Fed bars shareholder payouts from Citi, four others

Wed Mar 26, 2014 7:16pm EDT
 
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By Emily Stephenson and David Henry

WASHINGTON/NEW YORK (Reuters) - The Federal Reserve on Wednesday rejected Citigroup Inc's plans to buy back $6.4 billion of shares and boost dividends, saying the bank is not sufficiently prepared to handle a potential financial crisis.

The decision marks the second time in three years that Citigroup has failed to win the Fed's approval for its plan to return money to shareholders, known as the "capital plan."

Officials at the bank never saw the rejection coming, a source close to the matter said on Wednesday.

The rejection underscores that whatever strides Citi's chief executive, Michael Corbat, has made in fixing the bank's difficulties, he still has work to do. Shares of Citigroup, the third-largest U.S. bank, fell 5.4 percent to $47.45 in after-hours trading.

Since taking the reins at the bank in 2012, Corbat has been working hard to cultivate close relationships with regulators in Washington. His predecessor, Vikram Pandit, had a famously testy relationship with the Federal Deposit Insurance Corp's then chairman Sheila Bair, among other regulators.

But even after mending fences in Washington, Corbat was blindsided by the Fed's decision to nix his plan for paying out money to shareholders. His first hint that something might be awry with the bank's capital plans came last week, when the Fed disclosed its views of how global turmoil would affect the bank's capital levels, the source said. The Fed's projections were much less rosy than Citi's.

The bank, like its competitors, faces two opposing goals. It wants to have large amounts of capital to please regulators; it also wants to please its shareholders, and high levels of capital weigh on profitability.

Citi was one of five banks whose payout plans were rejected by the Fed on Wednesday. Three were the U.S. units of European banks. The fifth, Zions Bancorp, was expected because it was the only bank last week to fail a model run of a simulated crisis similar to the 2007-09 credit meltdown in the first part of the Fed's stress tests.   Continued...

 
A Citi sign is seen at the Citigroup stall on the floor of the New York Stock Exchange, October 16, 2012. REUTERS/Brendan McDermid