Citigroup Is Biggest US Bank To Fail Federal Reserve’s Stress Test
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Citigroup Inc, the US’s third largest bank, has failed an annual stress test conducted by the Federal Reserve, which determines whether US banks can withstand a potential financial shock in the future.
Citigroup Inc, the US’s third largest bank, has failed an annual stress test conducted by the Federal Reserve, which determines whether US banks can withstand a potential financial shock in the future.
According to a report by the Fed, Citigroup – along with Ally Financial, Metlife and SunTrust banks – did not manage to meet the minimum 5 percent capital ratio needed to survive a severe recession, with the test discovering that the company was particularly vulnerable to losses on home loans, commercial and industry financing, consumer loans and credit cards.
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The Fed also objected to the company’s proposed return of capital to shareholders, though it stated that it would allow Citi to continue paying their existing dividends on common and preferred stock.
“In light of the Federal Reserve’s actions, Citi will submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations,” said a company statement on Tuesday, as quoted by the Wall Street Journal. Citigroup also expressed confidence that it would pass the Fed’s test once the company sorted out its capital plan, especially as “Citi remains among the best capitalised large banks in the world.”
But while Citigroup was the largest victim in the Federal Reserve’s hypothetical scenario, 15 out of 19 US banks managed to meet the Fed’s requirements. A number of these banks also celebrated the results by announcing increased dividends for its shareholders and plans for a share buyback in the future.
JPMorgan Chase & Co, for instance, said that it would increase its dividend from 25 cents per share to 30 cents, with the company planning to buy back $15 billion of its stock by the first quarter of 2013. Wells Fargo & Co., on the other hand, announced that it would increase its dividend to 22 cents per share from 12 cents.
Unsurprisingly, share prices for the tested banks also reacted according to the results of the stress test. JP Morgan’s shares rose by 7 percent after news, while Citigroup’s stock price fell by 4 percent.
The Federal Reserve has stressed that its assessment process for this year was “deliberately stringent,” to ensure that the US financial system could survive even in the worst-case scenario.
“Strong capital levels are critical to ensuring that banking organizations have the ability to lend and to continue to meet their financial obligations, even in times of economic difficulty,” wrote the Fed in its press statement.
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However, while the American Bankers Association (ABA) were “pleased that the overwhelming majority of institutions passed the Federal Reserve’s stress tests with flying colours,” they also questioned whether the premise of the test had been excessively severe.
“The industry is now very well prepared for any challenging economic circumstances that could arise,” said ABA’s President Frank Keating, as quoted by AFP.
“At the same time, we object to testing bank capital under theoretical conditions that are far more severe than even those seen during ‘the Great Recession.’”
[quote]”It unjustifiably prohibits some institutions from paying dividends to shareholders and could potentially impair their ability to raise capital and make loans.”[/quote]
