FIN419 International Finance

FIN419 International Finance - International Finance 1...

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International Finance 1 International Finance Finance For Decision Making FIN/419
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International Finance 2 International Finance In 2010, Bank of America achieved the first-place position in the United States for investment banking revenues. Team B presents a discussion on how investment banking, regulatory, and contemporary issues affect BAC’s operations in an environment of record low interest rates, falling home prices, and low unemployment. The Basel Committee, established by the Group of Ten countries at the end of 1974 meets four times a year to discuss a wide range of financial issues. This committee with 27 member countries does not possess any formal international supervisory authority and its conclusions have no legal force. It seeks the endorsement of its member countries for its major initiatives. “Over the past few years, the Committee has moved more aggressively to promote sound supervisory standards worldwide” (Bank for International Settlements, p. 1, 2011). With the recent mortgage crisis and federal bank bailouts, Bank of America (BAC), along with all international banks face more and stricter regulations for compliance in managing their businesses. These regulations not only affect how banks do business, but also capital structure, public relations, and political pressures. Investment Banking “Regulators seeking to prevent another financial crisis and more taxpayer bailouts want banks to hold extra capital as a cushion against unexpected losses and to encourage prudent risk-taking” (Rothacker, p. 1, 2011). Currently, regulators require global banks to keep a minimum of seven percent of common equity. Basel’s committee asked regulators to raise this amount to 10% or higher. This could force some banks to issue more stock diluting the equity of current shareholders. Raising capital through equity markets with low share prices magnifies shareholder dilution. Brian Moynihan, president and chief executive officer of BAC repeatedly states BAC can close the gap between the current seven percent of shareholder equity to the required 9.5% through internal cash generated from
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International Finance 3 earnings (Son, 2011). A review of Bank of America’s 2010 annual report shows a debt-to-equity ratio of 8.9%. Bank of America uses investment banking to raise capital for equity, credit, and preferred stock. In 2009 BAK completed a $13.5 billion stock offering. This public share sale of 800 million shares at an average price of $10.77 as share created cash to meet the new stress test guidelines set by the United States Government (Sorkin, 2009). Another capital restricting by BAC’s investment group involved a conversion of $5.9 billion of BAC’s preferred stock into common stock (Sorkin, 2009). This swap created 436 new common shares and eliminated the dividend payments on the preferred stock. Bank of America regularly uses investment banking to raise capital and rebalance its capital
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This note was uploaded on 08/22/2011 for the course BUS 415 taught by Professor Barnes during the Spring '11 term at Coastal Carolina University.

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FIN419 International Finance - International Finance 1...

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