Five years ago, Bank of America (NYSE: BAC ) was on the brink of failure. Today, despite its well-publicized legal and reputational challenges, the Charlotte-based bank is safer than it's been in decades.
Thanks to a series of new and continuously evolving regulatory standards, banks are now obligated to hold more capital than ever before -- or, at least, more than they've been required to hold during the modern banking era.
This increased solvency, coupled with stringent annual stress tests, adds a robust cushion in the event of a financial downturn akin to the financial crisis.
How big is the cushion? In Bank of America's case, it equates to $62.3 billion in additional tangible equity that could be deployed to protect the bank from future failure.
In the third quarter of 2005, the Charlotte-based bank's tangible equity -- the sum of preferred stock, common stock, and retained earnings minus goodwill and other intangible assets (excluding mortgage servicing rights) -- was equal to only 4.75% of its total assets.
Today, that figure is 7.68%.
At Bank of America's current size, which is nearly double what it was in 2005, that equates to a difference of $62.3 billion in tangible equity. By this measure, it's made the second-largest improvement among the nation's biggest banks.
Citigroup (NYSE: C ) led the way by ratcheting up an analogous measure by a staggering $78.1 billion. JPMorgan Chase (NYSE: JPM ) came in third with $51.4 billion. And Wells Fargo (NYSE: WFC ) , the smallest of the group, was fourth with an additional $38.5 billion.
Does this mean investors should run out and buy Bank of America's stock -- or, for that matter, any of these other banks? Not necessarily. But it does mean that those who own it, myself included, can feel more at ease in it, and the industry's, future prospects.
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