Bank shrinks derivatives business here by €123bn

Bank of America shrank its derivatives business in Ireland by $169bn (€123bn) over the past two years as it moved contracts to London to simplify its accounting practices.

Merrill Lynch International Bank’s derivative contracts in Dublin fell to $368bn on December 31 from $537.3bn 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 $187bn to $406bn over the two years.

The derivatives were mostly created and booked by the bank’s London office, according to two people familiar with the matter. The move is part of a plan to simplify the bank’s structure, said one of the people.

John McIvor, a spokesman in London for the Charlotte, North Carolina-based Bank of America, declined to comment.

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 US 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.

“US GAAP more closely reflects netting arrangements,” said Kalbaugh.

BofA has named its Irish unit as its primary non-US 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.