Easy Street

Citigroup: Who Are You Calling A Failure?

Heidi Moore Mar 14, 2012

Citigroup, the bank once freely referred to as “Too Big to Fail,” and which received more money from the government than any other bank, is still, well, a little sensitive about word choice.

The bank put up a slightly snippy, defensive blog post on its site today, arguing that it did not, as been widely characterized, “fail” the Federal Reserve’s stress tests. The emphasis below is ours.

There has been a great deal of media coverage about the results of the Federal Reserve stress tests that were released yesterday. It is important to make clear that Citi did not ‘fail’ the stress test. As the report from the Federal Reserve makes clear, Citi has the capital to withstand the ‘severe stress scenario’ simulated by the Fed.

Our minimum capital ratio based on that test was 5.9%, well above the 5% minimum established by the Fed. It is only after our proposed return of additional capital was factored in that the Federal Reserve calculated our minimum capital ratio to be 4.9%. Simply put, the Federal Reserve’s objection to our capital plan does not equate with ‘failing’ the stress test. As of the end of 2011, Citi had a Tier One Common ratio of 11.8% and remains one of the best capitalized banks in the world.

Okay? Okay.


The Federal Reserve sees it differently. The Fed released the results of its stress tests yesterday, and made it clear that out of the 19 banks tested, 15 came through the stress tests well-capitalized. Four did not.

By way of background, the Fed tested the 19 largest banks in the country and asked the six biggest banks  – Goldman Sachs, JP Morgan, Bank of America, Citigroup, Wells Fargo and Morgan Stanley – to describe how their finances would be affected if another Lehman Brothers disaster took place. They also had to judge themselves in a major recession – nine straight quarters of slow growth, 13% unemployment, a 21% decline in housing prices, a stock market that could be down 50%, and a recession in Europe. You know, the usual.

So who are those four who didn’t hit the Fed’s benchmarks? Citigroup, Ally Financial, SunTrust and MetLife. Citigroup was one of the “BHCs,” or bank holding companies, that, in the worst-case scenario, would have had less than the Fed’s requirement of 5% Tier One common equity, which is a measure of a bank’s strength. The Fed provides tables to back up its claim on page 24 of its opus on the stress tests yesterday.

Overall, 4 of the 19 BHCs have one or more projected regulatory capital ratios that fall below regulatory minimum levels at some point over the stress scenario horizon, including 3 BHCs with a stressed ratio of tier 1 common equity to riskweighted
assets (the tier 1 common ratio) that falls below the 5 percent benchmark.

So the Fed says Citi did not meet the minimum benchmark, which could fairly be called “failing”; Citigroup insists it did not fail.

What gives?

It’s a fight over a dividend.

The key here is that Citi is saying that the Fed punished the bank for proposing “a return of additional capital,” which could be a dividend or a stock buyback. The Federal Reserve, perhaps made inordinately nervous by Citi’s past, put the kibosh on the idea of a dividend or buyback by insisting Citi would not survive a (theoretical) financial crisis in the future if it gave a dividend now.

Essentially, Citi wants to give its shareholders a boost by giving them a dividend — but is arguing at the same time that the dividend should have no cost to the bank’s capital holdings. It wants to go out and play like the other banks, but it also wants to say it’s getting its homework done at the same time. With the stress tests coming out so positively for so many banks, Citigroup doesn’t want to be the only big bank wearing a dunce cap.

But it’s probably not the Fed’s grades that Citi is really worried about; it’s the report card from the stock market. The bank’s stock is down over 3% today so far. The market’s perception is harder to argue with than the Federal Reserve’s.

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