Bank of America's derivatives shift stokes concerns


Bank of America raised eyebrows not too long ago when it said intended to shift some derivatives assets to a unit that holds insured funds, apparently at the request of counterparties that were concerned about recent credit downgrades.

Recall that Bank of America's bonds had recently been downgrade to Baa1 by Moody's. The issue sparked a firestorm, as the Federal Reserve applauded the move while the FDIC jeered. According to Bloomberg, the shift is not a done deal yet. It notes a regulatory filing that suggests regulators have yet to bless the move, though other big banks hold more derivatives assets at the holding company level.

The stakes are high for Bank of America. The credit downgrade--and we have to assume that there may be more to come--affected the amount of collateral it is required to post with counterparties for various derivatives transactions.  The lower the credit rating, the more the bank has to cough up. Nervous counterparties would rather their assets be held an insured unit with a higher credit rating. Of course, the derivatives assets would not be covered FDIC funds.

"In August, the bank said a two-level downgrade by all ratings companies would require it to post $3.3 billion in additional collateral and termination payments, based on agreements as of June 30. As of Sept. 30, counterparties were entitled to $4.9 billion beyond what the bank had posted, according to last week's filing. Of that, $3.2 billion resulted from the Moody's downgrade."

Hopefully, this will be resolved soon. There may be some negotiating going on at the regulatory level between the Fed and the FDIC.

For more:
- here's the article

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