Citigroup, other big U.S. banks flunk 'stress tests'
The Federal Reserve on March 13, 2012, issued its latest financial "stress tests" for big U.S. banks / CBS/AP
(CBS/AP) WASHINGTON - The Federal Reserve said on Tuesday that 15 of 19 major U.S. banks have passed the government's latest round of financial stress tests. Four institutions -- Citigroup (C), Ally Financial, MetLife (MTI), and (SunTrust (STI) -- fell short of the central bank's minimum capital requirements.
The Fed conducts the tests on banks every year, but this is the first time since 2009 that it released its results to the public. The central bank noted that all of the banks have built up their capital reserves since the 2008 financial crisis.
The tests are designed to make sure banks have enough cash and cash-like securities to withstand catastrophic losses in a financial crisis. The Fed wants banks to be strong enough to keep lending money to Americans and businesses.
The Fed reviewed the bank balance sheets to determine whether they could withstand a crisis that sends unemployment to 13 percent, causes stock prices to be cut in half and lowers home prices 21 percent from today's levels.
Citi's failure came as a shock. Analysts were expecting the bank to pass, especially after it reported two years of profits. Some analysts expected the bank to be able to increase its dividend to 10 cents a share and even buy back stock. Citi's stock fell 4 percent in the after-market.
For those banks that failed, the Fed can stop them from paying stock dividends or buying back their own stock. The Fed can also force them to raise money by selling additional stock or issuing debt.
The Fed released the results two days earlier than planned after JPMorgan sent out a press release saying it had passed the test.
After the first round of tests, in 2009, the Fed ordered 10 banks to raise a total of $75 billion. Bank of America (BAC) alone was told to raise $34 billion.
This year's test is more rigorous than earlier tests because the Fed wanted to be assured that the industry is prepared to meet more stringent international banking rules that go into effect in 2013.
It is also looking more closely at projected loan losses from credit cards and mortgages in an economic downturn because the Fed is worried about how another crisis would affect Americans.
The Fed wants banks to show they could not only withstand the crisis but keep lending to Americans and businesses. Restricting lending during a crisis, as the banks did in 2008, makes the economic toll worse.
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