Can Bank of America make the grade?

Sep 30, 2015
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Can Bank of America make the grade?

Sep 30, 2015
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It’s deadline day for Bank of America.

The Federal Reserve was unhappy with the megabank’s performance on its stress test back in March, and Bank of America’s resubmitted test is due Wednesday. Stress tests are designed to make sure large banks can withstand another recession without taking down the whole financial system.

“Bank of America had what the Federal Reserve described as deficiencies in the qualitative side,” said Stephen Biggar with Argus Research. That means Bank of America got the right answer on the test, but it didn’t show enough of its work — or at least the Fed didn’t like its work.

“My sense is what the Fed asks for is a more detailed scenario analysis, business by business, region by region,” said David Hilder, senior bank analyst at Drexel Hamilton.

Bank of America is the country’s second-largest bank. It’s had trouble with three of its past five stress tests; a stock buyback plan was scrapped last year because of miscalculations, and in 2011 the Fed shot down a plan to raise dividends.

“In recent years, it’s been among the weaker banks,” said Anat Admati, a professor of finance at Stanford University.

She said even if Bank of America passes with flying colors, she’s still skeptical about stress tests in general.

“They don’t see through the entire complicated system,” she said. “The system has a lot of connections across it and within it. The trouble is going to come from things that are not in the models.”

Value of stress tests aside, it’s true that the next big surprise will be, by definition, a surprise.

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