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Citigroup has abandoned efforts to return more capital to shareholders after opposition from the Federal Reserve, a decision likely to further strain relations between the company’s executives and investors.
The bank announced on Friday that it had “decided not to request any additional return of capital”, three months after the Fed said it was too weak to launch a multi-billion dollar share buyback programme.
Citi could have opted to scale back its request but it has instead decided to abandon it altogether. Executives feared another failure would be highly embarrassing after a series of setbacks this year, including a majority investor vote against a pay plan for Vikram Pandit, chief executive, and other senior employees.
The Fed objected to the bank’s buyback plan as part of the annual “comprehensive capital analysis and review”, a process started after the financial crisis to judge whether banks are healthy enough to withstand “stress scenarios”, including a severe global recession.
Citi was deemed to have sufficient capital to survive the stress scenario in reasonable health, which included the prospect of a surge in the US unemployment rate to more than 13 per cent. But it would narrowly fail to meet the Fed’s capital requirements if it completed its planned distribution to shareholders.
The bank was the most high profile failure in the process, though some banks, including Bank of America, did not ask for permission to increase their dividend. BofA’s plan met with Fed objections last year.
Citi executives were stunned by the Fed’s decision, which was based on the central bank’s estimates of losses in the stress scenario. Other banks – including those which passed the test – also believe that the Fed’s models were too harsh.
Fed officials have defended the exercise but agreed to hold a conference for bankers, academics and officials to discuss its models ahead of next year’s review.
Citi said the fact that it had to submit next year’s plan in January had a bearing on its decision not to pursue a capital return this year.
“We will make decisions regarding the 2013 capital plan later this year,” Citi said. “In the meantime, we will continue to build additional capital through earnings and the ongoing reduction of non-core assets.”
Citi also announced on Friday that it would redeem $5bn of trust preferred securities, a capital action approved by the Fed. Recent regulatory reform reduces the usefulness of the securities, which officials believe are not sufficient to absorb losses.
Moshe Orenbuch, analyst at Credit Suisse, said: “Citi has made significant strides in improving its capital and liquidity position and we would expect increased capital return in 2013”.
Mr Pandit had said in April that one option was “waiting until the 2013 submission” to ensure his plan was approved. He maintained that Citi was “one of the best capitalised banks in the world”.