The Federal Reserve ruled Wednesday that Citigroup’s internal processes for responding to economic shocks are don’t pass muster and that the bank therefore may not increase its payouts to shareholders as it had planned to do. It is the second such “stress test” that the megabank has failed in the past three years.
Citi’s failure came as a surprise in part because the bank holds more assets in reserve than the other banking giants that received Fed approval on Wednesday. Citi reported a 6.5 percent “Tier 1 common ratio,” the complicated metric the Fed uses to gauge how much money a bank has on hand to cover its investment risks in the event that some of its bets go bad. That is not only far above the 5 percent minimum capital ratio the Fed requires, but substantially higher than JP Morgan’s (5.5 percent) and Bank of America’s (5.3 percent), each of which passed their stress tests on Wednesday.
But Citi’s internal policies for managing its various lines of business around the planet and for anticipating what would happen to them in the event of another major recession are apparently too haphazard. Rather than pointing to any one glaring failure in those processes, the Fed pointed to a variety of small problems. “Taken in isolation, each of the deficiencies would not have been deemed critical enough to warrant an objection, but, when viewed together, they raise sufficient concerns regarding the overall reliability” of Citi’s planning process, the Fed wrote. Four other banks also failed their stress tests, but Citi was the only major American firm to come up short.
The banking industry has grown even more concentrated since the financial crisis. There are more assets in fewer hands than ever before, putting more pressure on risk management and global planning processes at each of the country’s giant banking companies. The largest banks have already failed to demonstrate that they could be safely dissolved in the event of their failure under a separate regulatory process. Now the Fed is saying that the megabank with the largest stockpile of emergency capital is so disorganized that it might not survive an economic shock. That could lead to renewed calls to break up the largest U.S. financial giants.