Citigroup saw its shares fall by nearly 5% on Thursday, after plans by the bank and another four banks to increase payments in dividends and stock buybacks, were rejected by the Federal Reserve.
The Fed announced that the management practices or the cushion in capital were not sufficiently robust to withstand an economic downturn that was severe.
The Fed announced that 25 other banks, which had also taken part in the annual “stress test” of the Fed, received green lights for their share repurchases and dividend payouts.
Goldman Sachs and Bank of America initially were short of the requirements for minimum capital but then met the standards following a reduction of their planned payments for dividends and share buybacks this past week.
Capital plans for HSBC North America holdings, Citigroup, RBS Citizens and Santander Holdings were all rebuffed due to flaws in the oversight practices in their banks or what was called by the Feds qualitative concerns.
Zions Bancorporation’s bank plan had been turned down due to it falling short of the capital required in the event of a recession.
The bank now has 90 days for addressing what the Fed identified as weakness and can resubmit their dividend and plans for their buyback of shares.
Shares of Citigroup dropped 4.7% in trading on Thursday morning. The decision by the Fed was part of its yearly checkup that it requires banks that have over $50 million in assets to go through ensuring they could endure the shocks similar to those that upended the banking system, which led to huge bailouts by the government in the financial crisis of 2008.
Citigroup received the largest bailout by the federal government during the financial crisis with $45 billion of cash infusions and many other billions in guarantees.
The Federal Reserve said rejecting Citigroup’s plans reflected the significantly heightened expectations for the most complex and largest holding companies of banks.
The Central Bank said that Citigroup had made significant progress improving risk management and its control practices over the last few years, but its plan for capital contained deficiencies.
The Fed for example questioned the ability of Citigroup to project revenues and losses for the material parts of the company’s global operations.
Deborah Campbell
