Bank of America 2009 Annual Report Download - page 31

The Board of Governors of the Federal Reserve System (Federal
Reserve) lowered the federal funds rate to close to zero percent early in
the first quarter and in mid-March announced a program of quantitative
easing, in which it purchased U.S. Treasuries, mortgage-backed securities
(MBS) and long-term debt of government-sponsored enterprises (GSEs).
This program contributed to lower mortgage rates generating an increase
in consumer mortgage refinancing which helped homeowners, and along
with lower home prices, stimulated activity in the housing market.
In early 2009, the short-term funding markets began to return to
normal and the U.S. government began to unwind its alternative liquidity
facilities, and loan and asset guarantee programs. By mid-year, order had
been restored to most financial market sectors. The stock market fell
sharply through mid-March, but rebounded abruptly, triggered in part by
the U.S. government’s bank stress tests and banks’ successful capital
raising. The stock market rally through year end retraced some of the
losses in household net worth and increased consumer confidence.
Our consumer businesses were affected by the economic factors
mentioned above, as our Deposits business was negatively impacted by
spread compression. Global Card Services was affected as reduced
consumer spending led to lower revenue and a higher level of bank-
ruptcies led to increased provision for credit losses. Home Loans &
Insurance benefited from the low interest rate environment and lower
home prices, driving higher mortgage production income; however, higher
unemployment and falling home values drove increases in the provision
for credit losses. In addition, the factors mentioned above negatively
impacted growth in the consumer loan portfolio including credit card and
real estate.
Global Banking felt the impact of the above economic factors as busi-
nesses paid down debt reducing loan balances. In addition, the commer-
cial portfolio within Global Banking declined due to further reductions in
spending by businesses as they sought to increase liquidity, and the
resurgence of capital markets which allowed corporate clients to issue
bonds and equity to replace loans as a source of funding. The commer-
cial real estate and commercial – domestic portfolios experienced higher
net charge-offs reflecting deterioration across a broad range of industries,
property types and borrowers. In addition to increased net charge-offs,
nonperforming loans, leases and foreclosed properties and commercial
criticized utilized exposures were higher which contributed to increased
reserves across most portfolios during the year.
Capital markets conditions showed some signs of improvement during
2009 and Global Markets took advantage of the favorable trading
environment. Market dislocations that occurred throughout 2008 con-
tinued to impact our results in 2009, although to a lesser extent, as we
experienced reduced write-downs on legacy assets compared to the prior
year. During 2009, our credit spreads improved driving negative credit
valuation adjustments on the Corporation’s derivative liabilities recorded
in Global Markets and on Merrill Lynch structured notes recorded in All
Other.
GWIM also benefited from the improvement in capital markets driving
growth in client assets resulting in increased fees and brokerage
commissions. In addition, we continued to provide support to certain cash
funds during 2009 although to a lesser extent than in the prior year. As of
December 31, 2009, all capital commitments to these cash funds had
been terminated and the funds no longer hold investments in structured
investment vehicles (SIVs).
On a going forward basis, the continued weakness in the global
economy and recent and proposed regulatory changes will continue to
affect many of the markets in which we do business and may adversely
impact our results for 2010. The impact of these conditions is dependent
upon the timing, degree and sustainability of the economic recovery.
Regulatory Overview
In November 2009, the Federal Reserve issued amendments to Regu-
lation E, which implement the Electronic Fund Transfer Act (Regulation
E). The new rules have a compliance date of July 1, 2010. These
amendments change, among other things, the way we and other banks
may charge overdraft fees; by limiting our ability to charge an overdraft
fee for ATM and one-time debit card transactions that overdraw a
consumer’s account, unless the consumer affirmatively consents to the
bank’s payment of overdrafts for those transactions. Changes to our
overdraft practices will negatively impact future service charge revenue
primarily in Deposits.
On May 22, 2009, the Credit Card Accountability Responsibility and
Disclosure Act of 2009 (CARD Act) was signed into law. The majority of
the CARD Act provisions became effective in February 2010. The CARD
Act legislation contains comprehensive credit card reform related to credit
card industry practices including significantly restricting banks’ ability to
change interest rates and assess fees to reflect individual consumer risk,
changing the way payments are applied and requiring changes to
consumer credit card disclosures. Under the CARD Act, banks must give
customers 45 days notice prior to a change in terms on their account and
the grace period for credit card payments changes from 14 days to 21
days. The CARD Act also requires banks to review any accounts that were
repriced since January 1, 2009 for a possible rate reduction. As
announced in October 2009, we did not increase interest rates on con-
sumer card accounts in response to provisions in the CARD Act prior to
its effective date unless the customer’s account fell past due or was
based on a variable interest rate. Within Global Card Services, the provi-
sions in the CARD Act are expected to negatively impact net interest
income, due to the restrictions on our ability to reprice credit cards based
on risk, and card income due to restrictions imposed on certain fees.
In July 2009, the Basel Committee on Banking Supervision released a
consultative document entitled “Revisions to the Basel II Market Risk
Framework” that would significantly increase the capital requirements for
trading book activities if adopted as proposed. The proposal recom-
mended implementation by December 31, 2010, but regulatory agencies
are currently evaluating the proposed rulemaking and related impacts
before establishing final rules. As a result, we cannot determine the
implementation date or the final capital impact.
In December 2009, the Basel Committee on Banking Supervision
issued a consultative document entitled “Strengthening the Resilience of
the Banking Sector.” If adopted as proposed, this could increase sig-
nificantly the aggregate equity that bank holding companies are required
to hold by disqualifying certain instruments that previously have qualified
as Tier 1 capital. In addition, it would increase the level of risk-weighted
assets. The proposal could also increase the capital charges imposed on
certain assets potentially making certain businesses more expensive to
conduct. Regulatory agencies have not opined on the proposal for
implementation. We continue to assess the potential impact of the pro-
posal.
As a result of the financial crisis, the financial services industry is
facing the possibility of legislative and regulatory changes that would
impose significant, adverse changes on its ability to serve both retail and
wholesale customers. A proposal is currently being considered to levy a
tax or fee on financial institutions with assets in excess of $50 billion to
repay the costs of TARP, although the proposed tax would continue even
after those costs are repaid. If enacted as proposed, the tax could sig-
nificantly affect our earnings, either by increasing the costs of our
liabilities or causing us to reduce our assets. It remains uncertain
whether the tax will be enacted, to whom it would apply, or the amount of
the tax we would be required to pay. It is also unclear the extent to which
the costs of such a tax could be recouped through higher pricing.
Bank of America 2009 29