The U.S. Federal Reserve Board has rejected the proposed capital plans of five big banks, largely due to qualitative concerns with their capital planning processes.
The Fed released the results of its annual “stress tests” on Thursday. The Fed said it has approved the capital plans of 25 bank holding companies (including BMO Financial Corp., along with U.S. giants such as Bank of America, Goldman Sachs, JPMorgan Chase & Co. and Wells Fargo & Company), but that it objected to the plans of four firms based on qualitative concerns, and another one because it did not meet a minimum post-stress capital requirement.
The firms rejected for qualitative reasons include Citigroup Inc.; HSBC North America Holdings Inc.; RBS Citizens Financial Group, Inc.; and Santander Holdings USA, Inc. It also objected to the capital plan of Zions Bancorporation because the firm did not meet the minimum, post-stress tier-1 common ratio.
The Fed’s review of banks’ capital plans evaluates the capital planning processes and capital adequacy of the largest banks, including their proposed capital actions such as dividend payments and share buybacks and issuances. It considers both qualitative and quantitative factors, including a firm’s capital ratios under severe economic and financial market stress, and the strength of the firm’s capital planning process.
In the case of Citi, its plan included a US$6.4 billion common stock repurchase program through the first quarter of 2015 and an increase of its quarterly dividend to 5¢. The bank said that it will be permitted to continue with its current capital actions through the first quarter of 2015, including a $1.2 billion common stock repurchase program and a common stock dividend of 1¢ per share per quarter.
“Needless to say, we are deeply disappointed by the Fed’s decision regarding the additional capital actions we requested. The additional capital actions represented a modest level of capital return and still allowed Citi to exceed the required threshold on a quantitative basis,” said Michael Corbat, Citi’s CEO.
“We will continue to work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations and meet their standards on a qualitative basis as well. We have not yet made a decision as to when we will resubmit our plan,” he said.
The Fed notes that U.S. firms have substantially increased their capital since the first set of government stress tests in 2009, and that trend is expected to continue.