Bank of America has started discussions with the Federal Reserve after the central bank’s annual stress tests projected more favorable results than the lender is forecasting.
Bank of America is in dialogue with the Fed to “understand differences in other comprehensive income over the 9-quarter stress period between the Federal Reserve’s CCAR results and Bank of America’s Dodd-Frank Act stress test results,” it said in a statement Monday. CCAR stands for comprehensive capital analysis and review.
The discussions with the Fed are meant to resolve discrepancies so Bank of America can move ahead with its dividend plans. JPMorgan Chase, Wells Fargo, Morgan Stanley and Goldman Sachs Group led U.S. banks in announcing higher dividends last week after every lender subject to the Fed stress tests passed the exam. Bank of America didn’t disclose such moves.
In one example of the discrepancy, the Fed projected that Bank of America will post $22.3 billion in other comprehensive income, or AOCI, over a nine-quarter period under a hypothetical set of adverse economic conditions. Bank of America, however, projects $12.5 billion for that metric during the period, which began in the first quarter of this year.
The Fed said it expects Bank of America could register a $23 billion pre-tax loss during that period while the company forecasts an approximate $52 billion cumulative pre-tax loss.
“In short, [Bank of America’s] internal test seems to imply much less capital benefit from AOCI included in capital than did the Fed’s,” Piper Sandler analysts led by R. Scott Siefers wrote in a note.
Still, even eliminating that benefit could keep the bank below the 2.5% minimum stress capital buffer threshold, they wrote. “But we await some clarity before [Bank of America] makes any capital announcements,” they said.
Bank of America’s shares were little changed Monday, trading around $29.2 ahead of the U.S. Federal holiday.
Each year the Fed tests banking giants to see whether their balance sheets are sound enough to weather severe stress in the economy and financial markets. Last week’s findings showed all 23 big U.S. lenders examined can withstand a severe global recession and turmoil in real estate markets. The results indicated that firms would have enough capital to absorb as much as $541 billion in losses in a doomsday scenario, even if unemployment were to hit 10% and the stock market were to plummet 45%.
The results also injected some confidence into the banking industry after a tumultuous first half of the year. Typically clearing the exam sets the stage for banks to return billions of dollars to investors through dividends and stock buy-backs. Banks normally announce their capital plans alongside an updated CET1 ratio, which compares a bank’s capital against its assets.
Source: seattletimes.com
