Wednesday, March 14, 2012

Citibank Fails Stress Test, Dividends to Shareholders On Hold

Posted By on Wed, Mar 14, 2012 at 9:17 AM

The good news is that 15 of 19 large United States banks passed the Federal Reserve's most recent stress test. Of course, the bad news is that four failed, including one of the nation's biggest - Citibank.

The formal announcement is expected later this week, but The New York Times reports this morning that firms "like JPMorgan and Wells Fargo are proving resilient, as they clean up their books and the economy improves." But a few others, like Citigroup, Ally Financial, Sun Trust and MetLife "remain on shaky ground, grappling with soured mortgages."

The stress test assumed that the 19 blanks would be slammed with $534 billion of losses in just over two years. When banks don't pass muster, the Fed can force the lenders to raise more capital or postpone their dividend plans. Citigroup has already been told by the central bank that its plan to return capital to shareholders has been rejected.

Why $534 billion? The stress tests showed that an unemployment rate of 13 percent, a 50 percent drop in stock prices and a 21 percent decline in house prices would produce aggregate losses of $534 over nine quarters.

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