Bank of America sued for $542 million over FDIC’s rule on counterparty risk

BANK OF AMERICA Corp. owes the Federal Deposit Insurance Corp. (FDIC) at least $542 million for deposit insurance that it refuses to pay, the US 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 secondbiggest US 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 US 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.

TWO YEARS

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.

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, US District Court, District of Columbia ( Washington).