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WASHINGTON, March 26 (Reuters) - The U.S. Federal Reserve on Wednesday rejected Citigroup's planned payout to shareholders because of shortcomings found in its annual check-up of the financial health of the country's biggest banks, the second time Citi was dealt a blow in the so-called stress tests.
Citi was among five banks that the Federal Reserve blocked from going through with planned payouts because of results from the stress tests.
The Fed also blocked plans for higher dividends or share buybacks submitted by the U.S. units of HSBC, RBS and Santander due to weaknesses in their capital planning processes.
Zions Bancorp's was the fifth bank whose plan were barred, though this was expected because Zions last week was the only bank to miss minimum hurdles for regulatory capital in a first tranche of the stress tests, which simulate a future crisis as severe as the 2007-09 credit meltdown.
"Both the firms and supervisors have more work to do as we continue to raise expectations for the quality of risk management in the nation's largest banks," Fed Governor Daniel Tarullo said in a statement on Wednesday.
The five banks will not be allowed to move forward with proposed raises in dividends and share buybacks, though they can continue with shareholder payouts at the same pace as they did last year.
The Fed said it approved capital plans submitted by the remaining 25 banks in this year's tests.
Two large Wall Street banks, Bank of America and Goldman Sachs, had to resubmit their capital plans after seeing their first set of stress test results.
Citigroup had failed the stress tests in 2012. Its shares fell 3 percent then after the Fed objected to its planned capital returns, which contributed to the downfall of Vikram Pandit as chief executive.
Michael Corbat, who succeeded Pandit as CEO, met with bank regulators shortly after he came into the job in October 2012, looking to bolster relationships, and had widely been expected to play it safe when it came to capital plans.
The annual tests aim to determine whether banks are robust enough to weather the next crisis. Last week, the Fed said that all 30 banks but Zions had passed a model run of a simulated crisis similar to the 2007-09 credit meltdown.
For this round, regulators looked at whether banks could carry out their planned capital distributions and maintain a buffer. The rejections indicate that officials are not satisfied with banks' preparations for a hypothetical future downturn.
The Fed did not disclose the details of banks' proposed capital plans. Banks whose plans were approved are expected to announce them soon.
(Reporting by Douwe Miedema and Emily Stephenson; Editing by Leslie Adler)