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12/22/2024 12:12:29 pm

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Big US Banks Pass First Round of Stress Test

Citigroup sign

The Federal Reserve's recent stress test, which included a $500 billion of combined losses scenario, showed that the biggest banks in the United States have enough capital to continue its business even if the country will face financial troubles.


The results of the first round of the Comprehensive Capital Analysis and Review (CCAR) showed that all the 31 banks that went under the test passed. 

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However, the banks are up for another challenge as the Fed is expected to announce on Wednesday whether or not it has accepted or rejected the banks' proposals to return capital to shareholders over the next two years.

The CCAR has become Washington's preferred way of keeping a watch on the banks and to ensure that no repeat of the 2008 Goldman Sachs and Citigroup incident happens. 

In 2008, the banking industry resulted in the breakdown of the country's financial system and many financial institutions were severely affected.

U.S. banks have the prerogative to manage its balance sheet and may buy back its shares, pay out dividends or increase capital. 

However, all these are subject to the approval of the Fed and if disapproved, the bank will suffer the consequences. Among those who failed last year's CCAR were Citigroup, Citizens, HSBC and Santander. 

The Fed rejected Citigroup's plan citing deficiencies and "insufficient" improvement in areas that were flagged up. 

This resulted in Citi being barred from returning $6.4 billion of capital to its shareholders through a buyback. 

The Fed also disallowed the bank from increasing its quarterly dividends on its common stock to five cents from the present one cent.

With Fed's disapproval, Citigroup shares underperformed the S&P banking sector by 12 percent, and its price book ratio is below the average of 0.8 percent for big banks.

Citigroup did not resubmit new plans but focused on passing this year's stress test.

Banks that passed the CCAR last year, however, cannot be complacent as the Fed's methods for their stress test have remained undisclosed.

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