Why you should care about Bank of America's struggles
January 26, 2011
One bank's financial results stood in contrast to the generally cheery earnings reports that have been released over the past couple weeks. Bank of America posted a loss of $2.24 billion for 2010. If you think this one exception to the improving banking sector doesn't matter, guess again.
Bank of America is not just another bank. It is the largest in the U.S., with 57 million individual and small business customer relationships. In other words, Bank of America has a disproportionately large effect on depositors and on the banking sector overall.
Still struggling
Bank of America's problems are largely a hangover from the mortgage crisis. It acquired sub-prime mortgage specialist Countrywide Financial just as the crisis was coming to a head, which was a bit like tossing an anvil into a sinking boat. They've also had to settle claims from Fannie Mae and Freddie Mac over damaged mortgages Bank of America sold them, and other investor claims could follow.
All of this has a dual impact on Bank of America. It hurts earnings now, and it keeps the bank in damage-control mode which hinders efforts to build business for the future.
Impact on depositors
So what does all this mean to the ordinary depositor--people with savings accounts, money market accounts, checking accounts, etc.? The struggles of Bank of America impact them in two ways:
- Continued trouble with mortgage defaults means that concerns about the stability of the banking system can't completely be put to rest. Banking has come a long way from 2008, but the Bank of America is so huge that its problems could have an out-sized impact on the rest of the industry.
- Being in a defensive mode influences the Bank of America to offer low savings and money market rates, and to raise fees on checking accounts. This not only affects Bank of America customers, but has an influence on the industry as a whole.
Overall, the banking sector is getting better. However, since Bank of America comprises such a large share of that sector, banking can't be said to be completely recovered until Bank of America is doing better.
