Fed Rebuffs Citigroup on Capital Plans

The Federal Reserve has rejected Citigroup’s capital plans, effectively dashing hopes that the bank could increase its dividends and share repurchases, and dealing another blow to its recovery plans.

The Citigroup was the largest United States bank to be faulted  on Wednesday, as part of the Fed’s Comprehensive Capital Analysis and Review. The regulator blessed dividend and share repurchase plans submitted by rivals JPMorgan Chase, Bank of America and Wells Fargo.

Over all, the results of the annual test showed that most of the banking system has healed substantially since the financial crisis. The Fed used the annual test to review the capital plans of 30 large banks under a series of stressful scenarios.

Citigroup’s failure is a setback for a bank that has aggressively tried to shed risks and cut costs after receiving a taxpayer rescue five years ago. The Fed also rejected the bank’s plans in 2012. Shares of the bank fell as much as 5 percent in after-hours trading.

In its report, the Fed said there were “sufficient concerns regarding the overall reliability of Citigroup’s capital planning process.”    The central bank said that while Citigroup had made progress in the areas of “risk-management and control practices” its capital planning process “reflected a number of deficiencies.”

Citigroup, the Fed said, had failed to make “sufficient improvement” in certain areas that supervisors had previously identified as “requiring attention.”

Specifically, the Fed questioned the sprawling bank’s “ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations, and its ability to project revenue and losses under a stressful scenario.”

The capital plans of the American units of three international banks, HSBC of Britain, Santander of Spain and Royal Bank of Scotland were also rejected.

The Fed cited “inadequate governance and weak internal controls” in the capital planning process at HSBC and Royal Bank of Scotland. The Fed said Santander faced similar problems in addition to flaws with the bank’s risk management during the process.

The Fed also rejected Zion’s capital plans because the Utah bank’s minimum capital cushion fell under the regulatory minimum when tested under stress.