The Federal Reserve says that for now Bank of America (BAC) has to suspend its plans to give money back to shareholders because it did not correctly report capital ratios on recent stress tests. The mistake was a result of an “incorrect adjustment” connected to bad debts that the bank took on during the Merrill Lynch acquisition several years ago. This blunder caused Bank of America to report $4 billion more capital on its books than what actually exists.
The bank got $60 billion in structured notes as part of the Merrill deal. Because it did not lower its capital to factor in the losses related to the notes, the amount of capital was erroneously boosted.
Before the error became known, the Fed granted permission for the bank to up its quarterly dividend for the first time since the economic crisis. It also said BofA could repurchase $4 billion of stock. Now, BofA will have to develop a new capital plan.
According to The Wall Street Journal, legal experts say that the mistake could expose the bank to false reporting fines. (Right now, however, it doesn’t look like Bank of America turned the incorrect data in on purpose.) Upon announcing the snafu, the bank provided correct numbers for capital up to as far back as 2013’s first quarter.
If there were to be a penalty and all the time from then to the discovery of the error were factored in, the penalty could be $788,000 (perhaps even $3-4 million if the time considered were to stretch far back as 2009, which is when the bank started using the calculation method that resulted in the recent mistake). The Fed said it doesn’t plan to file an enforcement action against the bank over the blunder.
The news prompted BofA shares to drop last week. The mistake comes at a time that the bank is trying to enhance its credibility and its business. (Just last month, it announced that litigation costs tied to its settlement with the Federal Housing Finance Agency was about $6 billion.)
The “Stress Test”
This process is supposed to make sure that banks have enough capital available in the event of a bad recession. This has allowed the Fed to monitor how much capital banks give to shareholders as opposed to dividend increase and stock buybacks. This year, Citigroup’s (C) capital plan was rejected because of a number of deficiencies.
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Is Bank of America’s $4 billion blunder proof it’s too big?, CBS News, April 29, 2014
Bank of America’s big math error, CNNMoney, April 28, 2014
Stress Test and Capital Planning, Federal Reserve
More Blog Posts:
Bank of America, Its Ex-CEO To Pay $25M to Settle Securities Case with NY Over Merrill Lynch Deal, Stockbroker Fraud Blog, March 31, 2014
Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B, Institutional Investor Securities Blog, March 29, 2014
Citigroup and Royal Bank of Scotland Fail Federal Stress Test, Institutional Investor Securities Blog, March 26, 2014