Oops, says BofA, we messed up our capital calculations. We don't have as much money on hand for shocks or emergencies as we thought. Since that's the principal thing that banking regulators care about, you might wonder what happens to banks who do this. Perhaps it would be interesting to consider some alternatives, might offer a sense of what bank supervision does and doesn't involve these days.
- The Fed could prosecute BofA executives for fraud. Call that the securities regulator/white collar approach. One problem, fraud must be intentional, so this would have to be not an error, but at the very least some sort of reckless accounting. It punishes individuals in management who contributed to the fraud.
- The Fed/FDIC could revoke their license or pull the inspectors. This is the USDA approach. The problem is that it is too nuclear - both of those things would shut down a bank that is far too big to fail.
- The Fed could fine them. This is the money laundering approach, and those fines are often imposed not just for tolerating the laundering of money, but for having inadequate controls in place to prevent it. We may see a fine here, BofA is pretty much saying that it had inadequate controls in place by acknowledging that it did the calculations wrong to the tune of billions of dollars.
- Or the Fed could do what the Fed is, for now, doing. It is suspending any dividend increases by the bank until it submits an accurate account of the state of its capital reserves, and has that account approved by the agency as sufficient. This is a somewhat new thing in high level banking oversight - punish the shareholders, thereby encouraging them to monitor management. Does it work? It is perhaps a little untested, although suspending capital distributions has been a tool used by the FDIC on the sorts of distressed small banks that were its old stock in trade. Seeing that tool applied to Citi and now BofA, however, is a dfferent thing altogether. It will be interesting to see if this trend continues.
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