Bank of America Moves to Smooth Impact of Interest-Rate Swings
September 23 2016 - 12:13PM
Dow Jones News
By Michael Rapoport
Bank of America Corp.'s earnings likely will be less volatile
from quarter to quarter as the result of an accounting change the
bank announced Friday.
In a Securities and Exchange Commission filing, Bank of America
said it would change an accounting method that has boosted its
reported net interest income when long-term interest rates rise,
and hurt net interest income when rates fall. BofA had said in July
that it was thinking of changing its method.
The change relates to how the bank accounts for some of the
mortgage-backed securities it owns. When long-term rates fall, that
means more people prepay or refinance the mortgages backing those
securities; when rates rise, fewer people prepay or refinance.
Under BofA's current accounting method, which differs from many of
its peers, the bank accounts for those changes by revising the
period over which it spreads some of its costs to buy the
securities. That means more or fewer costs get put into any given
quarter, thus lowering or raising the bank's profits.
In the second quarter, for instance, BofA said its pretax
earnings were reduced by $974 million because of the
"market-related adjustments" it made as long-term rates fell. In
last year's second quarter, when long-term rates went up, the bank
recorded positive adjustments of $669 million.
Under its new method, BofA will account for its costs over the
lives of the securities, the way other banks already do, and it
will no longer have "market-related adjustments" each quarter. Both
methods are permitted under accounting rules.
BofA said in its filing that the change "will reduce volatility
of its reported net interest income" and align the accounting
method "more closely to its peers."
Write to Michael Rapoport at Michael.Rapoport@wsj.com
(END) Dow Jones Newswires
September 23, 2016 11:58 ET (15:58 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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