Bank Watch

BofA’s next hurdle: ‘Stress test’ resubmission

Bank of America CEO Brian Moynihan faces a new challenge next week, when the Charlotte-based lender resubmits its ‘stress test’ to the Federal Reserve, which in March identified ‘deficiencies’ and ‘weaknesses’ in the bank’s capital planning.
Bank of America CEO Brian Moynihan faces a new challenge next week, when the Charlotte-based lender resubmits its ‘stress test’ to the Federal Reserve, which in March identified ‘deficiencies’ and ‘weaknesses’ in the bank’s capital planning. ogaines@charlotteobserver.com

Now that Bank of America CEO Brian Moynihan has survived efforts to take away his chairman title, the bank is preparing for its next challenge: winning Federal Reserve approval for its “stress test” resubmission.

In March, as part of its annual stress testing of large banks, the Fed discovered “deficiencies” and “weaknesses” in the lender’s capital planning process. The regulator told the bank it had until Sept. 30 to fix the issues and resubmit its capital plan.

On Tuesday, reporters interviewing CEO Brian Moynihan after a shareholders meeting that the lender held in Charlotte asked Moynihan about the capital plan resubmission.

Moynihan did not say much about the subject, which is typical for a process lenders conduct confidentially with a regulator.

“We will submit it on September 30th. ... We’ve done all the work we believe we’re supposed to do,” Moynihan said before moving on to other questions.

Analysts and investors will be closely watching the outcome of the bank’s resubmission. The March misstep was the lender’s third stress-test gaffe in five years. All of the missteps have taken place under Moynihan’s tenure as CEO, which began in 2010:

▪ The Fed nixed a plan in 2011 that called for raising Bank of America’s then-penny-per-share quarterly common stock dividend. The move was a blow to Moynihan, who had told investors earlier in 2011 that the bank would likely increase dividends later that year.

▪ The Fed in March of last year said it would allow the bank to increase its 1-cent dividend to 5 cents a quarter and buy back $4 billion in common stock. The plan for the stock buybacks was later scrapped after the bank in April 2014 disclosed that it had been miscalculating its capital ratios. That error caused the bank to stall its plan to raise the dividend to 5 cents until the Fed in August of last year approved a resubmitted capital plan.

▪ In March of this year, the Fed gave conditional approval to Bank of America’s plan for repurchasing $4 billion in common stock, while warning the lender it “would expect to object” to the capital plan and may restrict buybacks if the lender fails to satisfactorily address the concerns the regulator identified by Sept. 30.

Federal stress testing began in 2009 to make sure the largest banks have enough capital to withstand another economic downturn.

The testing process involves two parts.

In one part, the Fed determines whether lenders would meet a range of minimum capital ratios under two differing hypothetical recessions. Bank of America passed that round in March.

In the second part, the Fed determines whether the banks would still meet minimum capital requirements in an economic downturn if they carried out their proposed capital plans, such as increasing dividends or buying back shares.

In that round of testing, the Fed said it found weaknesses in certain aspects of Bank of America’s modeling practices for losses and revenue, as well as in some aspects of the company’s internal controls.

After Bank of America resubmits its plan next week, the Fed is expected to respond within 75 days.

Deon Roberts: 704-358-5248, @DeonERoberts

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