Bank of America missed a $4bn problem for five years, and the Federal Reserve only recently noticed. It may be time to worry
You think you’re feeling stressed?
Just ask Brian Moynihan, CEO of Bank of America, his views of the topic of “stress”, and stand back. Bank of America flunked the Federal Reserve’s test of bank health, called a stress test. Each year the Fed asks the country’s 30 largest financial institutions to determine whether they’re healthy enough to survive a crisis – like a repeat of the 2008 meltdown or worse.
Passing the Fed’s stress test is the equivalent of a Good Housekeeping seal of approval by regulators for the banks these days: it says banks are safe enough to use some of their money to pay dividends and buy back shares. Falling short of the mark, however, is more than just humiliating for bank CEOs. It has real-world consequences for investors in these stocks as they see the share price fall. It also adds to the nervousness the rest of us have about banks, even five years after the crisis: do they really know what they’re doing?
The Fed is trying to figure that out, and it’s a hard grader. It has provided a reality check to Goldman Sachs, JP Morgan, even Citigroup, which flunked the Fed’s test.
Bank of America thought it had it made: the Fed passed the bank. Then came the discovery that for years, the bank had made a $4bn mistake, overstating how much capital it had to fall back on. The mistake dated back all the way to the bank’s acquisition of Merrill Lynch.
Unsurprisingly, when Bank of America fessed up to the Fed, the regulator changed its tune. It forced BofA to nix the divided increase and share buyback plans that the bank had so triumphantly announced after being told in March it had passed the dreaded annual stress test ritual.
So, if you’re an investor – or simply a bystander, anxious about the health of the financial institution where you keep your checking and savings accounts – should you be more stressed about what is going on at Bank of America or about what is happening at the Federal Reserve, which didn’t notice the problem in the first place?