4 U.S. banks fail stress tests

The U.S. Federal Reserve said Tuesday four major American banks failed to show they have enough capital to survive another serious downturn. The list includes Citigroup, the nation's third-largest bank.

15 pass U.S. Federal Reserve exercise

Citibank ATMs are shown in New York in January. The bank's parent firm, Citigroup, was lne of four major U.S. banks to fail U.S. Federal eserve stress tests. (Mark Lennihan/Associated Press)

Four major U.S. banks failed to show they have enough capital to survive another serious downturn, the Federal Reserve said Tuesday. The list included Citigroup, the nation's third-largest bank.

The Fed said 15 of the19 major banks tested passed. The Fed noted that all 19 banks are in a much stronger position than immediately after the 2008 financial crisis.

Still, SunTrust, Ally Financial and MetLife joined Citi in failing to meet the test's minimum capital requirements.

The Fed reviewed the bank balance sheets to determine whether they could withstand a crisis that sends unemployment to 13 per cent, causes stock prices to be cut in half and lowers home prices 21 per cent from today's levels.

Citi's failure a shock

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 three per cent 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.

Last year, the Fed allowed some banks — including JPMorgan Chase and Wells Fargo — to raise their dividends because they were deemed healthier.

The Fed has conducted the stress tests each year since 2009. This was the first time since then that the results have been made public.

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 US. Bank of America 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.