Fed Faulted BofA Regarding Its Foresight

By Christina Rexrode 

        Bank of America Corp. earlier this year was chastised by the Federal Reserve for not anticipating problems with its "stress test" submission, a rebuke that led the firm to hire a bevy of consultants to help address the issue, according to people familiar with the matter.
        The Fed, which administers the annual tests to gauge whether big banks can withstand another financial shock, has told Bank of America it doesn't believe its management is forward-looking enough and instead merely reacts to problems after they are raised by regulators, some of these people said. In March, the Fed only granted the Charlotte, N.C., bank conditional approval to return capital to shareholders, meaning it must submit a revised stress-test plan by Sept. 30.
        The details of the Fed's feedback to the bank weren't released publicly and haven't been previously reported. The Fed's concerns focused on the bank's ability to deal with a future crisis, an issue the regulator has raised with other banks as well, and not its overall management, according to a person close to the situation.
        In response to the criticism, Bank of America hired several outside consultants, including McKinsey & Co., KPMG LLP, Ernst & Young and Deloitte, to scrutinize the way it runs the tests, according to others close to the situation. The bank disclosed in April that it will spend an extra $100 million this year to improve its stress-testing procedures.
        Chief Executive Brian Moynihan "is keeping the heat on everyone to get this on track, and he's leaving no stones unturned in terms of marshaling resources," said a bank spokesman.
        Bank of America in March was the only one of the biggest U.S. banks to not earn an unequivocal approval. The result marked Bank of America's third stress-test flub in five years, a record worse than that of any of the other major U.S. banks. The lender also was the only one of the biggest banks that didn't ask for permission to raise its dividend.
        Bank of America, the nation's second-largest bank by assets, has faced a number of regulatory challenges in recent years. It continues to operate under restrictions imposed by a secret regulatory sanction, first issued in 2009, that criticized its ability to assess risk, among other issues, according to people familiar with the situation. And regulators recently downgraded the bank's community-lending rating, which measures compliance with related laws.
        The bank also earned ill will from regulators last fall, as previously reported by The Wall Street Journal, when the board gave Mr. Moynihan the job of board chairman even though officials at the Fed and the Office of the Comptroller of the Currency expressed reservations, since the move ran counter to a previous shareholder vote.
        Inside the bank, Chief Financial Officer Bruce Thompson and Chief Risk Officer Geoff Greener have clashed over who should take the blame for the stress-test missteps, according to people familiar with the situation. A bank spokesman declined to make Mr. Thompson and Mr. Greener available for comment, citing their schedules.
        "The management team is pulling together to make this a top priority," the spokesman said. "Clearly, there's pressure to get this right so we can deliver for our shareholders."
        The Fed put the stress tests in place after the financial crisis as a way to assure the public that banks were well capitalized. But they have become a powerful tool for the government, because they give regulators the ability to control whether firms can buy back shares or pay dividends, which are important to shareholders.
        When Citigroup Inc. failed the stress test last year--a harsher rebuke than Bank of America's conditional approval this year--the CEO vowed to step down if the bank failed again. Citigroup passed the stress test this year after an intense effort to show regulators it had a handle on assessing risk across its entire organization. Privately, bankers have complained to one another that the Fed hasn't been clear about what it wants.
        "Ultimately, they'll probably get it right, but it just takes some time, " Barclays analyst Jason Goldberg said of Bank of America. "Clearly, they've got to be better at it, because the bar gets raised each year."
        This year's stress-test misstep came at a particularly unfortunate time for Bank of America, which had hoped to focus on increasing revenue after wrestling through a mountain of crisis-related litigation. The Fed is allowing the bank to continue paying its dividend and buying back shares before its resubmits its stress-test plan in September.
        "The general belief is that [Bank of America's] capital is trapped," said Charles Peabody, an analyst at Portales Partners. The bank's stress-test problem "puts a cap on their ability to raise their dividend and/or buy back shares. That is a concern, because it has a big impact on how the stock should be valued."
        To lead the stress-test resubmission, Mr. Moynihan tapped a longtime ally, Terry Laughlin, president of strategic initiatives. The men first worked together in the early 1990s at Fleet Financial Group. Mr. Greener and Cathy Bessant, who runs technology and operations, also are playing key roles. Mr. Greener was elevated to the role of chief risk officer last year around the time Bank of America discovered a $4 billion error in the way it calculated capital levels. That happened even though Mr. Greener had been in charge of the unit that oversaw how the bank reported and calculated capital levels.
        The stress-test consultants, plus internal staff, are examining a number of issues, including how management communicates with the board and whether risk-related decision making is too centralized at headquarters, according to people familiar with the matter. To some inside the bank, this year's conditional approval was particularly troubling, because the bank already went through its stress-test processes last year, after the capital error, and said it found no significant issues. The bank hired the accounting firm KPMG to help with that assessment.
        In public comments, bank executives have pointed out that, by the numbers, the company did well. The bank's projected capital levels in a severe recession were higher this year than on last year's test.
        Victoria McGrane contributed to this article.
        Write to Christina Rexrode at christina.rexrode@wsj.com
        Access Investor Kit for Bank of America Corp.
        Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US0605051046
        (END) Dow Jones Newswires

        June 16, 2015 19:00 ET (23:00 GMT)

#FX
#Forex
#SaleForex
#FedFaultedBofA
#Foresight