Citigroup and Royal Bank of Scotland Fail Federal Stress Test

A capital plan to reward investors with stock buybacks and dividends by Citigroup Inc. (C) was one of five to fail Federal Reserve stress test. The others that did not succeed were those involving the US units of Royal Bank of Scotland Group Plc. (RBS), HSBC Holdings Plc. (HSBA), Zions Bancorporation (ZIONS) and Banco Santander SA (SAN). The central bank, however, did approve plans for 25 banks, including those from Bank of America (BAC) and Goldman Sachs (GS) after both lowered their dividend and buyback requests.

Regulators have been trying to prevent another financial crisis like the one in 2008 by conducting yearly tests on the way the biggest banks would do in a similar crisis. According to analysts, banks had intended to pay out about $75 billion in excess capital to raise returns and reward shareholders. This is the second year in a row that the Fed has taken issue with certain plans.

While Citigroup requested the least capital return among the five biggest banks in the country last year after its plan was turned down in 2012, this year it could have passed on just quantitative grounds. However, the central bank found numerous deficiencies in Citigroup’s planning practices, including whether it could project revenues and losses while under stress, as well as be able to properly measure exposures.

Now, Citigroup and the other institutions that weren’t approved must turn in revised capital plans and suspend increased dividend payments until they get formal approval by the Fed. The foreign banks will not be allowed to pay greater dividends to their parent firm. And while the Fed approved the shareholder-reward plans of Goldman and Bank of America, they had to resubmit them after the strategies initially fell under minimum capital levels in the ‘severely adverse’ stress testing conditions.

Banks usually announce buybacks and dividend raises soon after the stress test results are issued. Collectively this year, banks got approval to pay out about 60% of estimated net income for the upcoming four quarters.

Last week, the Fed disclosed the way banks are projected to perform in a hypothetical recession with unemployment in this country at 11.3%, stock prices dropping nearly 50%, and the costs of homes dropping 25%. Projected losses for the 30 banks was at $377 billion over 9 nine quarters.

At The SSEK Partners Group, our securities lawyers are continuing to work with investors who suffered losses from the last economic crisis because of the negligent investment advice and inadequate broker services they received. We handle securities fraud cases involving mortgage-backed securities, residential mortgage-backed securities, auction rate securities, real estate investment trusts, non-traded real estate investment trusts, collateralized debt obligations, alternative investments, collateralized mortgage obligations, derivative securities, credit default swaps, and other investments that failed. Our securities attorneys represent clients in arbitration and in the courts.

Fed Kills Citi Plan to Pay Investors, The Wall Street Journal, March 26, 2014

Federal Reserve Board announces approval of capital plans of 25 bank holding companies participating in the Comprehensive Capital Analysis and Review, Board of Governors of the Federal Reserve, March 26, 2014

Dodd-Frank Act Stress Tests, Board of Governors of the Federal Reserve, March 24, 2014

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