The second-largest U.S. bank said fixing the mistake reduced a
capital level by $4 billion, or about three-quarters of the extra
money that the Federal Reserve had approved its returning to
shareholders over the next year.
News of the gaffe sent the bank's shares down 6.3 percent on Monday
to close at $14.95, in the biggest one-day decline in the stock
since November 2012. (BREAKINGVIEWS-BofA reclaims banking dunce cap
with $4 billion flub.
The announcement illustrates how difficult it is to determine
appropriate capital levels for the biggest banks, particularly under
hypothetical stress situations that regulators consider. Bank of
America now has to submit its request to return more capital to
shareholders for a third time, and the Fed itself previously erred
in projecting the bank's minimum capital ratios under a stressed
The previously approved increase in the bank's dividend would have
been the first since the financial crisis, and raising it has been a
focus of top executives. Banks historically paid out relatively high
dividends, spurring retirees and other investors seeing income to
buy their shares.
Banks failed to cut their dividends even as their earnings shrank
during the financial crisis, burning up valuable capital and leaving
them more vulnerable as the housing market deteriorated. In
response, lawmakers have given regulators much more control over
banks' plans to return funds to shareholders.
The Fed said Bank of America has 30 days to submit a new plan that
corrects the errors and ensures no further reporting problems if it
would like to return more money to shareholders over the next four
The bank said its new plan will likely be more modest than its prior
request. In March, the bank received approval to buy back $4 billion
of shares and increase its dividend payout by more than $1.5 billion
a year, or 5 cents per share per quarter from 1 cent.
Analysts said the bank would likely increase its dividend as
previously planned, while not asking to buy back any shares.
The accounting error stemmed from Merrill Lynch & Co debt, which
Bank of America assumed after it bought the investment bank and
brokerage during the financial crisis.
The acquisition, which Bank of America agreed to in September 2008,
boosted earnings in areas like investment banking and wealth
management by billions of dollars, but it has also given management
some real headaches. Bank of America agreed to pay $2.4 billion in
2012 to settle allegations that it had misled investors about
Merrill's health at the time of the purchase. Additionally, the New
York Attorney General's office intends to take action against the
bank as a result of an investigation of Merrill's mortgage bond
[to top of second column]
THIRD TIME'S THE CHARM?
The bank already had to scale back its requests to return capital in
2014. The Fed said Bank of America's original request would have
left it with too little capital to withstand a hypothetical economic
crisis, and it asked the bank to tweak its request. (http://link.reuters.com/byf88v)
Other banks have also stumbled during their efforts to win approval
to pay more capital to shareholders. Citigroup Inc's plan was
rejected after the Fed took issue with the bank's ability to assess
risks and capital needs. Goldman Sachs Group Inc also had to adjust
its initial proposed payout to shareholders to win approval from the
The problems Bank of America announced on Monday related to how it
calculated the value of structured notes that investment bank and
brokerage Merrill Lynch had issued. Changes in the value of the
notes have an impact on the bank's earnings and capital levels under
generally accepted accounting rules.
But regulators pay less attention to capital levels under GAAP, and
focus instead on a measure known as "regulatory capital," which
strips out changes in the value of the notes. In making that
adjustment, the bank failed to account for the fact that some of the
notes had matured or were redeemed.
Factoring in those redemptions and maturities cut the bank's capital
ratios by 0.30 percentage points to 9.0 percent from 9.3 percent by
one measure. The bank estimates that it will need to maintain a 8.5
percent minimum capital requirement under this measure by 2019.
Bank of America found the errors over the past week as it prepared a
quarterly filing with the U.S. Securities and Exchange Commission, a
person familiar with the matter said. It notified the Fed and worked
through the weekend so it could announce the adjustments on Monday,
the source said.
The reduction in regulatory capital and capital ratios will not
affect the company's historical consolidated financial statements or
shareholders' equity, the bank said.
The Charlotte, North Carolina-based bank's shares have whipsawed
since the start of the year, rising 16 percent from the start of
January before giving those gains and more since late March. Overall
the bank's shares are down about 3.7 percent since the start of the
year compared to a 2.4 decrease in the KBW bank index in the same
(Reporting by Peter Rudegeair in New York and Tanya Agrawal in
Bangalore; editing by Ted Kerr, Jeffrey Benkoe and Tom Brown)
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