Bank of America 2012 Annual Report Download - page 103

Bank of America 2012 101
Table 53 presents the total contract/notional amount of credit
derivatives outstanding and includes both purchased and written
credit derivatives. The credit risk amounts are measured as net
asset exposure by counterparty, taking into consideration all
contracts and collateral with that counterparty. The contract/
notional amounts of credit derivatives decreased primarily due to
portfolio optimization and increased utilization of clearinghouses
in relation to certain regulatory initiatives and refinement of risk
mitigation activities. For information on written credit derivatives,
see Note 3 – Derivatives to the Consolidated Financial Statements.
The credit risk amounts discussed above and presented in
Table 53 take into consideration the effects of legally enforceable
master netting agreements, while amounts disclosed in Note 3 –
Derivatives to the Consolidated Financial Statements are shown
on a gross basis. Credit risk reflects the potential benefit from
offsetting exposure to non-credit derivative products with the same
counterparties that may be netted upon the occurrence of certain
events, thereby reducing our overall exposure.
Table 53 Credit Derivatives
December 31
2012 2011
(Dollars in millions)
Contract/
Notional Credit Risk
Contract/
Notional Credit Risk
Purchased credit derivatives:
Credit default swaps $ 1,559,472 $ 8,987 $ 1,944,764 $ 14,163
Total return swaps/other 43,489 402 17,519 776
Total purchased credit derivatives $ 1,602,961 $ 9,389 $ 1,962,283 $ 14,939
Written credit derivatives:
Credit default swaps $ 1,531,504 n/a $ 1,885,944 n/a
Total return swaps/other 68,811 n/a 17,838 n/a
Total written credit derivatives $ 1,600,315 n/a $ 1,903,782 n/a
n/a = not applicable
Counterparty Credit Risk Valuation Adjustments
We record counterparty credit risk valuation adjustments (CVA) on
certain derivative assets, including our credit default protection
purchased, in order to properly reflect the credit risk of the
counterparty. We calculate CVA based on a modeled expected
exposure that incorporates current market risk factors including
changes in market spreads and non-credit related market factors
that affect the value of a derivative. The exposure also takes into
consideration credit mitigants such as legally enforceable master
netting agreements and collateral. Table 54 presents credit
valuation gains (losses), net of hedges, for 2012 and 2011. In
2012, we refined our methodology for CVA on derivatives on a
prospective basis. We no longer consider the probability of default
for both the counterparty and the Corporation when calculating
the counterparty CVA and now only consider the probability of the
counterparty defaulting for CVA. For more information, see Note 3
– Derivatives to the Consolidated Financial Statements. The effect
of this change in estimate on CVA is reflected in the table below.
Credit valuation gains for 2012 were due to improved counterparty
creditworthiness, partially offset by hedge results. For information
on our monoline counterparty credit risk, see Monoline Exposure
on page 99.
Table 54 Credit Valuation Gains and Losses
2012 2011
(Dollars in millions) Gross Hedge Net Gross Hedge Net
Credit valuation
gains (losses) $ 1,022 $ (731) $ 291 $(1,863) $ 1,257 $ (606)
Non-U.S. Portfolio
Our non-U.S. credit and trading portfolios are subject to country
risk. We define country risk as the risk of loss from unfavorable
economic and political conditions, currency fluctuations, social
instability and changes in government policies. A risk management
framework is in place to measure, monitor and manage non-
U.S. risk and exposures. Management oversight of country risk,
including cross-border risk, is provided by the Country Credit Risk
Committee, a subcommittee of the CRC. In addition to the direct
risk of doing business in a country, we also are exposed to indirect
country risks (for example, related to the collateral received on
secured financing transactions or related to client clearing
activities). These indirect exposures are managed in the normal
course of business through credit, market and operational risk
governance, rather than through the country risk governance.
Table 55 presents our total non-U.S. exposure broken out by
region at December 31, 2012 and 2011. Non-U.S. exposure is
presented on an internal risk management basis and includes
sovereign and non-sovereign credit exposure, securities and other
investments issued by or domiciled in countries other than the
U.S. Risk assignments by country can be adjusted for externally
guaranteed loans outstanding and certain collateral types.
Exposures which are subject to external guarantees are reported
under the country of the guarantor. Exposures with tangible
collateral are reflected in the country where the collateral is held.
For securities received, other than cross-border resale
agreements, outstandings are assigned to the domicile of the
issuer of the securities.
Table 55 Total Non-U.S. Exposure by Region
December 31
(Dollars in millions) 2012 2011
Europe $ 137,778 $ 121,778
Asia Pacific 92,412 75,828
Latin America 21,246 15,133
Middle East and Africa 8,200 5,533
Other (1) 22,014 18,795
Total $ 281,650 $ 237,067
(1) Other includes Canada exposure of $20.3 billion and $16.9 billion at December 31, 2012 and
2011.