27th Mar 2014 10:19
Washington (Alliance News) - The US Federal Reserve on Wednesday rejected Citigroup Inc's capital plan and those put forth by four other banks as part of its annual stress test.
The Fed said in a statement it based its decision to veto the capital plans of Citigroup, the US units of Royal Bank of Scotland Group PLC, HSBC Holdings PLC and Banco Santander SA on qualitative concerns. Its decision to fail the fifth bank, Zions Bancorporation, was based on the bank's inability to meet a minimum post-stress capital requirement.
The Fed said both HSBC North America and RBS Citizens had significant deficiencies in their capital planning processes, including "inadequate governance and weak internal controls around the processes."
Deficiencies in RBS Citizens's practices for estimating revenue and losses under a stress scenario and for ensuring the appropriateness of loss estimates across business lines given a specific stress scenario.
RBS has been planning an initial public offering of Citizens later in 2014, with an aim of fully divesting the business by the end of 2016, in order to improve its own capital position and turn its attention to becoming a UK-focused retail bank.
HSBC was also highlighted for "specific deficiencies" in its practices for estimating revenue and losses for "material aspects" of its operations under a stress scenario.
In a statement Thursday, HSBC said the Federal Reserve did not object to HSBC North America's capital actions including payment of dividends on outstanding preferred stock of HSBC North America and its subsidiaries.
The Federal Reserve said RBS and HSBC are required to resubmit their capital plans and are "not permitted to implement their requested plans for increased capital distributions."
RBS shares were Thursday morning quoted at 303.10 pence, down 1.0%. HSBC shares were quoted at 606.90 pence, down 0.7%.
Major US banks, Goldman Sachs Group Inc and Bank of America Corp, passed the stress test only after reducing their requests for buybacks and dividends. The Fed approved the plans of 25 other banks.
The test of the capital plans of 30 US banks, including the US-based affiliates of foreign banks, is the second part of the annual stress testing, which the regulating central bank conducts to prevent a repeat of the 2008 financial crisis and to evaluate how the largest banks would fare in a severe recession.
The test is meant to ensure that the banks do not rely too heavily on their capital to pay dividends or buy back stock. The less capital available at a bank, the more susceptible it is to a crisis.
"Strong capital levels help ensure that banking organizations have the ability to lend to households and businesses and to continue to meet their financial obligations, even in times of economic difficulty," the Fed statement said.
The central bank found multiple deficiencies in Citigroup's planning practices and expressed concern with its ability to project losses in "material parts of its global operations" and to reflect all business exposures.
"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 Citigroup's capital planning process," the Fed said.
Citigroup Chief Executive Mike Corbat said in a statement that Citigroup is "deeply disappointed" by the rejection and said the company would "work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations."
The Fed stress test has been conducted for four years. It evaluates the capital planning processes and capital adequacy of the largest bank holding companies, including the firms' proposed capital actions such as dividend payments and share buybacks and issuances.
When looking at a bank's capital plan, the Federal Reserve considers factors including a bank's capital ratios under severe economic and financial market stress and the strength of the firm's capital planning process.
Source dpa-AFX and Alliance News
Update by Samuel Agini; [email protected]; @samuelagini
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