Bank of America's $109B Paper Losses Signal Banking Troubles

Bank of America is facing significant paper losses of around $109 billion due to its capital allocation decision during low interest rates and cheap liquidity. The bank used deposit inflows to buy government bonds at high valuations and low yields, resulting in substantial losses compared to its rivals. While the losses may not lead to financial distress, they pose an earnings problem as the bank holds long-dated securities with low yields in a higher interest rate environment. The stress test results indicate confidence in the banking system, but Bank of America's management team's effectiveness in capital allocation is questioned, leading to a projected lag in profitability compared to peers.