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Does Bank of America's Stock Price Matter?

Bank of America
Oliver Quillia for cnbc.com
Bank of America

Bank of America's shares are charging upward this morning.

This raises the question: Does the share price matter? The Very Serious People can be counted on to remind you, at least when shares are falling, that a bank's stock price doesn't matter so much.

"There is no impact whatsoever on Bank of America's balance sheet, based upon the price of its stock in the open market. If the price of the stock goes to a penny a share, it has no impact on the balance sheet of Bank of America. Bank of America sells the stock to the public, it takes in the money, and that is the end of the transaction as far as Bank of America is concerned. If you're going to break a bank, you're going to have a run on its deposits. That's not happening. Exactly the opposite is happening…Deposits are pouring into Bank of America," Dick Bove said in a recent interview.

But that's not quite right. Actually, share price does matter. It matters because it is an indicator of the financial health of a bank.

When shareholders flee, counterparties take notice. They demand to know why the market is pricing the bank at one half of tangible book value. At the margin, they start to require greater amounts of collateral for trades. Liquidity can evaporate very quickly.

Why do bank counterparties react to the price of the stock? It's not really that much of mystery. It can be very hard to know the actual financial health of a bank. Senior management cannot be counted on to tell the truth. Balance sheets are vague and opaque. The market price of a bank, while not the only indicator of financial health, at least represents a real data point. It tells you what investors think the bank is worth.

If Bank of America's stock went to a penny a share, it would have an immediate and severe impact on the ability of the bank to remain in business. It's lunacy to think otherwise.

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