Bank of America Corp said on Monday that regulators had suspended its plan to buy back more shares and raise its dividend after the bank realized it had miscalculated a measure of the capital on its books.
The second-largest U.S. bank said fixing the mistake reduced a capital level by $4 billion, or about three-quarters of the extra money that the Federal Reserve had approved its returning to shareholders over the next year.
News of the gaffe sent the bank’s shares down 6.3 per cent on Monday to close at $14.95, in the biggest one-day decline in the stock since November 2012.
The announcement illustrates how difficult it is to determine appropriate capital levels for the biggest banks, particularly under hypothetical stress situations that regulators consider. Bank of America now has to submit its request to return more capital to shareholders for a third time, and the Fed itself previously erred in projecting the bank’s minimum capital ratios under a stressed scenario.
The previously approved increase in the bank’s dividend would have been the first since the financial crisis, and raising it has been a focus of top executives. Banks historically paid out relatively high dividends, spurring retirees and other investors seeing income to buy their shares.
Banks failed to cut their dividends even as their earnings shrank during the financial crisis, burning up valuable capital and leaving them more vulnerable as the housing market deteriorated. In response, lawmakers have given regulators much more control over banks’ plans to return funds to shareholders.
The Fed said Bank of America has 30 days to submit a new plan that corrects the errors and ensures no further reporting problems if it would like to return more money to shareholders over the next four quarters.
The bank said its new plan will likely be more modest than its prior request. In March, the bank received approval to buy back $4 billion of shares and increase its dividend payout by more than $1.5 billion a year, or 5 cents per share per quarter from 1 cent.
Analysts said the bank would likely increase its dividend as previously planned, while not asking to buy back any shares.
The accounting error stemmed from Merrill Lynch & Co debt, which Bank of America assumed after it bought the investment bank and brokerage during the financial crisis.