BofA’s Capital Plan Criticized in Fed Stress Tests

The U.S. approved the capital plans of 29 of the 31 largest U.S. banks, including BofA, but failed the U.S. arms of Deutsche Bank and Santander.
Matthew HellerMarch 12, 2015
BofA’s Capital Plan Criticized in Fed Stress Tests

The U.S. Federal Reserve unconditionally approved the capital plans of 29 of the 31 largest U.S. banks but, in the final leg of this year’s stress tests, ordered Bank of America to resubmit a revised plan in the fall.

All 31 had passed the first phase of tests, which examined whether they have enough capital to withstand the “severely adverse scenario” of nine quarters of stressful economic conditions. The second phase evaluated the banks’ capital planning processes and capital adequacy, including planned capital actions such as dividend payments and share buybacks and issuances.

In a report released Wednesday, the Fed said it did not object to BofA’s plan, “but is requiring the institution to submit a new capital plan by the end of the third quarter to address certain weaknesses in its capital planning processes.”

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The Fed said it found “weaknesses in certain aspects of Bank of America’s loss and revenue modeling practices and in some aspects of the [bank holding company’s] internal controls.”

The Wall Street Journal said the “conditional non-objection” was “a blow to Chief Executive Brian Moynihan’s efforts to clean the slate and improve relations with regulators,” noting it was the bank’s third stress-test glitch in five years and that it “sets up a challenge for the firm to quickly address problems with its internal controls and other qualitative measures.”

The only banks that failed the second round of tests were the U.S. divisions of foreign banks Deutsche Bank and Santander Holdings. As a result, they are technically banned from increasing their dividends or share repurchases for the next year.

The Fed Board of Governors objected to Santander’s 2015 capital plan on qualitative grounds because of “widespread and critical deficiencies” across the bank holding company’s capital planning processes. Specific deficiencies were identified in the areas of “governance, internal controls, risk identification and risk management, management information systems (MIS), and assumptions and analysis,” the Fed report said.

In its evaluation of Deutsche Bank, the Fed identified “numerous and significant deficiencies across [the bank’s] risk-identification, measurement, and aggregation processes; approaches to loss and revenue projection; and internal controls.”

Overall, though, the stress test results show “the nation’s largest banks are in far better shape than they were going into the financial crisis, and better than they were even a year ago,” Fortune reported. BofA’s conditional capital plan pass, it said, “comes as a bit of a surprise” since it appeared to be a top performer on the first part of the Fed’s stress test.

BofA had to resubmit its capital plan last year after admitting it had overlooked $4 billion in losses that it had incurred over the previous few years. “That mess-up could in part be what led the Fed to determine this year that BofA has a few weaknesses in its internal controls that it needs to address,” Fortune said.