Citigroup Fails Fed’s Stress Test

Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Bank of America Corp. won approval for its first dividend increase since the financial crisis.

Lenders announced more than $60 billion of dividends and stock buybacks after the Fed approved capital plans for 25 of the 30 banks in its annual exam. Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of concerns about the quality of their processes, the central bank said yesterday in a statement. Zions Bancorporation failed after its capital fell below Fed minimums in a simulation of a severe economic slump.

The results show lenders may still face obstacles to boosting dividends and buybacks even as regulators say the firms have doubled their capital since the first public stress test in 2009. The Fed is increasing scrutiny of the industry’s controls and planning processes as concerns about capital levels wane.

“Things are improving and the banking industry has turned a corner; it just might not be as far along as the market would like,” said Joseph Vitale, a partner at law firm Schulte Roth & Zabel LLP who represents financial firms. “You’ve still got some time to go before the regulators see things as business-as-usual again.”

Higher payouts may help bank stocks continue their recent rally. The KBW Bank Index of 24 lenders advanced 4 percent this year through yesterday, compared with the 0.2 percent gain for the Standard & Poor’s 500, and the KBW benchmark beat the broader measure in three of the past four years. TRUNews