For the get-tough Fed, giving Citi some stress is just a start

By Roy C. Smith

But the real story may be that the Fed, itself under new management, truly wants to be a different type of regulator – one that is going to be strict, proactive and controlling.

They might well protest: “We are no longer the overly aggressive, run-amok bank we were in the past. We’ve totally changed our board, replaced our CEO twice, shrunk our balance sheet by 20% by selling off $700 billion of non-core assets (including a large, well-loved brokerage business), laid off 50,000 employees, reduced leverage from 18.5 times equity at its peak in 2007 to 10 times today, increased deposits as a percentage of assets from 38% to 51%, and restored $13.7 billion of profits. No other major US bank has restructured itself since the crisis as much as we have.”

The question comes after the Federal Reserve’s unexpected rejection of Citigroup’s plan to increase dividends and buy back some stock following its annual bank stress test. The bank also failed a similar stress test in 2012, an event that contributed to the replacement of Vikram Pandit by Michael Corbat. This time, however, Citigroup’s under-stress capital ratios were well above minimums and exceeded those of its peers.

Being allowed to boost its quarterly dividend and repurchase some stock were key short-term goals of the new Citigroup management team. All of its peers passed the tests and were allowed to increase dividends. So why did the Fed fail only Citigroup – for “qualitative” reasons – and deny its request for a modest increase in quarterly dividends (to five cents a share, from one cent)?

Read full article as published in Financial News.

Roy Smith is the Kenneth G. Langone Professor of Entrepreneurship and Finance and a Professor of Management Practice.