US regulator sues Bank of America over payment dispute

A banking regulator on Monday sued Bank of America Corp over $542 million in deposit insurance that it said the second-largest U.S. bank "refuses to pay."

The Federal Deposit Insurance Corporation (FDIC) charges banks a fee to protect customer deposits. The largest financial companies must pay more for that protection.

"Bank of America underreported its counterparty exposures by tens of billions of dollars," the complaint filed in federal court in Washington said.

Specifically, the FDIC points to "counterparty risk" or the danger that another leading financial firm could fail and cost Bank of America. No other leading lender has understated its counterparty risk as did Bank of America, the complaint said.

Lawyers for the bank said they expected to prevail in court.

Michael Krimminger, a lawyer for Cleary Gottlieb who is representing the Charlotte-based bank, said the dispute concerned the interpretation of technical rules governing the insurance fund.

"In my view, the FDIC's position in this instance is erroneous," he said.

The FDIC declined to comment.

The Bank of America Corp. (NYSE: BAC) headquarters stands in Charlotte, N.C. DAVIS TURNER/BLOOMBERG

Reports: FDIC slaps Bank of America with $542M lawsuit over payment claim

The Federal Deposit Insurance Corp. has filed a lawsuit against Bank of America Corp. (NYSE: BAC), claiming the Charlotte-bank owes at least half a billion dollars in unpaid deposit insurance, according to a Bloomberg report.

The U.S. banking regulator sued Bank of America in federal court in Washington on Monday over accusations that the bank "ignored FDIC instructions on how to account for its exposure to counterparties," Bloomberg and other media outlets reported.

BofA's failure to pay $542 million as a fee for insurance protection spanned much of 2013 and all of 2014, according to the FDIC's suit. It alleges that Bank of America "refuses to pay" money associated with failing to follow a rule enacted in 2011 that requires banks to "report counterparty exposure at the consolidated company level."

In a statement, the bank contested that it failed to comply with the FDIC rule.

“The amount in question, derived from a technical disagreement about a calculation from several years ago regarding a rule that has had changing provisions over time, comprises a fraction of what we annually pay to the FDIC," said Bank of America spokesman Lawrence Grayson, in a statement emailed to the Charlotte Business Journal. "We believe that we are in compliance with the FDIC’s several rules, including those which have been recently reinterpreted.

"We have kept the FDIC regularly updated on our calculations. There is a disagreement over the interpretation of this technical rule, and we look forward to the court’s review.”

The suit states that Bank of America — the nation's second-largest bank — did not properly calculate exposure faced by its parent-level companies, which in turn led the bank to understate how much it owed in insurance protection for its 20 largest counterparties.

The FDIC said it determined that Bank of America owes $542 million based on correct data regarding counterparty exposures it received from the bank in December. Though, the FDIC says the total payment amount owed by the bank is more than $1 billion and dates back to 2011, reported Bloomberg, adding that the agency could revise its complaint.

As of mid-afternoon Monday, bank shares were trading at $22.58, down by 0.4% since the market closed on Friday.

Bank of America Sued for $542 Million Over FDIC Risk Rule

Bank of America Corp. owes the Federal Deposit Insurance Corp. at least $542 million for deposit insurance that it refuses to pay, the U.S. regulator claimed in a lawsuit.

The bank ignored FDIC instructions on how to account for its exposure to counterparties, according to the agency, which sued Monday in federal court in Washington over payments in the last three quarters of 2013 and all of 2014. The total dating to 2011 exceeds $1 billion, according to the FDIC, which said it may revise its complaint.

In a statement, the second-biggest U.S. lender said it complied with FDIC rules.

“The amount in question, derived from a technical disagreement about a calculation from several years ago regarding a rule that has had changing provisions over time, comprises a fraction of what we annually pay to the FDIC,” the Charlotte, North Carolina-based bank said in a statement.

The bank has regularly updated the FDIC on its calculations, and said the matter should have been resolved through continued discussions rather than litigation. It now “looks forward to the court’s review,” according to the statement.

Revised Rules

In recent years, the FDIC has been boosting how much the biggest U.S. banks must pay into the deposit-insurance fund. In 2014, it revised the rules to cut out a practice that many banks were using to reduce their assessments by declaring lower levels of counterparty risk. And last year, the agency acted on a Dodd-Frank Act demand that it put large banks on the hook to get more money in the fund than it had before the 2008 financial crisis.

The crisis drove the deposit fund billions of dollars into the red as hundreds of banks collapsed and the government had to weigh in to ensure depositors didn’t lose money.

In its complaint, the FDIC said the total Deposit Insurance Fund was just under $81 billion through Sept. 30, instead of just under $82 billion, because of the Bank of America underpayment. The bank’s domestic deposits were $1.2 trillion through Sept. 30, according to the complaint.

The agency changed its rules in 2011 to require banks to report counterparty exposure at the consolidated company level. The bank failed to follow this rule in calculating its exposure to its largest counterparty, which wasn’t identified in the complaint, according to the FDIC.

Two Years

For almost two years, the bank understated the amount of insurance protection it owed in connection with its 20 biggest counterparties because it didn’t properly add up all of the exposure its parent-level company faces, the FDIC claimed. Failing to consolidate the exposure to its single largest counterparty resulted in miscalculating what it owed the fund by $542 million, according to the suit. The FDIC said the lender also excluded six of its top-20 counterparties in the second quarter of 2013 and again in the fourth quarter of 2014.
On Dec. 1, Bank of America gave the FDIC the correct data on its counterparty exposures. That led the agency to conclude that its underpayment for the seven quarters identified in the lawsuit was $542 million, according to the complaint.

“The FDIC made significant changes in the relevant regulation in 2014, and now is claiming that what it added in 2014 is actually what the rule said all along,” the bank’s lawyer, Eugene Scalia, said in a statement. “Our position is that the new words gave the regulation new meaning.”

Of the nine largest banks, only Bank of America failed to follow the rule, according to the complaint.

The case is FDIC v. Bank of America, 17-cv-36, U.S. District Court, District of Columbia (Washington).

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