of these loans of $2 million in 2021.
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, 2021 and 2020.
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. Prior to 2020, we recognized an allowance for loan losses under an incurred loss model. The allowance for credit losses is reviewed on a regular basis, and any provision for credit losses is recorded to reflect the amount necessary to maintain the allowance for expected credit losses at a level which represents what management does not expect to recover due to expected credit losses. 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 separately using one or more of the methods noted above. As of December 31, 2021, we had 9 loans for $232 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 $11 million as of December 31, 2021 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.
Credit Quality
Credit quality for financial assets held at amortized cost is 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, 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 84% of our loans were rated as investment grade as of December 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 or financial circumstances that could affect credit risk or economic downturns. Loans to counterparties rated as speculative account for approximately 15% of our loans as of December 31, 2021, and are concentrated in leveraged loans. Approximately 94% of those leveraged loans have an external credit rating, or equivalent, of "BB" or "B" as of December 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:
December 31, 2021Commercial and FinancialCommercial Real EstateTotal Loans
(In millions)
Investment grade$24,974 $2,222 $27,196 
Speculative4,714 270 4,984 
Special mention118 62 180 
Substandard164 — 164 
Total(1)(2)
$29,970 $2,554 $32,524 
December 31, 2020Commercial and FinancialCommercial Real EstateTotal Loans 
(In millions)
Investment grade$20,859 $1,724 $22,583 
Speculative4,852 372 5,224 
Special mention67 — 67 
Substandard34 — 34 
Doubtful17 — 17 
Total(1)
$25,829 $2,096 $27,925 
(1) Loans Include $3,108 million and $2,982 million of overdrafts as of December 31, 2021 and December 31, 2020, respectively. Overdrafts are short-term in nature and do not present a significant credit risk to us. As of December 31, 2021, $2,944 million overdrafts were investment grade and $164 million overdrafts were speculative.
(2) Total does not include $8 million of loans classified as held-for-sale as of December 31, 2021.
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, 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)20212020201920182017PriorRevolving Loans
Total(1)
Domestic loans:
Commercial and financial:
Risk Rating:
Investment grade$1,988 $59 $347 $2 $37 $— $13,591 $16,024 
Speculative1,096 351 706 425 350 7 343 3,278 
Special mention— — 70 29 19 — — 118 
Substandard— 5 71 56 8 — — 140 
Total commercial and financing$3,084 $415 $1,194 $512 $414 $7 $13,934 $19,560 
Commercial real estate:
Risk Rating:
Investment grade$580 $129 $383 $657 $276 $197 $— $2,222 
Speculative24 49 149 20 — 28 — 270 
Special mention— — 22 40 — — — 62 
Total commercial real estate$604 $178 $554 $717 $276 $225 $— $2,554 
Non-U.S. loans:
Commercial and financial:
Risk Rating:
Investment grade$4,087 $— $— $— $— $— $4,863 $8,950 
Speculative561 201 264 204 120 31 55 1,436 
Substandard— 24 24 
Total commercial and financing$4,648 $201 $264 $228 $120 $31 $4,918 $10,410 
Total loans(2)
$8,336 $794 $2,012 $1,457 $810 $263 $18,852 $32,524 
(1) Any reserve associated with accrued interest is not material. As of December 31, 2021, accrued interest receivable of $86 million included in the amortized cost basis of loans has been excluded from the amortized cost basis within this table.
(2) Total does not include $8 million of loans classified as held-for-sale as of December 31, 2021.
The following table presents the amortized cost basis, by year of origination and credit quality indicator as of December 31, 2020:
(In millions)20202019201820172016PriorRevolving Loans
Total(1)
Domestic loans:
Commercial and financial:
Risk Rating:
Investment grade$1,894 $388 $4 $167 $200 $— $12,836 $15,489 
Speculative432 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 
Speculative120 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 
Speculative283 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 years ended December 31, 2021 and 2020:
Year End December 31, 2021
Commercial and Financial
(In millions)Leveraged Loans
Other Loans(1)
Commercial Real EstateAvailable-for-sale securitiesHeld-to-Maturity SecuritiesOff-Balance Sheet CommitmentsAll Other Total
Allowance for credit losses:
Beginning balance$97 $17 $8 $— $3 $22 $1 $148 
Charge-offs(2)
(2)— — — — — — (2)
Provision(29)(6)6 2 (3)(2)(1)(33)
FX translation(5)1 — — — (1)— (5)
Ending balance$61 $12 $14 $2 $— $19 $— $108 
(1) Includes $11 million allowance for credit losses on Fund Finance loans and $1 million on other loans.
(2) Related to the sale of leveraged loans in 2021.
Year Ended December 31, 2020
Commercial and Financial
(In millions)Leveraged Loans
Other Loans(1)
Commercial Real EstateHeld-to-Maturity SecuritiesOff-Balance Sheet CommitmentsAll Other Total
Allowance for credit losses:
Beginning balance$61 $10 $2 $— $19 $1 $93 
Charge-offs(2)
(41)— — — — — (41)
Provision70 7 6 3 2 — 88 
FX translation7 — — — 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 expected credit losses in the loan portfolio. We recorded a $33 million release of credit reserves in 2021, which reflected observed and expected improvements in both credit quality and economic outlook. 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 December 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.