Fed Approves Citigroup's Capital Plan

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 [e-mail]

(END) Dow Jones Newswires

June 29, 2016 16:44 ET (20:44 GMT)

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