Wells Fargo 2015 Annual Report Download - page 203

Note 14: Guarantees, Pledged Assets and Collateral
Guarantees are contracts that contingently require us to make lending and other indemnifications, written put options,
payments to a guaranteed party based on an event or a change in recourse obligations, and other types of arrangements. Table 14.1
an underlying asset, liability, rate or index. Guarantees are shows carrying value, maximum exposure to loss on our
generally in the form of standby letters of credit, securities guarantees and the related non-investment grade amounts.
Table 14.1: Guarantees – Carrying Value and Maximum Exposure to Loss
December 31, 2015
Maximum exposure to loss
Expires
after one Expires
year after three
Expires in through years Expires Non-
Carrying one year three through after five investment
(in millions) value or less years five years years Total grade
Standby letters of credit (1) $ 38 16,360 9,618 4,116 642 30,736 8,981
Securities lending and other
indemnifications — — — — 1,841 1,841 —
Written put options (2) 371 7,387 6,463 4,505 1,440 19,795 9,583
Loans and MHFS sold with recourse 62 112 723 690 6,434 7,959 4,864
Factoring guarantees — 1,598 — — — 1,598 1,598
Other guarantees 28 62 17 17 2,482 2,578 53
Total guarantees $ 499 25,519 16,821 9,328 12,839 64,507 25,079
December 31, 2014
Maximum exposure to loss
Expires Expires
after one after three
Expires in year years Expires Non-
Carrying one year or through through five after five investment
(in millions) value less three years years years Total grade
Standby letters of credit (1) $ 41 16,271 10,269 6,295 645 33,480 8,447
Securities lending and other
indemnifications — — 2 2 5,948 5,952 —
Written put options (2) 469 7,644 5,256 2,822 2,409 18,131 7,902
Loans and MHFS sold with recourse 72 131 486 822 5,386 6,825 3,945
Factoring guarantees — 3,460 — — — 3,460 3,460
Other guarantees 24 9 85 22 2,158 2,274 69
Total guarantees $ 606 27,515 16,098 9,963 16,546 70,122 23,823
(1) Total maximum exposure to loss includes direct pay letters of credit (DPLCs) of $11.8 billion and $15.0 billion at December 31, 2015 and 2014, respectively. We issue
DPLCs to provide credit enhancements for certain bond issuances. Beneficiaries (bond trustees) may draw upon these instruments to make scheduled principal and interest
payments, redeem all outstanding bonds because a default event has occurred, or for other reasons as permitted by the agreement. We also originate multipurpose lending
commitments under which borrowers have the option to draw on the facility in one of several forms, including as a standby letter of credit. Total maximum exposure to loss
includes the portion of these facilities for which we have issued standby letters of credit under the commitments.
(2) Written put options, which are in the form of derivatives, are also included in the derivative disclosure in Note 16 (Derivatives).
“Maximum exposure to loss” and “Non-investment grade”
are required disclosures under GAAP. Non-investment grade
represents those guarantees on which we have a higher risk of
being required to perform under the terms of the guarantee. If
the underlying assets under the guarantee are non-investment
grade (that is, an external rating that is below investment grade
or an internal credit default grade that is equivalent to a below
investment grade external rating), we consider the risk of
performance to be high. Internal credit default grades are
determined based upon the same credit policies that we use to
evaluate the risk of payment or performance when making loans
and other extensions of credit. These credit policies are further
described in Note 6 (Loans and Allowance for Credit Losses).
Maximum exposure to loss represents the estimated loss
that would be incurred under an assumed hypothetical
circumstance, despite what we believe is its extremely remote
possibility, where the value of our interests and any associated
collateral declines to zero. Maximum exposure to loss estimates
in the table above do not reflect economic hedges or collateral we
could use to offset or recover losses we may incur under our
guarantee agreements. Accordingly, this required disclosure is
not an indication of expected loss. We believe the carrying value,
which is either fair value for derivative-related products or the
allowance for lending-related commitments, is more
representative of our exposure to loss than maximum exposure
to loss.
STANDBY LETTERS OF CREDIT We issue standby letters of
credit, which include performance and financial guarantees, for
customers in connection with contracts between our customers
and third parties. Standby letters of credit are agreements where
we are obligated to make payment to a third party on behalf of a
customer if the customer fails to meet their contractual
obligations. We consider the credit risk in standby letters of
credit and commercial and similar letters of credit in
determining the allowance for credit losses.
Wells Fargo & Company
201