Analysis: Is Citi safer than JPMorgan? And other stress-test questions

Sat Mar 9, 2013 12:05am EST
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By David Henry

NEW YORK (Reuters) - The newest stress tests for U.S. banks produced scores that are at odds with other measures of lenders' safety, in another sign that some institutions may be too big for regulators to understand and executives to manage.

For example, Citigroup Inc, which has been bailed out multiple times by the U.S. government, showed up on the score sheets posted by the Federal Reserve on Thursday as being clearly safer than JPMorgan Chase & Co.

That conclusion is at odds with the views of investors, bond analysts and credit-rating agencies, as well as when measured by a yardstick regulators themselves want to use in the future.

"At the end of the day, there is a legitimate question about the ability of regulators to fully evaluate $2 trillion institutions because of the complexity and exposures they have," said Fred Cannon, director of U.S. research at Keefe, Bruyette & Woods.

On Thursday, the Federal Reserve reported the latest results of the tests that began after the 2007-2009 financial crisis to determine if banks have enough capital to withstand a severe economic crisis. The Fed concluded that the banks are in "a much stronger position" than before the financial crisis in 2008.

While experts are not arguing with the fact that the banks are better capitalized now and that the system is safer than it was in the run-up to the financial crisis, some of the numbers the regulators published left analysts and bank executives groping for explanations. The test raises questions about the ability of regulators to head off the next big threat to the financial system because of the complexity of the institutions.

The results are also important as they will help the Fed decide how much capital banks can return to investors.

The report showed that Citigroup's capital, as tracked by the Tier 1 common capital ratio, would dip to 8.3 percent during two years of hypothetical stress. JPMorgan's would fall to 6.3 percent. Both numbers are better than the 5 percent minimum under current regulations, but they show Citigroup having a bigger cushion to weather losses.   Continued...

A woman walks into a Citibank branch in New York January 17, 2012. REUTERS/Shannon Stapleton