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!