The latest round of so-called stress tests worked out well for 15 of 19 banks. Their capital levels, the Federal Reserve concluded, are adequate enough to withstand a hypothetical financial crisis - one that the central bank says is unlikely to occur (13 percent unemployment and a stock-market decline of 50 percent). But four banks did not make the grade, including Citigroup. From the WSJ:
Of those four, Citigroup, SunTrust and Ally would see a key capital ratio fall below 5% if they continued with all of their capital plans through the end of next year, the Fed said. Citigroup said it would submit a revised capital plan to the Fed this year, as required. Ally Financial, the biggest loser of the stress tests, also known as Comprehensive Capital Analysis and Review, emerged from the harsh hypothetical economic downturn posed by Fed officials with less regulatory capital than the regulators want banks to have on hand.
Today's results show that nearly three years of economic expansion have helped U.S. banks raise profits, rebuild capital, and increase liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008 nearly toppled the financial system. "It is night and day," Jason Goldberg, senior analyst at Barclays Capital Inc. in New York, said before the announcement. "In 2009, about half the banks failed the stress test. The industry's capital position is higher today, and better quality. There is a lot less leverage."
Citi's failure came as a shock. Analysts were expecting the bank to pass, especially after it reported two years of profits. Some analysts expected the bank to be able to increase its dividend to 10 cents a share and even buy back stock. Citi's stock fell 4 percent in the after-market. For those banks that failed, the Fed can stop them from paying stock dividends or buying back their own stock. The Fed can also force them to raise money by selling additional stock or issuing debt.