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Was Bank of America’s $4 billion error really an error?

Source: Creative Commons

Source: Creative Commons

The BofA so-called $4 billion “error” in its stress test calculations is, in my view, another sign of overbearing government regulations and their negative impact on the marketplace.

The “error” was in the calculation of capital it would have under the Federal Reserve’s onerous stress test.  Apparently, the capital requirements of the Basel III regulatory regime are so complex that even the Fed’s army of inspectors didn’t catch the very same error in past stress tests, as BofA’s calculations have been consistent over the years.

While I don’t feel much sympathy for the BofA behemoth, we all should be distressed that the Federal Reserve could wipe out $10 billion of market value (the decline in BofA’s stock price) for a mistake they didn’t catch for several years in a hypothetical exercise that is highly unlikely to unfold.  The transparency that they have been seeking for the banking system has now been clouded by needless complexity in the test, and, as a result, markets are now less likely to pay attention to such results in the future.

Read more at The Wall Street Journal

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee.

Contact Robert Barone or the professionals at UVA (Joshua Barone and Andrea Knapp) who are available to discuss client investment needs. Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.

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