Posted on March 26, 2014 at 4:37 PM
Wednesday, Mar 26 at 4:37 PM
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" received 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 reducing their planned dividend payments and share buybacks over the past week.
The capital plans of Citigroup, HSBC North America Holdings, RBS Citizens Financial Group and Santander Holdings USA all were rebuffed because of flaws in their oversight practices 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 now have 90 days to address the weaknesses identified by the Fed and resubmit their dividend and share buyback 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 bailouts in the 2008 financial crisis.
Citigroup was the biggest recipient of federal bailout money during the crisis, getting $45 billion in cash infusions and many billions more in guarantees. The Fed said its rejection of Citigroup's plans "reflects significantly heightened supervisory expectations for the largest and most complex" bank holding companies.
The Fed said Citigroup "has made considerable progress improving" its risk management and control practices the past several years, but its capital plan contained "a number of deficiencies." For example, 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 company said its plans "represented at a modest level of capital return and still allowed Citi to exceed the required (capital) threshold." The banking giant said it will continue to work closely with Fed officials "to better understand their concerns" and meet their standards.
The plans of HSBC and RBS Citizens were rejected because of "inadequate governance and weak internal controls," among other factors. The Fed also cited flaws in the two banks' "practices for estimating revenue and losses" in certain circumstances.
Zions, meanwhile, had a Tier 1 common ratio, which compares high-quality capital to risk-weighted assets, of 4.4%, below the Fed's 5% minimum. The bank said last week that it would resubmit its capital plan after the Fed released initial results that showed the bank likely falling short of the minimum.
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.
"With each year we have seen broad improvement in the industry's ability to assess its capital needs under stress," Fed Gov. Daniel Tarullo said. "However, both the firms and supervisors have more work to do as we continue to raise expectations for the quality of risk management in the nation's largest banks."
In the extreme scenario, the Fed test assumed a rise in the 6.7% unemployment rate to 11.2%, a 50% drop in stock prices and a decline in home prices to 2001 levels.