The Federal Reserve has just released its Comprehensive Capital Analysis and Review, an annual stress test of major banks operating in the United States.
Citi is the only megabank headquartered in the U.S. to fail the stress test, and shares are dropping fast — they are now down more than 4% in after-hours trading.
Below is the Fed’s explanation for its rejection of Citi’s capital plan:
The Federal Reserve’s objection to Citigroup’s CCAR 2014 capital plan in part reflects significantly heightened supervisory expectations for the largest and most complex BHCs in all aspects of capital planning. While Citigroup has made considerable progress in improving its general risk-management and control practices over the past several years, its 2014 capital plan reflected a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there was not sufficient improvement.
Practices with specific deficiencies included Citigroup’s ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations, and its ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures. Taken in isolation, each of the deficiencies would not have been deemed critical enough to warrant an objection, but, when viewed together, they raise sufficient concerns regarding the overall reliability of Citigroup’s capital planning process to warrant an objection to the capital plan and require a resubmission.
And here is the statement Citi just released in response to the news:
NEW YORK–(BUSINESS WIRE)–The Federal Reserve Board (Fed) today announced that it objected to the capital plan submitted by Citi as part of the 2014 Comprehensive Capital Analysis and Review (CCAR). The capital actions requested by Citi included a $US6.4 billion common stock repurchase program through the first quarter of 2015 and an increase of Citi’s quarterly common stock dividend to $US0.05.
Citi will be permitted to continue with its current capital actions through the first quarter of 2015. These include a $US1.2 billion common stock repurchase program and a common stock dividend of $US0.01 per share per quarter. These actions are subject to approval by Citi’s Board of Directors in the normal course.
Michael Corbat, Citi’s Chief Executive Officer, said: “Needless to say, we are deeply disappointed by the Fed’s decision regarding the additional capital actions we requested. The additional capital actions represented a modest level of capital return and still allowed Citi to exceed the required threshold on a quantitative basis.
“We will continue to work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations and meet their standards on a qualitative basis as well. We have not yet made a decision as to when we will resubmit our plan.
“We clearly are being challenged to meet the highest standards in the CCAR process. Despite whatever shortcomings the Fed saw in our capital planning process, we have made tremendous progress over the past several years in enhancing our capital position and Citi remains one of the best-capitalised financial institutions in the world. We will continue to work incredibly hard to serve our clients and generate the returns our shareholders expect and deserve,” Mr. Corbat concluded.