Bank of America 2014 Annual Report Download - page 66

64 Bank of America 2014
businesses and finance customer activities. Changes in certain
market factors, including, but not limited to, credit rating
downgrades, could negatively impact potential contractual and
contingent outflows and the related financial instruments, and in
some cases these impacts could be material to our financial
results.
We consider all sources of funds that we could access during
each stress scenario and focus particularly on matching available
sources with corresponding liquidity requirements by legal entity.
We also use the stress modeling results to manage our asset-
liability profile and establish limits and guidelines on certain
funding sources and businesses.
Basel 3 Liquidity Standards
The Basel Committee has issued two liquidity risk-related
standards that are considered part of the Basel 3 liquidity
standards: the Liquidity Coverage Ratio (LCR) and the Net Stable
Funding Ratio (NSFR). The LCR is calculated as the amount of a
financial institution’s unencumbered HQLA relative to the
estimated net cash outflows the institution could encounter over
a 30-day period of significant liquidity stress, expressed as a
percentage. As with other Basel Committee standards, the Basel
Committee’s liquidity risk-related standards do not directly apply
to U.S. financial institutions, but require adoption by U.S. banking
regulators as described below.
In 2014, the U.S. banking regulators finalized LCR
requirements for the largest U.S. financial institutions on a
consolidated basis and for their subsidiary depository institutions
with total assets greater than $10 billion. Under the final rule, an
initial minimum LCR of 80 percent is required in January 2015,
and will increase thereafter in 10 percentage point increments
annually through January 2017. These minimum requirements are
applicable to the Corporation on a consolidated basis and to our
insured depository institutions. As of December 31, 2014, we
estimate the consolidated Corporation to be in compliance with
LCR on a fully phased-in basis. For more information on our balance
sheet actions to reduce risk and increase liquidity related to LCR,
see Executive Summary – Balance Sheet Overview on page 24.
In 2014, the Basel Committee issued a final standard for the
NSFR, the standard that is intended to reduce funding risk over a
longer time horizon. The NSFR is designed to ensure an appropriate
amount of stable funding, generally capital and liabilities maturing
beyond one year, given the mix of assets and off-balance sheet
items. The final standard aligns the NSFR to the LCR and gives
more credit to a wider range of funding. The final standard also
includes adjustments to the stable funding required for certain
types of assets, some of which reduce the stable funding
requirement and some of which increase it. The U.S. banking
regulators are expected to propose a similar NSFR regulation in
the near future. We expect to meet the NSFR requirement within
the regulatory timeline.
Diversified Funding Sources
We fund our assets primarily with a mix of deposits and secured
and unsecured liabilities through a centralized, globally
coordinated funding strategy. We diversify our funding globally
across products, programs, markets, currencies and investor
groups.
The primary benefits of our centralized funding strategy include
greater control, reduced funding costs, wider name recognition by
investors and greater flexibility to meet the variable funding
requirements of subsidiaries. Where regulations, time zone
differences or other business considerations make parent
company funding impractical, certain other subsidiaries may issue
their own debt.
We fund a substantial portion of our lending activities through
our deposits, which were $1.12 trillion at both December 31, 2014
and 2013. Deposits are primarily generated by our CBB, GWIM and
Global Banking segments. These deposits are diversified by
clients, product type and geography, and the majority of our U.S.
deposits are insured by the FDIC. We consider a substantial portion
of our deposits to be a stable, low-cost and consistent source of
funding. We believe this deposit funding is generally less sensitive
to interest rate changes, market volatility or changes in our credit
ratings than wholesale funding sources. Our lending activities may
also be financed through secured borrowings, including credit card
securitizations and securitizations with GSEs, the FHA and private-
label investors, as well as FHLB loans. During 2014, $4.1 billion
of new senior debt was issued to third-party investors from the
credit card securitization trusts.
Our trading activities in other regulated entities are primarily
funded on a secured basis through securities lending and
repurchase agreements and these amounts will vary based on
customer activity and market conditions. We believe funding these
activities in the secured financing markets is more cost-efficient
and less sensitive to changes in our credit ratings than unsecured
financing. Repurchase agreements are generally short-term and
often overnight. Disruptions in secured financing markets for
financial institutions have occurred in prior market cycles which
resulted in adverse changes in terms or significant reductions in
the availability of such financing. We manage the liquidity risks
arising from secured funding by sourcing funding globally from a
diverse group of counterparties, providing a range of securities
collateral and pursuing longer durations, when appropriate. For
more information on secured financing agreements, see Note 10
– Federal Funds Sold or Purchased, Securities Financing
Agreements and Short-term Borrowings to the Consolidated
Financial Statements.
We issue long-term unsecured debt in a variety of maturities
and currencies to achieve cost-efficient funding and to maintain
an appropriate maturity profile. During 2014, we issued $32.7
billion of long-term unsecured debt, including structured note
issuance of $2.8 billion, a majority of which was issued by the
parent company. We also issued $3.3 billion of unsecured long-
term debt through BANA. While the cost and availability of
unsecured funding may be negatively impacted by general market
conditions or by matters specific to the financial services industry
or the Corporation, we seek to mitigate refinancing risk by actively
managing the amount of our borrowings that we anticipate will
mature within any month or quarter.