Print edition: 
NEW YORK — Bank of America Corp., hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren't authorized to speak publicly.
The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn't believe regulatory approval is needed, said people with knowledge of its position.
Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.
"The concern is that there is always an enormous temptation to dump the losers on the insured institution," said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. "We should have fairly tight restrictions on that."
Jerry Dubrowski, a spokesman for Charlotte, N.C.-based Bank of America, declined to comment on the transfers or the firm's discussions with regulators. The company "continues to accommodate the needs of our clients through each of our multiple trading entities, including Bank of America NA," he said in an e-mailed statement, referring to the company's deposit-taking unit.
Barbara Hagenbaugh, a Fed spokeswoman, said she couldn't discuss supervision of specific institutions. Greg Hernandez, an FDIC spokesman, declined to comment.
Moody's Investors Service downgraded Bank of America's long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell from A2 to Baa1, the third-lowest investment- grade rank, while the retail bank declined from Aa3 to A2.
The Moody's downgrade spurred some of Merrill's partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody's decision, said a person familiar with the matter.
Bank of America's rating is now four grades below the one Moody's assigned to JPMorgan Chase, the biggest U.S. bank by deposits at midyear, and a level below the rating given to Citigroup, the third-biggest. Bank of America is the only U.S. lender that lacks a rating of A3 or higher among the five firms listed by the Office of the Comptroller of the Currency as having the biggest derivatives books.
"We had worked very hard over the course of the last nine months to be prepared to the extent that we did receive a downgrade, and feel very good about the way that we've minimized the potential impact" Bank of America chief financial officer Bruce Thompson said Wednesday in a conference call with analysts. "Since the downgrade, we have not seen any change in our global excess liquidity sources."
Derivatives are financial instruments used to hedge risks or for speculation. They're derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.
Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades.
