Fed rejects payment, buyback plans from five U.S. banks

WASHINGTON – The Federal Reserve said Wednesday it rejected plans by Citigroup Inc. and four other large U.S. banks for dividend payments and stock buybacks after annual stress tests.

Those tests raised questions about weaknesses in the risk-planning processes of Citi and three other banks. And the Fed rejected the capital distribution plan of one firm, Zions Bancorp of Salt Lake City, because of concerns about its financial health during an extreme financial downturn.

Overall, 25 of the 30 biggest banks received regulatory approval to pay back money to shareholders after the tests indicated the firms could withstand a severe economic shock even after shedding that capital.

Bank of America Corp. and Goldman Sachs Group Inc. received approval only after scaling back their capital distribution plans in the past week, allowing the banks to pass a key test of financial soundness.

Zions was the only bank whose plan was rejected because it would leave the bank at risk of failure in a deep recession.

The company was the one bank that effectively failed the first round of stress tests last week. Those tests did not take into account this year’s dividend and stock-buyback plans.

The other three banks that, along with Citigroup, had problems in their planning processes were HSBC North America Holdings Inc., RBS Citizens Financial Group Inc. and Santander Holdings USA Inc.

The Fed said those four banks showed weakness in drawing up their capital distribution plans, such as how they assess risk and model potential losses.

Those four banks can’t increase their dividend payments or stock buybacks this year but are allowed to duplicate last year’s distributions when they resubmit their plans to the Fed for approval.

Fed officials said this year’s results showed that the nation’s largest banks now were better able to handle a deep recession than they were when the first stress tests were done in the aftermath of the 2008 financial crisis.

“With each year, we have seen broad improvement in the industry’s ability to assess its capital needs under stress and continuing improvements to the risk-measurement and -management practices that support good capital planning,” said Federal Reserve Gov. Daniel K. Tarullo, who oversees the central bank’s regulatory functions.

“However, both the firms and supervisors have more work to do as we continue to raise expectations for the quality of risk management in the nation’s largest banks,” he said.

Bank of America and Goldman Sachs reduced their planned capital distributions to shareholders after getting the results from the first round of this year’s tests last week. Under their original distribution plans, both firms would have had too much leverage, the stress tests found.