Bank of America Corp. shrank its Irish derivatives business by $169 billion in the past two years as part of a plan to move most of its contracts in Dublin to London by the end of 2014.
Merrill Lynch International Bank Ltd.’s derivative contracts in Dublin fell to $368.6 billion on Dec. 31 from $537.3 billion at the end of 2011, according to filings lodged with Ireland’s companies office. The move helped cut the Irish-based bank’s total assets by $187 billion to $406 billion over the two years.
“Bank of America, as well as most large, internationally active banks, are addressing a dual goal of cost reductions and regulatory pressure to simplify risk,” said David Knutson, a credit analyst with Legal & General Investment Management America Inc. in Chicago.
Bank of America plans to move most of the derivatives on its Irish balance sheet at the end of 2011 to its London operation, said two people with knowledge of the matter, who asked not to be identified because the matter is confidential.
The derivatives were mostly created and booked by the bank’s London office, according to the people. The move is of a plan to simplify the bank’s structure, one of the people said.
John McIvor, a spokesman in London for Charlotte, North Carolina-based Bank of America, declined to comment on the shift.
A derivative is a contract between two parties linked to the future value or status of the underlying asset to which it refers, including interest rates or the price of stocks or commodities.
Under Irish accounting standards, banks are required to report derivatives assets and liabilities separately on a gross basis, regardless of any legally binding agreements between parties to a contract to setoff, or net, their exposures in the event of a bankruptcy.
A balance sheet size of derivatives positions would be much smaller under U.S. GAAP, or generally accepted accounting principles, according to Gary Kalbaugh, a law professor focusing on banking and derivatives at Hofstra University in Hempstead, New York.
“U.S. GAAP more closely reflects netting arrangements,” said Kalbaugh.
Bank of America has named its Irish unit as its primary non-U.S. banking entity and one of four foreign subsidiaries identified as “material entities” in its living will, according to filings with the Federal Deposit Insurance Corporation.
Merrill Lynch International Bank remains the largest lender in Ireland by assets, three times the size of Bank of Ireland Plc, the biggest consumer lender. The business, set up in Dublin in 1995, is among five Irish-based banks subject to the European Central Bank’s stress tests this year.