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62 Billion Reasons Bank of America Is Safer Today Than Ever Before

By John Maxfield - Feb 15, 2014 at 6:00PM

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While Bank of America still has challenges ahead -- namely, cleaning up its remaining legal liability dating back to the financial crisis -- there are 62 billion reasons to have faith that it's a safer investment today than ever before.

Five years ago, Bank of America (BAC 3.39%) 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 (C 2.11%) led the way by ratcheting up an analogous measure by a staggering $78.1 billion. JPMorgan Chase (JPM 2.61%) came in third with $51.4 billion. And Wells Fargo (WFC 2.14%), 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.

John Maxfield owns 1,000 shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$35.07 (3.39%) $1.15
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$53.19 (2.11%) $1.10
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$118.39 (2.61%) $3.01
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$44.33 (2.14%) $0.93

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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