Major banks navigate financial impacts of switch from Bloomberg index
Bank of America (BoA) has been charged approximately $1.6 billion due to the finance industry’s shift away from the London Interbank Offered Rate (Libor) benchmark.
The noncash pretax charge of about $1.6 billion was booked in the fourth quarter of 2023 and is expected to be gradually recouped into interest income through 2026.
This financial move comes as the Bloomberg Short-Term Bank Yield Index (BSBY), an alternative to LIBOR, is set to be permanently discontinued on November 15. This transition is part of a larger movement in the financial industry, including efforts by mortgage entities like Fannie Mae and Freddie Mac to move away from LIBOR towards more stable and reliable benchmarks.
As a result, BoA and other banks have to “de-designate” certain interest-rate swaps used in cash-flow hedges of BSBY-indexed loans, as the index’s discontinuation affects forecast cash flows.
The impact of this $1.6 billion charge has slightly affected Bank of America’s common equity tier 1 ratio, reducing it by eight basis points at the end of 2023.
Read more: Not all lenders are equally prepared for LIBOR change
Despite this, analysts like Piper Sandler & Co.’s Scott Siefers view this as a one-time accounting charge with minimal impact on the bank’s capital.
“This strikes us as a one-time accounting charge that will affect only reported earnings and have just a minimal impact on capital,” Siefers told Bloomberg.
In a related development, Dallas-based Comerica Inc. also disclosed a similar accounting adjustment. The bank is set to take a charge of $91 million in non-interest income due to the discontinuation of the index.
However, this is somewhat mitigated by a non-cash pretax benefit of $3 million in net interest income. Comerica expects to gradually earn back the charge over time, primarily in 2025 and 2026. The fourth quarter for Comerica will also include a $109 million charge from the Federal Deposit Insurance Corp.’s special assessment and a $25 million expense related to cost-cutting initiatives.
As the banking sector adapts to these changes, Bank of America’s stock experienced a slight downturn, dropping 1.9% on Monday. Both banks are scheduled to report their fourth-quarter earnings soon, which will further illuminate the impact of these accounting changes on their financial statements.
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