USA TODAY International Edition
5 banks fail Fed ‘ stress tests’
Citigroup’s capital plans rejected
The Federal Reserve rejected the plans of Citigroup and four other banks to raise dividend payments and increase stock buybacks, saying their management practices or capital cushions are not robust enough to withstand a severe economic downturn.
Twenty- five other banks that took part in the Fed’s annual “stress test” got a green light for their planned dividend payouts and share repurchases. Bank of America and Goldman Sachs initially fell short of minimum capital requirements but met the standards after cutting their planned dividend payments and share buybacks the past week.
The capital plans of Citigroup, HSBC North America Holdings, RBS Citizens Financial Group and Santander Holdings USA were rebuffed because of flaws in their oversight or what the Fed calls “qualitative concerns.”
Zions Bancorporation’s plan was turned down because it fell short of the minimum capital buffer required in the event of a severe recession.
The banks have 90 days to address the weaknesses and resubmit their plans.
Citigroup’s shares fell more than 5% in after- hours trading soon after the Fed’s 4 p. m. ET announcement.
The Fed’s decision was part of the annual checkup it requires banks with more than $ 50 billion in assets to undergo to ensure they can endure shocks like those that upended the banking system and led to big government bail- outs in the 2008 financial crisis.
Citigroup was the biggest recipient of federal bailout money during the crisis, getting $ 45 billion in cash infusions. The Fed questioned Citigroup’s ability to project revenue and losses “for material parts of the firm’s global operations” in a sharp economic downturn. The central bank also cited gaps in Citigroup’s own stress testing that reflect “its full range of business activities and exposures.”
In a statement, Citigroup said it had planned to raise its quarterly dividend to 5 cents per share and repurchase $ 6.4 billion of its stock. Instead, it can continue its current dividend payment of 1 cent per share and $ 1.2 billion in stock repurchases.
“Needless to say, we are deeply disappointed by the Fed’s decision regarding the additional capital actions we requested.” The firm said its plans “represented a modest level of capital return and still allowed Citi to exceed the required ( capital) threshold.”
As a group, the 30 bank holding companies had a Tier 1 common ratio of 11.6% in the fourth quarter of 2013, up from 5.5% in the first quarter of 2009 and 11.3% in last year’s stress test.