Bank of America Under Suspicion by the Fed

| About: Bank of (BAC)

Why did the Fed object to Bank of America's (NYSE:BAC) increase in capital distributions to its shareholders?

Bank of America released a form 8-K March 18 saying:

On March 18, 2011, the Federal Reserve indicated that it objected to the proposed increase in capital distributions for the second half of 2011. Additionally, the Federal Reserve informed the Corporation [BAC] that it could resubmit a revised comprehensive capital plan. The Corporation [Bank of America] will continue to work with the Federal Reserve and intends to seek permission for a modest increase in its common dividend for the second half of 2011, through the submission of a revised comprehensive capital plan to the Federal Reserve.

We need to make it clear that the Fed did not indicate that it was rejecting the overall capital plan, just that it wouldn't approve an increase at this point. BAC can still resubmit the plan at some point later in 2011. We interpret this as meaning the Fed believes that BAC is not capitalized enough.

We are not entirely surprised that the Fed wants to see several more quarters before allowing BAC to increase capital returns to shareholders. BAC does have lower capital levels than its peers (8.6% T1C vs. 9.5% for peers) and outsized exposure to housing.

Disclosure: I am long UYG.