Fed blow to Citi as five banks fail stress tests

THE FEDERAL Reserve last night rejected plans by Citigroup and the US subsidiaries of HSBC, Royal Bank of Scotland and Santander to buy back shares or raise dividends.

The Fed said that there were “qualitative concerns” over the five US banks’ capital plans, warning they would not allow them to survive in the event of another financial crisis. The shock decision sent shares in Citigroup, which had planned to buy back $6.4bn of shares as well as boost dividends, down over five per cent in after hours trading.

Zions Bancorp, which last week failed the first round of the two-part stress test, had its capital plans objected to because it did not meet the minimum ratio of capital against its assets after the tests.

The decision could complicate the strategy of the Royal Bank of Scotland (RBS); the group said earlier this year that it is open to a takeover of its US subsidiary RBS Citizens Financial Group, which would help improve its capital position.

Another 23 banks had their capital plans approved by the central bank without any further comment, while Bank of America and Goldman Sachs had their programmes accepted only after re-submitting them to include more conservative plans for buybacks and dividends.

The Fed emphasised that the banks have made significant improvements since the beginning of 2009, with the ratio of the highest quality capital against assets measured by their risk rising from an average of 5.5 per cent to 11.6 per cent in just short of five years.