Bank of America 2015 Annual Report Download - page 200

198 Bank of America 2015
Other Derivative Contracts
The Corporation funds selected assets, including securities issued
by CDOs and CLOs, through derivative contracts, typically total
return swaps, with third parties and VIEs that are not consolidated
by the Corporation. The total notional amount of these derivative
contracts was $371 million and $527 million with commercial
banks and $921 million and $1.2 billion with VIEs at December
31, 2015 and 2014. The underlying securities are senior securities
and substantially all of the Corporation’s exposures are insured.
Accordingly, the Corporation’s exposure to loss consists principally
of counterparty risk to the insurers. In certain circumstances,
generally as a result of ratings downgrades, the Corporation may
be required to purchase the underlying assets, which would not
result in additional gain or loss to the Corporation as such exposure
is already reflected in the fair value of the derivative contracts.
Other Guarantees
The Corporation has entered into additional guarantee agreements
and commitments, including sold risk participation swaps, liquidity
facilities, lease-end obligation agreements, partial credit
guarantees on certain leases, real estate joint venture guarantees,
divested business commitments and sold put options that require
gross settlement. The maximum potential future payment under
these agreements was approximately $6.0 billion and $6.2 billion
at December 31, 2015 and 2014. The estimated maturity dates
of these obligations extend up to 2040. The Corporation has made
no material payments under these guarantees.
In the normal course of business, the Corporation periodically
guarantees the obligations of its affiliates in a variety of
transactions including ISDA-related transactions and non-ISDA
related transactions such as commodities trading, repurchase
agreements, prime brokerage agreements and other transactions.
Payment Protection Insurance Claims Matter
In the U.K., the Corporation previously sold payment protection
insurance (PPI) through its international card services business
to credit card customers and consumer loan customers. PPI covers
a consumer’s loan or debt repayment if certain events occur such
as loss of job or illness. In response to an elevated level of
customer complaints across the industry, heightened media
coverage and pressure from consumer advocacy groups, the
Prudential Regulation Authority and the Financial Conduct Authority
(FCA) investigated and raised concerns about the way some
companies have handled complaints related to the sale of these
insurance policies. In November 2015, the FCA issued proposed
guidance on the treatment of certain PPI claims.
The reserve was $360 million and $378 million at
December 31, 2015 and 2014. The Corporation recorded expense
of $319 million and $621 million in 2015 and 2014. It is possible
that the Corporation will incur additional expense related to PPI
claims; however, the amount of such additional expense cannot
be reasonably estimated.
Litigation and Regulatory Matters
In the ordinary course of business, the Corporation and its
subsidiaries are routinely defendants in or parties to many pending
and threatened legal, regulatory and governmental actions and
proceedings.
In view of the inherent difficulty of predicting the outcome of
such matters, particularly where the claimants seek very large or
indeterminate damages or where the matters present novel legal
theories or involve a large number of parties, the Corporation
generally cannot predict what the eventual outcome of the pending
matters will be, what the timing of the ultimate resolution of these
matters will be, or what the eventual loss, fines or penalties related
to each pending matter may be.
In accordance with applicable accounting guidance, the
Corporation establishes an accrued liability when those matters
present loss contingencies that are both probable and estimable.
In such cases, there may be an exposure to loss in excess of any
amounts accrued. As a matter develops, the Corporation, in
conjunction with any outside counsel handling the matter,
evaluates on an ongoing basis whether such matter presents a
loss contingency that is probable and estimable. Once the loss
contingency is deemed to be both probable and estimable, the
Corporation will establish an accrued liability and record a
corresponding amount of litigation-related expense. The
Corporation continues to monitor the matter for further
developments that could affect the amount of the accrued liability
that has been previously established. Excluding expenses of
internal and external legal service providers, litigation-related
expense of $1.2 billion was recognized for 2015 compared to
$16.4 billion for 2014.
For a limited number of the matters disclosed in this Note, for
which a loss, whether in excess of a related accrued liability or
where there is no accrued liability, is reasonably possible in future
periods, the Corporation is able to estimate a range of possible
loss. In determining whether it is possible to estimate a range of
possible loss, the Corporation reviews and evaluates its matters
on an ongoing basis, in conjunction with any outside counsel
handling the matter, in light of potentially relevant factual and legal
developments. In cases in which the Corporation possesses
sufficient appropriate information to estimate a range of possible
loss, that estimate is aggregated and disclosed below. There may
be other disclosed matters for which a loss is probable or
reasonably possible but such an estimate of the range of possible
loss may not be possible. For those matters where an estimate
of the range of possible loss is possible, management currently
estimates the aggregate range of possible loss is $0 to $2.4 billion
in excess of the accrued liability (if any) related to those matters.
This estimated range of possible loss is based upon currently
available information and is subject to significant judgment and a
variety of assumptions, and known and unknown uncertainties.
The matters underlying the estimated range will change from time
to time, and actual results may vary significantly from the current
estimate. Therefore, this estimated range of possible loss
represents what the Corporation believes to be an estimate of
possible loss only for certain matters meeting these criteria. It
does not represent the Corporation’s maximum loss exposure.
Information is provided below regarding the nature of all of
these contingencies and, where specified, the amount of the claim
associated with these loss contingencies. Based on current
knowledge, management does not believe that loss contingencies
arising from pending matters, including the matters described
herein, will have a material adverse effect on the consolidated
financial position or liquidity of the Corporation. However, in light
of the inherent uncertainties involved in these matters, some of
which are beyond the Corporation’s control, and the very large or
indeterminate damages sought in some of these matters, an
adverse outcome in one or more of these matters could be material
to the Corporation’s results of operations or liquidity for any
particular reporting period.