Bank of America finally won approval from the Fed for its resubmitted stress test, which allows the bank to continue paying their shareholders a 5- cent a share quarterly dividend and to buy back its own stock. If the bank had not passed this resubmitted stress test, the Fed could have forced the bank to stop paying dividends to its shareholders.
Might we be too far off in asking if the Fed is dumbing down its stress tests so that any one (bank), can pass, even though it forces resubmission?
Three times? Really? Since when are we allowed to retake an exam of any kind three times to make sure we can pass? Wish my professors had been as kind.
In March of this year, the Fed had asked Bank of America to redo certain aspects of its test, which they said had deficiencies in its revenue modeling and internal controls. Incidentally in 2015, Bank of America was the only large bank forced to resubmit.
Bank of America has had deficiencies for quite a while, with more ”snags” in its testing than any other large bank which made it the only large bank in 2015 that had to resubmit. In fact, this year marked its third stress misstep in the last five years. It seems that Bank of America has been submitting inaccurate numbers since 2009.
Yet, even though Bank of America has passed, the Fed noted it wasn’t fully satisfied with the bank’s resubmission. While the bank did make progress, it “must continue to make steady, demonstrable progress” before next year’s test, the Fed said — perhaps a warning that investors who expect an increase in the bank’s dividend have to take seriously. But wait, weren’t they warned before? Did it make any difference?
The Federal Reserve conducts annual stress tests to assure banks have sufficient capital and can, if need be, survive another financial crisis. Banks that do not get a passing grade are restricted by the Fed from returning capital to shareholders. This Bank of America resubmission points out several issues.
It means that the stress test is a bar the Fed can and may raise even higher each coming year. The Fed has also made it clear that stress tests are going to be more difficult to pass for the largest banks. However the Fed is not yet clear about what it will require in the next round of testing this coming year.
With that said, there are several issues that need to be examined more closely.
Earlier this year, I posted on the stress test discrepancy, “The Federal Reserve Board’s annual stress tests, started in 2009, are complex, time consuming and an exacting process. The goal, to assure banks stay solvent and have a safe ratio of assets to capital.”
Yet, some detractors say the stress tests are a sham. As early as 2009, when the tests were initiated, David Stockman, author of The Great Defamation: the Corruption of Capitalism in America, skewered the tests and wrote, “The key problem with the whole stress test exercise is that it does nothing to improve financial system transparency.”
Stockman claims the tests are a joke. He cited Bank of America as sailing through the first two testing rounds, yet after Bank of America passed both rounds and they got approval to reward their shareholders for the bank’s good capital management, they notified the Fed that they had miscalculated their capital by a few billion dollars – that’s right, a few billion!
Let’s also not forget that the banks use the same consultants to guide them through the tests, often using former Fed regulators from the agencies conducting these tests! By the way, I also wonder if there’s any truth to the rumors that bank lobbyists are attempting to put limitations on the stress test in the year end funding bill.
Stockman is convincing in his argument that stress testing is not the answer to the “too big to fail” banks. Breaking them up is his preferred solution, but this scenario with Bank of America is dumbing down the few standards we presently have.
[tweetthis]Bank of America miscalculated their capital by a few BILLION dollars. ~ @RichardMBowen #BofA #tbtf[/tweetthis]