Bank of America Exceeds Fed Minimum Capital Level Under Stress Scenario
June 23 2016 - 5:26PM
Dow Jones News
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's Tier 1 leverage ratio, which measures
high-quality capital as a share of all assets, was 6.4%, exceeding
a 4% minimum.
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 christina.rexrode@wsj.com
(END) Dow Jones Newswires
June 23, 2016 17:11 ET (21:11 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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