GE 2011 Annual Report Download - page 121

GE 2011 ANNUAL REPORT 119
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LOAN COMMITMENTS
Notional amount
December 31 (In millions) 2011 2010
Ordinary course of business
lending commitments (a) $ 3,756 $ 3,853
Unused revolving credit lines (b)
Commercial (c) 18,757 21,314
Consumer—principally credit cards 257,646 227,006
(a) Excluded investment commitments of $2,064 million and $1,990 million as of
December 31, 2011 and 2010, respectively.
(b) Excluded inventory financing arrangements, which may be withdrawn at our
option, of $12,354 million and $12,303 million as of December 31, 2011 and 2010,
respectively.
(c) Included commitments of $14,057 million and $16,243 million as of December 31,
2011 and 2010, respectively, associated with secured financing arrangements
that could have increased to a maximum of $17,344 million and $20,268 million
at December 31, 2011 and 2010, respectively, based on asset volume under the
arrangement.
DERIVATIVES AND HEDGING
As a matter of policy, we use derivatives for risk management
purposes, and we do not use derivatives for speculative pur-
poses. A key risk management objective for our fi nancial services
businesses is to mitigate interest rate and currency risk by seek-
ing to ensure that the characteristics of the debt match the
assets they are funding. If the form (fi xed versus fl oating) and
currency denomination of the debt we issue do not match the
related assets, we typically execute derivatives to adjust the
nature and tenor of funding to meet this objective. The determi-
nation of whether we enter into a derivative transaction or issue
debt directly to achieve this objective depends on a number of
factors, including market related factors that affect the type of
debt we can issue.
The notional amounts of derivative contracts represent the
basis upon which interest and other payments are calculated
and are reported gross, except for offsetting foreign currency
forward contracts that are executed in order to manage our
currency risk of net investment in foreign subsidiaries. Of the
outstanding notional amount of $328,000 million, approximately
89% or $292,000 million, is associated with reducing or eliminat-
ing the interest rate, currency or market risk between fi nancial
assets and liabilities in our fi nancial services businesses. The
remaining derivative activities primarily relate to hedging against
adverse changes in currency exchange rates and commodity
prices related to anticipated sales and purchases and contracts
containing certain clauses which meet the accounting defi ni-
tion of a derivative. The instruments used in these activities are
designated as hedges when practicable. When we are not able to
apply hedge accounting, or when the derivative and the hedged
item are both recorded in earnings currently, the derivatives are
deemed economic hedges and hedge accounting is not applied.
This most frequently occurs when we hedge a recognized foreign
currency transaction (e.g., a receivable or payable) with a deriva-
tive. Since the effects of changes in exchange rates are refl ected
currently in earnings for both the derivative and the transaction,
the economic hedge does not require hedge accounting.
The following table provides information about the fair value
of our derivatives by contract type, separating those accounted
for as hedges and those that are not.
2011 2010
Fair value Fair value
December 31 (In millions) Assets Liabilities Assets Liabilities
DERIVATIVES ACCOUNTED
FOR AS HEDGES
Interest rate contracts $ 9,446 $ 1,049 $ 5,959 $ 2,675
Currency exchange
contracts 4,189 3,174 2,965 2,533
Other contracts 1 11 5—
13,636 4,234 8,929 5,208
DERIVATIVES NOT
ACCOUNTED FOR
AS HEDGES
Interest rate contracts 319 241 294 552
Currency exchange
contracts 1,309 425 1,602 846
Other contracts 381 137 531 50
2,009 803 2,427 1,448
NETTING ADJUSTMENTS (a) (3,294) (3,281) (3,867) (3,857)
CASH COLLATERAL (b)(c) (2,310) (1,027) (2,043) (1,385)
Total $10,041 $ 729 $ 5,446 $ 1,414
Derivatives are classified in the captions “All other assets” and “All other liabilities”
in our financial statements.
(a) The netting of derivative receivables and payables is permitted when a legally
enforceable master netting agreement exists. Amounts included fair value
adjustments related to our own and counterparty non-performance risk. At
December 31, 2011 and 2010, the cumulative adjustment for non-performance
risk was a loss of $13 million and $10 million, respectively.
(b) Excludes excess collateralization of $579 million at December 31, 2011 and an
insignificant amount at December 31, 2010.
(c) Excludes securities pledged to us as collateral of $10,574 million and
$5,577 million at December 31, 2011 and 2010, respectively.
Fair Value Hedges
We use interest rate and currency exchange derivatives to hedge
the fair value effects of interest rate and currency exchange rate
changes on local and non-functional currency denominated
fi xed-rate debt. For relationships designated as fair value hedges,
changes in fair value of the derivatives are recorded in earnings
within interest and other fi nancial charges, along with offsetting
adjustments to the carrying amount of the hedged debt. The
following table provides information about the earnings effects of
our fair value hedging relationships for the years ended
December 31, 2011 and 2010.
2011 2010
(In millions)
Gain (loss)
on hedging
derivatives
Gain (loss)
on hedged
items
Gain (loss)
on hedging
derivatives
Gain (loss)
on hedged
items
Interest rate contracts $5,888 $(6,322) $2,387 $(2,924)
Currency exchange
contracts 119 (144) 47 (60)
Fair value hedges resulted in $(459) million and $(550) million of ineffectiveness
in 2011 and 2010, respectively. In both 2011 and 2010, there were insignificant
amounts excluded from the assessment of effectiveness.