Fed: Citigroup fails stress test, but overall bank sector stronger

The nation's third largest bank, Citigroup, was among a handful of banks to fail the latest "stress test" conducted by the Federal Reserve.

The central bank announced Tuesday that under tough economic conditions, Citigroup, Ally Financial and Suntrust Banks all saw their Tier 1 common capital ratio, which is used to measure a bank's ability to weather losses, fall below the 5 percent minimum set by the Fed.

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However, the tests also showed that 15 of the 19 banks would be able to weather a significant economic downturn with an acceptable level of capital intact, an indication that the banking sector as a whole, hit hard by the financial crisis, is getting back on more solid footing.

All told, the tests indicate that banks are now better situated to weather tough times than they were during the height of the financial crisis in 2009, thanks to a "significant increase in capital" by those banks since the collapse, according to the Fed.

Under the stress test, the Fed tested the banks' books under a hypothetical scenario where unemployment climbs to 13 percent, equity prices are cut in half and housing prices plummet by 21 percent.

If that were to occur, the Fed estimates that the banks tested would lose a combined $534 billion during the nine quarters of the hypothetical downturn. The Fed took pains to point out that these results are not intended to forecast future bank performance, but are "deliberately stringent and conservative assessments under hypothetical, adverse economic conditions."

However, even if banks were to cut into their capital with actions like paying out dividends and buying back stocks, more than 75 percent of the nation's biggest banks would still hold capital reserves above regulatory minimums in that bleak scenario.

Stocks surged at the end of the day, after JP Morgan announced it was boosting its dividend payments to investors and buying back $15 billion in stock after clearing the stress test. Major stock indices hit their highest levels since the financial crisis as the Nasdaq closed above 3,000 for the first time in more than a decade.