Citigroup Fails Fed Stress Test: Is It Time For a Break Up?

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Citigroup (NYSE:C) executives learned at 4:15 p.m. New York time on Tuesday that the bank had failed the Federal Reserve’s annual stress tests, but that result does not mean the institution could not withstand prolonged market stress like the financial industry experienced between June 30, 2008 and December 31, 2008 — the worst of the financial crisis. “The Federal Reserve expects large, complex bank holding companies (BHCs) to have sufficient capital to continue lending to support real economic activity while meeting their financial obligations, even under stressful economic conditions,” explained the central bank in the preface to its 2014 report. And, as the results suggest, Citigroup could not deliver.

“Surprise would be an understatement,” a top Citigroup executive told the Financial Times, describing the reaction of the bank’s leadership to the failure. Shareholders responding by bidding down shares of the bank’s stock, while some analysts called for a leadership change or a break up of the bank.

Not only did the Fed’s assessment find that Citigroup — the third largest U.S. bank by assets — had failed to sufficiently correct deficiencies it had pointed out after the 2012 test, but the central bank also took issue with the “reliability” of the bank’s financial projections under the hypothetical economic conditions of the test. Specifically, the Fed said it had concerns about Citigroup’s “ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations.” For that reason, it received a failing grade.

Wednesday saw the release of the Feds official results, and the 24 hours between executives being informed of the results via conference call and the market learning of the failure, saw anger and bafflement coursing through the bank’s leadership; it was the second time in three years that Citigroup’s capital plan for its sprawling operations fell short of the qualitative measures set out by the central bank. As a result, its plan to increase dividends and repurchase stock was denied.

Now, as sources familiar with the company’s thinking told The New York Times, bank executives are still struggling to understand the Fed’s reasoning and how best to respond just a day after the results were learned via conference call. “Needless to say, we are deeply disappointed by the Fed’s decision regarding the additional capital actions we requested,” Chief Executive Officer Michael Corbat said in a Wednesday press release.

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