Fed Approves Citigroup's Capital Plan
June 29 2016 - 4:59PM
Dow Jones News
By Christina Rexrode
Citigroup Inc. got a green light on the Federal Reserve's stress
test for the second year in a row.
The Fed on Wednesday approved the New York bank's capital plan
after determining that Citigroup could keep lending in a severe
economic downturn. The approval clears the way for the company to
raise dividends, increase share buybacks, or both.
The Fed's approval gives breathing room to Citigroup CEO Michael
Corbat. The bank had failed the test twice, including one time
during his tenure as chief executive. One of Mr. Corbat's mandates
when he was installed in the job was to improve the bank's
relationship with regulators.
The Fed's approval is also particularly important to the bank
because many investors have been disappointed by its relatively low
dividends and share price. The bank is expected to announce later
Wednesday its plans for upcoming dividend and buybacks, both of
which can increase a company's share price.
The Fed calculated that at the low point of a hypothetical
recession, Citigroup's common equity Tier 1 ratio -- which measures
high-quality capital as a share of risk-weighted assets -- would be
7.7%, above the 4.5% level the Fed views as a minimum. The new
ratio, unlike the one reported last week by the Fed in a related
test, takes into account the bank's proposed capital plan.
The bank's Tier 1 leverage ratio, which measures high-quality
capital as a share of all assets, would be 6.1% in a hypothetical
recession under the Fed's estimates, above the 4% minimum.
The bank might have also been helped by taking a more
conservative tack on its submission. Generally, the banks are more
optimistic than the Fed is about how they would fare in a severe
recession. But last week, on the first round of stress-test
results, Citigroup estimated that its ratios would fall lower than
the Fed did.
The latest stress-test result incorporates quantitative factors
assessed in data released by the Fed last week. These included a
simulation of how the bank's capital buffers would hold up under a
world-wide recession. The Fed's "severely adverse" scenario of
financial stress this year included a 10% U.S. unemployment rate,
significant losses in corporate and commercial real estate lending
portfolios, and negative rates on short-term U.S. Treasury
securities.
This second part of the test also included a qualitative
assessment by the Fed of a bank's capital-planning process and
internal controls. The Fed has the ability to object to a bank's
capital plan on either quantitative or qualitative grounds.
Write to Christina Rexrode at christina.rexrode@wsj.com
(END) Dow Jones Newswires
June 29, 2016 16:44 ET (20:44 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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