Bank of America will have to suspend its capital plans, the Federal Reserve announced, following a recent disclosure the banking institution incorrectly reported data used in the calculation of regulatory capital ratios. Those ratios were submitted as inputs in a stress test conducted by the Federal Reserve. The board announced Monday it would suspend planned increases in BoA’s capital distributions and the corporation would be required to resubmit its capital plan.
Following the announcement Monday, Bank of America’s stock dipped 6.3%, making it the lowest one-day dive since 2012, according to the Wall Street Journal. BAC experienced a total market value loss of about $10 billion, according to CNN Money.
When Bank of America prepared its quarterly report, “incorrect adjustments” related to its 2009 acquisition of Merill Lynch & Co., Inc. were found, according to the company. Previously, the company included estimated preliminary Basel III capital amounts and ratios as well as Basel 1 capital amounts and ratios for 2013. When the release was issued, “the bank incorrectly adjusted for cumulative realized losses on Merrill Lynch issued structured notes that had matured or were redeemed by the company subsequent to the date of the Merill Lynch acquisition.” As a result, BoA announced a downward revision to the company’s previously disclosed regulatory capital amounts and ratios.
Under orders from the Federal Reserve, Bank of America must suspend its plans to buy back $4 billion of common stock and increase its dividend from 1 cent a share to 5 cents. The planned dividend boost would have been the first made by BoA since the financial crisis. Under the new capital plan, BoA warned these capital actions would likely be less than announced before.
Bank of America’s new capital plan must address the errors in its regulatory capital calculations and also must undertake a review of its regulatory capital reporting to ensure no future errors are made. The plan must be resubmitted within 30 days, according to the Federal Reserve. BoA will not be able to increase its capital distributions – including those approved during the initial stress test – until the Federal Reserve officially confirms the accuracy of the new capital plan. The bank said it would engage a third party to review processes and materials prior to resubmission.
Anytime a bank that is part of the Federal Reserve’s Comprehensive Capital Analysis and Review program has a material change that could potentially lead to an alteration in a firm’s capital position, the reserve has the power to require the organization to resubmit its capital plan.
Bank of America’s error serves as a reminder to all banking institutions – big and small – the dangers of inaccurate reporting. In order for banks to prevent financial setbacks and a tarnished reputation it is critical to implement a sound process that embraces controlled reporting of all capital to regulatory agencies.