Two of Wall Street’s largest lenders are questioning the Federal Reserve’s projections for their future income, the latest sign of tension around the central bank’s annual stress tests.
(Bloomberg) — Two of Wall Street’s largest lenders are questioning the Federal Reserve’s projections for their future income, the latest sign of tension around the central bank’s annual stress tests.
Bank of America Corp. and Citigroup Inc. said Monday that they are in discussions with the central bank after their own estimates differed from those of the Fed. The results of the yearly exams and projections are closely watched because they are a key factor in determining how much banks can return to investors in payouts.
The results released last week showed that the biggest 23 US firms can withstand a severe global recession and turmoil in real estate markets. Although that’s broadly a positive sign for the industry, the tests remain a flash point. Some advocates argue the exams need to be much tougher, while industry groups are girding to fight a looming overhaul.
Since taking over as the Fed’s top bank watchdog last year, Michael Barr, the vice chair for supervision, has said the central bank is considering changes that will assess more types of financial stress as part of a broad look at lenders’ capital requirements. He has said that the changes will seek to address issues raised by the recent bank failures.
Monday’s questions from two of the biggest US lenders about the Fed’s projections. adds another wrinkle. Bank of America said in a statement that it was talking to the Fed to “understand differences in other comprehensive income over the 9-quarter stress period.” Separately, Citi said it was looking to “understand differences in non-interest income.” In BofA’s case, the Fed’s projection was rosier. For some of Citi’s forecasts, it was the opposite.
A spokesman for the Fed declined to comment.
Last week, Citi announced it would raise its dividend to 53 cents from 51. Unlike most of its major rivals, Citigroup will face a higher stress capital buffer in the coming quarters, the firm said. Bank of America has yet to announce its dividend plans. JPMorgan Chase & Co., Wells Fargo & Co., Morgan Stanley and Goldman Sachs Group Inc. led US banks in announcing higher dividends last week.
In one example of the discrepancy, the Fed projected that Bank of America will post $22.3 billion in other comprehensive income over a nine-quarter period under a hypothetical set of adverse economic conditions. Bank of America, however, projects $12.5 billion for that metric during the period that began in the first quarter of this year. The Fed also expects Bank of America to record a $23 billion pretax loss during that time frame, while the company forecasts an approximate $52 billion cumulative pretax loss.
As for Citigroup, its own stress test results predicted $64.4 billion of non-interest income in the nine-quarter period. The Fed forecast $43.9 billion.
Bank of America and Citi’s shares were little changed Monday, closing around $29.20 and $46.74 ahead of the US holiday.
–With assistance from Katanga Johnson.
(Updates with details throughout.)
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