Bank of America Takes a Hit in Earnings Due to Support for Bloomberg’s Short-Lived Interest Rate Index

Bank of America

Bank of America recently announced that its support for Bloomberg L.P.’s Short-Term Bank Yield Index (BSBY) will result in a $1.6 billion hit to its earnings report. However, the bank expects to recover this amount over time.

BSBY was intended to replace the London Interbank Offered Rate (Libor), which was widely used in loans worldwide until a rate-rigging scandal led to its demise. Bank of America was one of the main backers of Bloomberg’s new interest rate index.

Photo by Javier Haro on Unsplash

In a securities filing, Bank of America stated that it will need to “de-designate” the interest-rate swaps associated with BSBY and reclassify how it accounts for them. As a result, the bank will incur a noncash, pretax charge of $1.6 billion in the fourth quarter. Despite this initial setback, Bank of America anticipates earning back the $1.6 billion as interest income over time, with a significant portion expected to be recovered by the end of 2026.

According to Jason Goldberg, a bank analyst at Barclays, this change is primarily an “accounting nuisance” rather than a significant financial concern. He pointed out that Bank of America will generate $1.6 billion in earnings over the next few years, effectively offsetting the one-time charge.

Scott Siefers, an analyst at Piper Sandler, also downplayed the impact of this accounting change. In a note to clients, he stated that while it may introduce some noise into Bank of America’s quarterly earnings, it is unlikely to have a significant long-term effect on the bank.

The transition from Libor to alternative benchmark rates has been a complex process for financial institutions globally. Regulators have been working to establish reliable and transparent reference rates to replace Libor. Bloomberg saw an opportunity to develop its own benchmark for banks to use in loans, leading to the creation of BSBY. However, the short-lived nature of BSBY and the subsequent need for reclassification have resulted in this temporary setback for Bank of America.

Despite the financial impact, Bank of America’s support for BSBY demonstrates its commitment to adapting to changing market conditions and embracing new industry standards. The bank’s willingness to back innovative solutions, even if they are short-lived, highlights its dedication to providing reliable and trustworthy financial services to its customers.

Additionally, on Monday, Dallas-based Comerica Inc. issued an investor disclosure stating that the BSBY change would result in a pretax noninterest income charge of $91 million in the fourth quarter in addition to a $3 million interest income benefit. Comerica, like BofA, anticipates gradually offsetting the one-time hit, with the majority of the benefit occurring in 2025 and 2026.

However, it is unlikely that many banks used BSBY as much as Bank of America, which lent money to a number of publicly traded firms that referenced the benchmark, as detailed in securities filings.

The key feature that made BSBY attractive was that it was credit-sensitive. Like Libor, it moved up when financing conditions were tighter, which meant the interest payments banks received from borrowers reflected any stresses in real-time.

In contrast, because it is based on some of the safest transactions in the world, the Secured Overnight Financing Rate, which has replaced Libor in the US, is regarded as “risk-free.” Bankers claim that this does not reflect the fact that it costs them more to fund their operations during tighter markets because SOFR moves very little during stressful financial times.

A series of virtual workshops were organized by regulators in 2020 and 2021 to discuss the role of credit-sensitive rate options, and Bank of America and several regional banks took part in those sessions.

Following those meetings, supervisors over banks said they would not object to banks using non-SOFR rates, provided they were aware of the risks and took appropriate precautions. However, observers believe that part of BSBY’s demise was due to Chairman Gary Gensler of the Securities and Exchange Commission’s outspoken criticism of the company.

In conclusion, Bank of America’s decision to support Bloomberg’s Short Term Bank Yield Index has resulted in a $1.6 billion hit to its earnings report. While this accounting change may introduce some noise into the bank’s quarterly earnings, analysts believe it will not have a significant long-term impact. Bank of America remains committed to navigating the transition from Libor to alternative benchmark rates and providing reliable financial services to its customers.

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