Citigroup Failed To Pass the Stress Tests
Published in Le Monde
(France) on 27 March 2014
by Stéphane Lauer (link to original)
(France) on 27 March 2014
by Stéphane Lauer (link to original)
Translated from
by Michael Krimian.
Edited by Gillian Palmer.
That is what one calls a slap. Amid the series of stress tests the Federal Reserve runs on the big American banks, on March 26, five of them have been judged too feeble to allow themselves to increase their dividends and proceed to buy their own shares.
Citigroup, the third largest bank in terms of assets, is among the bad bunch, along with three big foreign bank branches — the British HSBC and RBS, and the Spanish Santander. Zions Bancorporation, a small bank in Utah, is also part of the blacklist.
Severe Scenarios
About 30 establishments have been subjected by the Fed to a series of financial crisis scenarios to test their soundness. These measures follow the Dodd-Frank law on Wall Street reform. This legislation was implemented after the Lehman Brothers bankruptcy in September 2008, in order to avoid using public funds once again to keep the financial sphere afloat.
Only the most important banks, with more than $50 billion of assets in the United States, are concerned, that is to say, the entities considered "too big to fail" and whose demise endangers the financial system.
Concretely, the tests evaluate what would happen in a dire scenario, such as 11 percent unemployment in 2015, gross domestic product plummeting by 4.75 percent, share price losing half of its value, the real estate market falling by 25 percent, and on top of that, a recession in the eurozone and Japan.
$217.1 Billion in Losses for 30 Banks
These stress tests, created in 2010, have two parts. On March 21, the Fed evaluated the responsive capacity of these 30 banks to this catastrophic scenario, while maintaining an adequate level of real asset available.
Twenty-nine have passed. The only one that failed is Zions, whose capital-debt ratio is under the 5 percent requirement, which already disqualified the bank for the second phase of the test.
In these extreme conditions, the cumulative net loss before taxes would amount to $271.1 billion for Zions, $49.1 billion for Bank of America, $45.7 billion for Citigroup, $37.6 billion for JPMorgan Chase, and $23 billion for Goldman Sachs.
The second phase, named Comprehensive Capital Analysis and Review, whose results were published Wednesday, is a more individualized review, which evaluates the distribution and holding of assets. Even though the majority of banks have passed in general, most still have lots of work ahead.
Citigroup Shares Plummet
Citigroup was saved in 2008 thanks to taxpayers’ money, a bailout amounting to $45 billion. It is the second time in three years that the establishment failed these tests.
If the Fed admits that progress has been made in the domain of risk management and control, Citigroup’s holding asset plan still demonstrates some problems. Subsequently, Citigroup shares fell 5 percent after Wall Street's closure.
"Needless to say we are deeply disappointed by the Fed’s decision," concedes Michael Corbat, head of Citigroup. The bank "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," he added, without outlining when the bank will hand in a new plan to the central bank.
We understand Mr. Corbat’s disillusionment with the measure, for his predecessor, Vikram Pandit, was kicked out in fall of 2012 under similar circumstances: He was accused by some administrators of giving insufficient information about the real situation in the bank.
Bad Timing
Citigroup is already in the eye of the storm: The group recently uncovered fraud in its Mexican branch, resulting in a loss of $235 million in 2013. The third-largest American bank has since been under legal scrutiny by the U.S. Department of Justice for laundering money. According to the consensus established by Thomson Reuters, the group’s dividend should jump from 4 cents per share to 53 cents in 2015, after the end of the fiscal year.
Regarding HSBC and RBS, which were subjected to the test for the first time, their failures are because of poor management and almost nonexistent internal controls, declared the Fed. Same for Santander, for which the Fed highlighted with a little more severity the "generalized and important deficiency" in its risk management.
It is worth noting that Bank of America and Goldman Sachs did not pass until adjusting their capitalization plans last week.
Citigroup, the third largest bank in terms of assets, is among the bad bunch, along with three big foreign bank branches — the British HSBC and RBS, and the Spanish Santander. Zions Bancorporation, a small bank in Utah, is also part of the blacklist.
Severe Scenarios
About 30 establishments have been subjected by the Fed to a series of financial crisis scenarios to test their soundness. These measures follow the Dodd-Frank law on Wall Street reform. This legislation was implemented after the Lehman Brothers bankruptcy in September 2008, in order to avoid using public funds once again to keep the financial sphere afloat.
Only the most important banks, with more than $50 billion of assets in the United States, are concerned, that is to say, the entities considered "too big to fail" and whose demise endangers the financial system.
Concretely, the tests evaluate what would happen in a dire scenario, such as 11 percent unemployment in 2015, gross domestic product plummeting by 4.75 percent, share price losing half of its value, the real estate market falling by 25 percent, and on top of that, a recession in the eurozone and Japan.
$217.1 Billion in Losses for 30 Banks
These stress tests, created in 2010, have two parts. On March 21, the Fed evaluated the responsive capacity of these 30 banks to this catastrophic scenario, while maintaining an adequate level of real asset available.
Twenty-nine have passed. The only one that failed is Zions, whose capital-debt ratio is under the 5 percent requirement, which already disqualified the bank for the second phase of the test.
In these extreme conditions, the cumulative net loss before taxes would amount to $271.1 billion for Zions, $49.1 billion for Bank of America, $45.7 billion for Citigroup, $37.6 billion for JPMorgan Chase, and $23 billion for Goldman Sachs.
The second phase, named Comprehensive Capital Analysis and Review, whose results were published Wednesday, is a more individualized review, which evaluates the distribution and holding of assets. Even though the majority of banks have passed in general, most still have lots of work ahead.
Citigroup Shares Plummet
Citigroup was saved in 2008 thanks to taxpayers’ money, a bailout amounting to $45 billion. It is the second time in three years that the establishment failed these tests.
If the Fed admits that progress has been made in the domain of risk management and control, Citigroup’s holding asset plan still demonstrates some problems. Subsequently, Citigroup shares fell 5 percent after Wall Street's closure.
"Needless to say we are deeply disappointed by the Fed’s decision," concedes Michael Corbat, head of Citigroup. The bank "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," he added, without outlining when the bank will hand in a new plan to the central bank.
We understand Mr. Corbat’s disillusionment with the measure, for his predecessor, Vikram Pandit, was kicked out in fall of 2012 under similar circumstances: He was accused by some administrators of giving insufficient information about the real situation in the bank.
Bad Timing
Citigroup is already in the eye of the storm: The group recently uncovered fraud in its Mexican branch, resulting in a loss of $235 million in 2013. The third-largest American bank has since been under legal scrutiny by the U.S. Department of Justice for laundering money. According to the consensus established by Thomson Reuters, the group’s dividend should jump from 4 cents per share to 53 cents in 2015, after the end of the fiscal year.
Regarding HSBC and RBS, which were subjected to the test for the first time, their failures are because of poor management and almost nonexistent internal controls, declared the Fed. Same for Santander, for which the Fed highlighted with a little more severity the "generalized and important deficiency" in its risk management.
It is worth noting that Bank of America and Goldman Sachs did not pass until adjusting their capitalization plans last week.