GO
Loading...

Citi Bests Stress Tests, Discloses Buyback Plan

Thursday, 7 Mar 2013 | 9:31 PM ET
Getty Images

Where stress tests are concerned, call Citigroup "most improved."

The bank posted an 8.3 percent tier 1 common capital ratio - the highest of its peers - under the Federal Reserve's annual stress tests, which show how financial institutions would fare amid severe economic crisis.

While the tests have been carried out for three years, this is the first that it's been tackled in two, separate parts: The first, the performance of the banks on the Fed's models. The second, the Fed's sign-off on each bank's plan to return capital to shareholders.

Banks Pass Fed's Tests
CNBC's Kayla Tausche takes a look at how banks fared as the result of the Fed's stress tests.

The splitting of the tests came after Citigroup in 2012 cleared the capital hurdle, but saw the Fed strike down its proposal to disburse some of its remaining capital. The bank, as a result, categorically failed the test.

(Read More: Citigroup's Strategy to Become Global Consumer Bank)

At Citi's financial services conference in Boston this week, CEO Mike Corbat said this year, there's "no room for error."

This year, it cleared both, but chose to disclose its buyback plans ahead of the Fed's planned release, leading to much confusion among the bank's competitors. The remaining 17 banks had held their releases until the final results of all banks' capital plans are released by the Fed on March 14; however, the Federal Reserve did not preclude banks from disclosing what plans had been requested, according to a person familiar with the matter.

On the last page of a presentation discussing its internal stress-test results, Citi announced it had made a request to the Federal Reserve to repurchase up to $1.2 billion of its common equity, roughly the same amount it issues in employee stock each year. It did not request a raise to its $0.01 dividend.

(Read More: Goldman Sachs and Morgan Stanley Near Bottom of Stress Tests)

Are Fed's Banks Stress Tests Accurate?
Tony Nash, Managing Director at IHS, says the Fed's stress tests for banks are a political process. Their purpose is to paint extreme scenarios and to help people regain confidence in the banking system.

When Citigroup asked the Fed if it could disclose its request to buy back $1.2 billion in common equity, the Fed took no issue with the disclosure, according to a second person familiar with the matter.

Because the plan, although basic, was disclosed, it is expected that it passed Fed muster.

(Read More: Dow Record, How We Got Here, Where We're Going)

The hypothetical scenarios tested by the Fed, taking place over a two-year period, included a 12 percent unemployment rate, a 5 percent drop in GDP, a 20 percent drop in home prices, and a 50 percent drop in equities, as well as an instantaneous "shock" to the global financial system (still unclear what, exactly, that means).

A senior Fed official said a period of such financial duress has not occurred outside the Great Depression.

Ally Financial was the only bank not to clear the Tier 1 common capital ratio.

By CNBC's Kayla Tausche; Follow her on Twitter: @KaylaTausche

  Price   Change %Change
C
---

Banks