Fed’s Citi logic is hard to follow
By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions epxressed are his own.
Citigroup boss Vikram Pandit undoubtedly deserves some of the digs heās getting for his bankās inability to pass the Federal Reserve stress test. He spent much of the past year talking up the bankās risk-management nous and the prospect of returning capital to shareholders this year. And in fact, Pandit appears to have miscalculated and may have tried to give back too much. But itās also hard to follow some of the logic behind the regulatorās decision to flunk the recovering mega-bank.
According to the Fedās loan loss assumptions, only Capital One will be harder hit than Citiās overall rate of 11.2 percent. Considering Citiās past performance, both in the most recent financial crisis and so many others over the past couple of decades, the extra caution is warranted. And Pandit still has a bundle of crummy mortgage assets stuck in his bad bank, Citi Holdings.
Some of the haircuts nevertheless look high. The Fed model shows Citi losing more on first-lien mortgages, second-lien mortgage and home equity loans and commercial and industrial lending than virtually all its peers. And the watchdog imposed a 23 percent loss rate on āother consumerā assets. For Citi, thatās mostly loans to affluent borrowers in Asia and Latin America, and about a third related to a portfolio of OneMain loans in North America, which itās trying to sell.
Beyond that, itās tough to make the Fedās capital figures add up. Revealing extra stress-tested numbers, like risk-weighted assets, would help. Absent that, assume Citiās remain at around $1 trillion. Applying the regulatorās assumed 5.9 percent Tier 1 common ratio yields $58 billion of common equity.
But simply deducting from Citiās current common equity the overall $50 billion pre-tax loss the Fed projects, the number comes out $6 billion higher. That would be enough to pass the stress test, distribute $10 billion of capital and be left with the same 5.4 percent ratio as JPMorgan. Whatās more, based on past recessions, itās likely that Citiās risk-weighted assets would actually fall, adding even more of a buffer.
Of course, without more to go on, itās hard to know for sure. But it does at least make Panditās push to return capital look a bit less worrisome.