Inside Financial Services

The Fed’s Strange Takedown of Citigroup

Bank regulation isn't supposed to work this way

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The New York Times tries to make sense of Citigroup’s stress-test snafu:

Inside Citigroup, board members and senior executives expressed bafflement and anger as they prepared for the rejection to be announced by the Federal Reserve Wednesday afternoon, people briefed on the matter said. Was the Fed punishing Citigroup for a costly fraud last month at its Mexican unit? Was the regulator trying to look tough? Or was the Fed subtly pressing for a breakup of the bank-a goal of some regulators, investors and analysts for years? A day after Citigroup’s capital plan failed the Fed’s stress test for the second time in three years, bank executives were still struggling to understand the decision and how best to respond, these people said. [Emph. added]Silly me. Here I thought the purpose of prudent regulation-of the banking industry or any other-was to keep participants on the straight and narrow by providing clear guidance as to what’s acceptable what’s not. That’s why regulators write rules in the first place, and promulgate standards for things like minimum capital levels. Banks can thus know ahead of time whether they’re conducting their business the way they’re supposed to.Makes sense, right? So when a company like Citigroup gets a major regulatory spanking like the one it got Wednesday and can only respond with “bafflement,” something is not right with the regulatory process in a very basic way. Regulated entities aren’t supposed to be confused. “[T]he Fed criticized the ‘reliability’ of the bank’s financial projections under hypothetical situations aimed at testing the bank’s resilience during times of stress,” the Times notes. What’s that supposed to mean? How “reliable” can a projection be? It’s a projection! The Times also notes that the Citi rejection marked the first time Fed governors voted on“qualitative” aspects of banks’ capital plans. That’s “qualitative” as in, nothing in the actual numbers must have been especially objectionable. This is no way to regulate an industry. One can only take the Fed’s move this week as a random big-bank smackdown administered simply for the purpose of smacking down. Citi has made enormous strides in recent years in boosting its capital, shedding assets, and improving asset quality. It sailed through last year’s stress test with no problem. And yet the Fed suddenly discerns mysterious “qualitative” issues that put the company back to square one with its capital plan. This sort of arbitrariness impedes the banking industry’s ability to create credit, and is profoundly unfair to Citi’s management and shareholders. In my view, the Fed’s regulatory supervision under Dan Tarullo is a disgrace.What do you think? Let me know!

23 Responses to “The Fed’s Strange Takedown of Citigroup”

  1. Anonymous

    Whine on.
    The Fed was fine when it was bailing out the TBTF banks.

  2. Max

    I completely agree. Regulation for it’s own sake is wrong and very costly. These people are idiots.

  3. Ex bank CFO

    Right on the money! Love your comment on projections–have long felt too much emphasis on “crystal ball projections” which are, at best, useful over the very near term. Is the federal government undergoing stress testing?! I would warrant the government would/should be required to “shrink it’s activities”, since no additional “capital” (i.e., tax revenue) is to be raised! Maybe start with the CFPB?

  4. ETO

    I think the Citi crowd has a tin ear. They heard what they wanted to hear at least in part. The bank hasn’t been well run in years and this is more evidence.

  5. SW Pilgrim

    Feds don’t know what Citi is doing in addition to not knowing what they, themselves, are doing. Competition obviously explained themselves better, leaving Feds the option of hiring a guide dog or blaming CITI for its inability to make them understand their business. Unfortunately,, Mexican mess will crimp Medina Mora’s ascent to the post of senior change agent, opening the door for an outside hire with workout credentials.

  6. Ron Stuart

    I wondered how long before you would comment on this situation.

  7. eldon

    Mr. Brown,

    As a former regulator, I hope the goal is to break up large banks. I have seen firsthand that the regulatory agencies are incapable of competent regulation of large banks. Promotions for EICs at large banks and thrifts demonstrate that there is no accountability. E.G., Lawrence Carter, held lead positions at examination of WAMU, leading to the Examiner in Charge of examinations just prior to its failure, he left the EIC position to lead as EIC the conversion examination and subsequent examinations of Countrywide. Along with Dochow he was instrumental in the approval of the conversion. Although EIC just prior to major failures of these thrifts, after the merger of OTS with OCC, he was promoted from an examiner at OTS to Assistant Deputy Controller at OCC.

  8. Pat O'Brien

    The process resembles a Stalinist show trial where the terror is multiplied by the fact that the accused does not know what his transgression was. The Administration has been beating an anti-capitalist drum since 2008, this is just more of the same. ETO is right that this bank was not well run but even good banks, like M&T, are in the dark regarding what is expected.

