Bank of America 2015 Annual Report Download - page 62

60 Bank of America 2015
The types of potential contractual and contingent cash outflows
we consider in our scenarios may include, but are not limited to,
upcoming contractual maturities of unsecured debt and reductions
in new debt issuance; diminished access to secured financing
markets; potential deposit withdrawals; increased draws on loan
commitments, liquidity facilities and letters of credit; additional
collateral that counterparties could call if our credit ratings were
downgraded; collateral and margin requirements arising from
market value changes; and potential liquidity required to maintain
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 LCR and the Net Stable Funding Ratio (NSFR).
In 2014, 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. 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. Under the final rule, an initial minimum LCR of 80
percent was required as of January 2015, increased to 90 percent
as of January 2016 and will increase to 100 percent in January
2017. These minimum requirements are applicable to the
Corporation on a consolidated basis and to our insured depository
institutions. As of December 31, 2015, we estimate that the
consolidated Corporation was above the 2017 LCR requirements.
The Corporation’s LCR may fluctuate from period to period due to
normal business flows from customer activity.
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. Basel Committee
standards generally do not apply directly to U.S. financial
institutions, but require adoption by U.S. banking regulators. U.S.
banking regulators are expected to propose a similar NSFR
regulation applicable to U.S. financial institutions 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 $1.20 trillion and $1.12 trillion at
December 31, 2015 and 2014. Deposits are primarily generated
by our Consumer Banking, 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 Federal Deposit Insurance Corporation (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 FHLBs loans.
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. 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.
During 2015, we issued $43.7 billion of long-term debt,
consisting of $26.4 billion for Bank of America Corporation, $10.0
billion for Bank of America, N.A. and $7.3 billion of other debt.