Citigroup, one of four large US banks fail stress tests

Citigroup was one of four large US banks that flunked stress tests aimed at seeing how they would hold up in a new economic crisis, Federal Reserve data showed.

Three others -- Ally, Suntrust and MetLife -- also failed the tests, while 15 other large bank holding companies passed the exercise, the Fed said yesterday.

As a group, though, the 19 came through strongly, said the Fed, thanks to pressure for them to boost capital over the past three years as the financial sector digs its way out of the deep 2008-2009 recession.

"In fact, despite the significant projected capital declines, 15 of the 19 bank holding companies were estimated to maintain capital ratios above all four of the regulatory minimum levels under the hypothetical stress scenario," the Fed said.

The exercise opened the door for some of the most capital-flush banks to immediately announce new or higher dividend payments to shareholders, after the Fed prevented or limited such payouts by a number of the banks last year following a similar examination.

JPMorgan Chase announced a 20 per cent dividend hike and a USD 15 billion share buyback program, while Wells Fargo also sharply boosted its planned dividend.

Bank shares meanwhile surged in the final hour of trade on the US markets after JPMorgan jumped the gun with its announcement that it had passed the tests and would up its dividend.

The Fed had originally planned to release the results on Thursday.

The central bank's test subjected the banks to another theoretical crash of the economy to see how they would hold up: a US recession marked by a 50 per cent drop in stock prices, a 21 per cent fall in housing prices, and joblessness soaring to 13 per cent, all the while being buffeted by an even worse recession in Europe.

The test saw the 19 together losing USD 534 billion over nine months.

Despite that, the Fed said, at the end of the test period the banks together had core "tier one" capital at a level that was higher than the actual level they had during the financial crisis in early 2009.

That "reflects a significant increase in capital during the past three years," it said.

Citigroup was the largest of the four that failed the test -- its tier one capital ratio level fell in the theoretical crash to 4.9 per cent, below the fed's 5.0 per cent minimal threshold.