Is Bank of America financially stable?
Seems to be the question of the hour now. Will one of the great American banks face collapse? Will the Federal Deposit Insurance Corporation take over Bank of America as they did Silicon Valley. Again we find another American banking giant in hot water for purchasing too much debt at the height of the recent bond bubble. Additionally proper hedging did not become enacted. Any reasonable Chief Risk Officer would hedge that debt with proper risk management. Similar to Silicon Valley Bank. See our piece: What caused the run on Silicon Valley Bank?
Bank of America should have purchased more protection to financially protect itself from rising rates. Now, their unrealized losses on their Hold To Maturity book has reached staggering levels above tens of billions in losses.
However, recently, as Bloomberg reports: BofA Gets More Than $15 Billion in Deposits After SVB Collapse! Depositors turn to Bank of America in times of trouble, despite the precarious position of BofA’s balance sheet, which we will get into later on.
Writing On The Wall
Hints that that Bank of America headed into negative territory appeared in 4 consecutive quarterly statements showing increases in loan losses. This is on top of the publicly available loan losses that Bank of America experienced on their long-dated duration bond portfolio.
However, how bad is the situation?
Below we have a chart showing unrealized depreciation on Hold to Maturity Securities (HTM) for top 100 banks versus equity.
These unrealized losses are NOT reflected in profits or a deduct to equity via Other Comprehensive Income (OCI) – only in the footnotes! Moreover, we don’t find these losses reflected in stress tests or measures of capital adequacy.
Furthermore a 25 bp (1/4 of 1 percent) increase in rates for a 10-year security causes approximately 2 points in losses (100 par to 98 to reflect yield discount).
We don’t think its anywhere near Silicon Valley bad. Silicon Valley had negative book value after accounting for loan losses. Whereas Bank of America’s unrealized loan loss amounts to a high fraction of net tangible assets. Yes alarming, we agree. But, a $100 billion loss does NOT wipe out over $200 billion of equity. Don’t forget the Fed pumped them with money over the last 15 years. Banks have been tripping over capital. Now, that capital suddenly finds itself becoming tight everyone worries about what shoe is next to drop?
Will Silicon Valley Bank become the spark to light the bank crisis fuse? We don’t think so.
As we wrote in our piece: Is SVB Systemic?
“…back in 2008 Lehman Brothers failed because of bad debt that all of the big banks held. Today the big banks are flush. In addition, Silicon Valley had terrible risk management. How can you not hedge your bank’s largest asset?”
Will Bank of America collapse? We’ll see, but odds are in its favor for survival. If a Bank was too big too fail. B of A would certainly fit the bill!
B of A finds itself loaded with net unrealized losses, see chart:
The history of Bank of America dates back to 1904 when Amadeo Giannini, an Italian-American businessman, founded the Bank of Italy in San Francisco.
The bank was established to provide financial services to immigrants and small businesses that were often overlooked by larger banks.
In 1928, the Bank of Italy merged with the Bank of America, Los Angeles to form the Bank of America National Trust and Savings Association. The bank continued to grow through a series of mergers and acquisitions, including the acquisition of the largest bank in California, Security Pacific National Bank, in 1992.
In 1998, the bank officially changed its name to Bank of America Corporation in addition continued to expand globally through acquisitions, including the acquisition of FleetBoston Financial in 2004. Thus made Bank of America the largest bank in the United States by assets.
During the financial crisis of 2008, Bank of America acquired the investment bank Merrill Lynch, which skirted death to the subprime mortgage crisis. As a result, the acquisition made Bank of America the largest financial services company in the world at the time.
In conclusion, today, Bank of America is one of the largest banks in the world. Lastly, with operations in more than 35 countries and a diverse range of financial services, including consumer banking, investment banking, wealth management, and insurance.