  9. Former community bank director/CCO

    Being totally confused and left baffled following the exit interview with regulators is a common theme for bankers and directors. Corrective actions and goals for improved examinations are often left off the table of conversation and usually unclear. So glad to have retired but feel sorry for those of you still dealing with these power hungry regulators with vendettas.

  10. Joe.Gordon@wealthqb.com

    Bove mentioned on CNBC that Citi had a $400 million mistake/theft? issue in Mexico? Can you comment? Sounds like there was risk control issues.

  11. KenGreenberg

    The hens are clearly running the fox house.

    It’s great to know we have such competent regulators. They never make a mistake. It’s always “the banks.” I know it’s unrelated, but Lois Lerner takes the fifth, and the new IRS director decides not to comply with a subpoena for Lois Lerner’s emails. The same Lois who recently got a $42,000 bonus. Whatever happened over there was the Tea Party’s fault.

    It’s out of control…

  12. DSB

    Looking at the most recent Fed Y-9 performance report for Citi, the first thing that should strike you is that Citi’s loss rate is 4x that of the large bank peer group. Citi’s business model is more focused on subprime than the average for the peer group. Net losses on average loans and leases were almost 2% for Citi at the end of 2013 vs just 45bp for the large bank peers. So given this fact, you can understand why the Fed is more critical of Citi’s loss rates and capital plan than with other banks.

    And more here http://www.zerohedge.com/contributed/2014-03-27/citigroup-stress-test-rejection-really-surprise-really

  13. Al

    I completely disagree. The Fed’s lack of articulation is its strength because it forces bank management to think in terms of principles, rather than methods of gaming metrics. The Banamex issue is CRAZY. The low financial consequences are simply a result of luck. As Maurice Greenberg knew, when you operate a multinational financial corporation, you have to impose your risk management culture onto the foreign based management. You have to constantly push back against the information asymmetry inherent to the Citi model.

  14. RDM

    Tom – once again you have nailed it. The quote in the FT that betrays the wrong-mindedness of the Fed: to paraphrase, the Fed does not want to articulate the CCAR rules because they do not want the banks to study for the test. Really? The justicial system lays out clear rules and they enforce them. Why is there a different standard for the Fed. Define a prudent standard and then demand that it is met. My geuss is that the academics in the Fed have no clue what the standards should be, they just like to opine. The fish rots from the head down and that would be Dan Tarrulo

  15. Anonymous

    Tom you should ask them how long it takes them to close their books by business unit and on a fully consolidated basis.

  16. Jim

    And what is the credible reason why poor beleaguered Citi is the target and not JP Morgan, Bank of America. Wells Fargo.

    Only two banks failed the test.

    If you can get a passing grade when the curve is generous, then something is wrong.

  17. Phil

    Well said Tom. Here in 2014 the regulators say Citi does not have an appropriate capital plan, yet in 2006, as the financial system was going over a cliff, where was the criticism?

  18. stays72

    “What’s that supposed to mean? How “reliable” can a projection be? It’s a projection!” Tom, you are such a worthless analyst. A major financial institution that is dependent on government insurance and ultimate bailout has an obligation to the taxpayers to be accurate with their projections. If they are not accurate with their projections, there should be a change in management. And since the current Citibank executives are “struggling to understand the decision,” there is ample evidence that they are in over their heads. As you are with your pitiful analysis. Stick to something you know about, like taxpayer bailouts of the institutions you so ineptly vet.

  19. retired banker

    You are dead on. Citizens decision was ridiculous, subjective and unfair. The U.S. bank regulators are basically incompetent. They are always a day late and $ short as evidenced by multiple banking crises over the years they had no clue were coming. In mid 2000′s as asset quality and underwriting standards were falling apart, all they cared about was BSA/AML and filling out CTR’s. They beat the he’ll out of the small community banks and try to micro-manage everything. It is only a matter of time before the next crisis completely blindsides both the Fed and OCC and they and they overreact with another round of regulation overkill to further goal of having no banks smaller than $10 billion.

  20. tom brown

    stays72,
    do you think anyone could have reasonably predicted the losses from the last recession? No! home prices declining nationally more than any reasonable prediction I saw. By definition, you cannot be “accurate” in making predictions. If so, Warren Buffett would be out a billion dollars on all the smart analysts who made their predictions on the NCAA tournament games. Let’s live in the real world.

  21. Former large bank CEO

    Big losers in this new world of unpredictable regulation are consumers and small business. They are being driven out of banking system by overreaching unpredictable regulation and more and more rules by regulators with unintended consequences. Credit is almost nonexistent for small business due to new environment. It is choking economy and hurting job generation. The American public and the regulators love flogging the banks with little knowledge unintended consequences.

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