Risk & Compliance

BNY Mellon Fined $6M Over CLO Accounting

The SEC says the bank misreported risk-based capital ratios by excluding about $14 billion in collateralized loan obligations from its calculations.
Matthew HellerJanuary 13, 2017
BNY Mellon Fined $6M Over CLO Accounting

BNY Mellon has agreed to pay $6.6 million to settle charges that it overstated its risk-based capital ratios by excluding about $14 billion in collateralized loan obligations from its calculations.

The U.S. Securities and Exchange Commission said the bank incorrectly determined the CLOs did not pose a risk to the firm, resulting in its risk-capital ratios under Basel I being misreported in quarterly and annual reports from the third quarter of 2010 to the first quarter of 2014.

“Throughout this time period, BNY Mellon failed to make and keep accurate books and records with respect to its risk-weighted assets and regulatory capital ratios,” the SEC said in an order settling an enforcement action.

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In 2013, for example, the bank reported a Tier 1 capital ratio of 16.2% using a zero-risk weighting. If it had used the correct method, 100% risk weighting, the ratio would have been 14.8%.

“Regulatory capital ratios and risk-weighted assets are critical data points for investors in large banking institutions like BNY Mellon,” Michael J. Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said in a news release. “We will continue to aggressively focus on these kinds of disclosures to ensure that control failures do not prevent investors from receiving accurate and timely information.”

Before the first quarter of 2010, CLOs were off-balance sheet interests that BNY Mellon was not required to include in its risk-based capital calculations. But in June 2009, the Financial Accounting Standards Board changed its guidance to include CLOs among the assets that needed to be consolidated in a balance sheet, effective the third quarter of 2010.

According to the SEC, BNY Mellon complied with the new standard, adding about $14 billion in CLOs to its consolidated balance sheet in 2010, but improperly accounted for them with a zero-risk weighting.

“By applying this alternative treatment, BNY Mellon understated its risk-weighted assets that served as the denominator for certain of its capital ratios,” including the Tier 1 capital ratio, the total capital ratio, and the Tier 1 common equity to risk-weighted assets ratio, the SEC said.