Citigroup CEO Michael Corbat was reportedly blindsided last week by the news that his bank had flunked a Federal Reserve stress test for the second time in three years. That’s troublesome on multiple levels.
Citi’s embarrassing verdict not only means that Corbat and his team failed to win the confidence of their Fed regulators, but also that they failed to build the right kind of relationships with their overseers. Frankly, this kind of news shouldn’t have arrived out of the blue.
Apparently it did. Plainly speaking, Citi failed because its leadership wasn’t smarter about what was happening with its regulators. Citi’s capital levels comfortably exceeded the Fed’s threshold, but Corbat and Citi’s directors still had to scramble and hold an emergency board meeting to figure out just what lay behind the Fed’s concern about the “overall reliability of Citigroup’s capital planning process.”
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Investors were clearly shaken by the news, too. Citigroup’s shares have fallen about 6 percent since the stress test results became public, along with the Fed’s rejection of the bank’s plan to boost dividend payouts and increase stock buybacks.
In all, five banks failed to get approval from the Fed for their capital plans. The Fed said Zions Bancorp wouldn’t have enough high-quality assets on its books at the low point of a future recession. (Zions had been hoping to boost its dividend this spring; that now seems unlikely, unless it resubmits a plan in the next 90 days that regulators find addresses the deficiencies.)
The failures at Citi and the U.S. retail banking divisions of HSBC, the Royal Bank of Scotland (RBS Citizens Financial) and Santander Holdings USA were less quantitative in nature, meaning that there’s a lot more room for regulators to use their judgment and discretion rather than simply go by the numbers. That’s both worrying and encouraging – depending on who those regulators are and how tenacious and insightful they happen to be.
Right now, it seems they’re not prepared to put up with any B.S.
The bank may feel that they’ve made strides in their relationships with regulators, but regulators think they’re not being listened to — and that kind of perception gap doesn’t augur well.
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If you’re a Citigroup investor and have held on until now, you may want to start thinking about cutting your losses sometime soon — and preparing for some, ahem, interesting discussions at this spring’s annual meeting.
The truth about the stress tests is that, while they give regulators more oversight of the country’s biggest banks – and the ability to temporarily halt plans to distribute cash in the form of dividends or buybacks – they’re far from being a panacea. Perhaps the best aspect of the stress tests is that they tell bank CEOs that they’re being watched and held accountable.