Capital One 2010 Annual Report Download - page 186

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
166
Financial liabilities
Interest Bearing Deposits
The fair value of other interest-bearing deposits was determined based on discounted expected cash flows using discount rates
consistent with current market rates for similar products with similar remaining terms.
Non-Interest Bearing Deposits
The carrying amount of non-interest bearing deposits approximates fair value.
Senior and Subordinated Notes
We engage multiple third party pricing services in order to estimate the fair value of senior and subordinated notes. The pricing
service utilizes a pricing model that incorporates available trade, bid and other market information. It also incorporates spread
assumptions, volatility assumptions and relevant credit information into the pricing models.
Securitized Debt Obligations
We utilized multiple third party pricing services to obtain fair value measures for the large majority of our securitized debt
obligations. The techniques used by the pricing services utilize observable market data to the extent available; and pricing models
may be used which incorporate available trade, bid and other market information as described in the above section. We used internal
pricing models, discounted cash flow models or similar techniques to estimate the fair value of certain securitization trusts where third
party pricing was not available.
Other Borrowings
The carrying amount of federal funds purchased and repurchase agreements, FHLB advances, and other short-term borrowings
approximates fair value. The fair value of junior subordinated borrowings was estimated using the same methodology as described for
senior and subordinated notes. The fair value of other borrowings was determined based on trade information for bonds with similar
duration and credit quality, adjusted to incorporate any relevant credit information of the issuer. The increase in fair value of other
borrowings above carrying values at December 31, 2010 was primarily due to interest rate spreads across the industry and the
discounts in secondary trading activity exhibited in the junior subordinated borrowings during the second quarter of 2010.
Interest Payable
The carrying amount of interest payable approximates the fair value of this liability due to its relatively short-term nature.
Derivative Liabilities
Most of our derivatives are not exchange traded, but instead traded in over the counter markets where quoted market prices are not
readily available. The fair value of those derivatives, derived using models that use primarily market observable inputs, such as
interest rate yield curves, credit curves, option volatility and currency rates, are classified as Level 2. Any derivative fair value
measurements using significant assumptions that are unobservable are classified as Level 3, which include interest rate swaps whose
remaining terms do not correlate with market observable interest rate yield curves. The impact of counterparty non-performance risk is
considered when measuring the fair value of derivative assets. These derivatives are included in other liabilities on the consolidated
balance sheets.
We validate the pricing obtained from the internal models through comparison of pricing to additional sources, including external
valuation agents and other internal sources. Pricing variances among different pricing sources are analyzed and validated.
Commitments to extend credit and letters of credit
These financial instruments are generally not sold or traded. The fair value of the financial guarantees outstanding and included in
other liabilities as of December 31, 2010 and 2009 that have been issued since January 1, 2003 was $3 million. The estimated fair
values of extensions of credit and letters of credit are not readily available. However, the fair value of commitments to extend credit
and letters of credit is based on fees currently charged to enter into similar agreements with comparable credit risks and the current
creditworthiness of the counterparties. Commitments to extend credit issued by us are generally short-term in nature and, if drawn