Bank of America Exceeds Fed Minimum Capital Level Under Stress Scenario -- Update

By Christina Rexrode 

Bank of America Corp. has the capital to keep lending in a severe economic downturn, the Federal Reserve calculated Thursday in the first stage of its annual stress tests.

At the low point of a hypothetical recession, Bank of America's common equity Tier 1 ratio, which is a measure of high-quality capital as a share of risk-weighted assets, was 8.1%, exceeding the 4.5% level the Fed views as a minimum, the central bank estimated. Bank of America, using its own methodology, predicted the capital ratio would fall lower, to 6.7%, making the bank's own predictions more conservative than the Fed's.

Bank of America's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, was 6.4%, exceeding a 4% minimum. Bank of America predicted this ratio would be 5.7%, also more conservative than the Fed's own predictions.

Both ratios were higher than last year, when the Fed calculated that Bank of America would have a common equity Tier 1 ratio of 7.1 % and a Tier 1 leverage ratio of 5.1% at the low point of a recession.

Bank of America's projected pre-provision revenue jumped to $45.7 billion, up 33% from the Fed's prediction on last year's exam. But the bank's projected trading and counterparty losses also expanded, up nearly 14% to $20 billion.

The stress tests simulate a worldwide recession. The results were under the Fed's "severely adverse" scenario of financial stress, which this year includes a 10% U.S. unemployment rate, significant losses in corporate and commercial real estate lending portfolios, and negative rates on short-term U.S. Treasury securities.

The results will factor into the Fed's decision next week about whether to approve the bank's plan for rewarding shareholders with dividends or potential share buybacks. Banks whose capital ratios dropped close to minimum levels may choose to scale back their dividend or buyback plans before the Fed announces its final decision Wednesday. That day the banks can choose to announce whether they are raising their dividends or buying back more shares, important for enhancing shareholder returns.

Bank of America fumbled the stress test for three of the past five years, more than any of its big peers. Last year, the Fed told Bank of America that it had concerns about the way the bank managed risk. The Fed said in December that the bank had improved its capital-planning processes but needed to continue to make "steady, demonstrable progress."

Write to Christina Rexrode at [e-mail]

(END) Dow Jones Newswires

June 23, 2016 18:21 ET (22:21 GMT)

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