|Credit: USA Today|
In recent developments, Bank of America and Citigroup have engaged in discussions with the Federal Reserve regarding variations between the central bank’s annual stress test results and the lenders’ own forecasts. These talks aim to address and resolve the differences in projections. Both banks seek to understand the reasons behind the diverging outcomes to ensure accurate assessments and align their strategies accordingly. The outcome of these discussions will play a significant role in determining the future course of action for Bank of America and Citigroup.
Bank of America’s Dialogue with the Federal Reserve
Understanding Differences in Other Comprehensive Income
Bank of America has initiated discussions with the Federal Reserve to gain insights into the disparities observed in other comprehensive income over the 9-quarter stress period. The bank aims to reconcile the regulator’s Comprehensive Capital Analysis results with its own Dodd-Frank Act stress-test results. These conversations seek to provide clarity on the reasons behind the discrepancies and ensure accurate assessments of the bank’s financial position.
Rosier Projection by the Federal Reserve
Notably, the Federal Reserve’s projection presents a more favorable outlook for Bank of America. However, certain aspects of Citigroup’s forecasts contradict the regulator’s expectations, highlighting the variations between the two.
Citigroup’s Engagement with the Federal Reserve
Addressing Differences in Non-Interest Income
Citigroup has also initiated a dialogue with the Federal Reserve to understand the differences in non-interest income during the same period between the regulator’s CCAR results and the bank’s own Dodd-Frank Act stress-test results. These discussions aim to shed light on the underlying reasons for the disparities and ensure a comprehensive understanding of Citigroup’s financial standing.
Seeking Clarity for Dividend Plans
The discussions with the Federal Reserve hold immense significance for Bank of America, as they are crucial for resolving the discrepancies and enabling the bank to proceed with its dividend plans. Notably, several prominent US banks, including JPMorgan Chase, Wells Fargo, Morgan Stanley, and Goldman Sachs, announced increased dividends following the successful completion of the Fed stress tests. In contrast, Bank of America has not disclosed any similar moves, emphasizing the importance of addressing the inconsistencies identified during the stress tests.
Analyzing the Discrepancies
Bank of America’s Other Comprehensive Income
One instance of the observed discrepancy involves Bank of America’s other comprehensive income projections. While the Federal Reserve estimates that the bank will generate $22.3 billion in other comprehensive income over a nine-quarter period under hypothetical adverse economic conditions, Bank of America projects a figure of $12.5 billion for the same metric during the first quarter of this year and onward. Furthermore, the Federal Reserve expects the bank to record a $23 billion pretax loss during the stress period, whereas Bank of America forecasts an approximate $52 billion cumulative pretax loss.
Implications and Awaited Clarity
Analysts from Piper Sandler, led by R. Scott Siefers, have highlighted the potential implications of these discrepancies. The analysts noted that Bank of America’s internal test suggests significantly less capital benefit from AOCI (Accumulated Other Comprehensive Income) included in the bank’s capital compared to the Federal Reserve’s projections. Even without considering this benefit, the bank’s capital could potentially remain below the 2.5 percent minimum stress capital buffer threshold. However, clarity is awaited before Bank of America makes any capital-related announcements.
Citigroup’s Non-Interest Income
Regarding Citigroup, the stress test results revealed a discrepancy in the non-interest income projections. While Citigroupforecasts $64.4 billion of non-interest income over the nine-quarter period, the Federal Reserve’s projection stands at $43.9 billion. This significant difference highlights the need for further investigation and understanding of the factors contributing to the variation.
The Importance of Stress Tests
Each year, the Federal Reserve conducts stress tests on major banking institutions to assess the resilience of their balance sheets in the face of severe economic stress and market turbulence. The results play a crucial role in determining the banks’ ability to withstand adverse conditions and ensure the stability of the financial system. The stress test findings for the current year have instilled confidence in the banking industry, particularly after a challenging first half of the year.
Strengthening Confidence in the Banking Sector
The stress test results have demonstrated that all 23 major US banks examined have the capacity to weather a severe global recession and real estate market turmoil. The assessments indicate that these banks possess sufficient capital to absorb potential losses of up to $541 billion, even under a doomsday scenario with 10 percent unemployment and a 45 percent drop in the stock market.
These favorable stress test results have restored confidence in the banking sector, setting the stage for banks to return significant capital to investors through dividend payments and stock buybacks. Typically, banks announce their capital plans alongside an updated CET1 ratio, which compares a bank’s capital against its assets.
In light of these developments, Citigroup has announced an increase in its dividend from 51 cents to 53 cents. Notably, unlike most of its major competitors, Citigroup will face a higher stress capital buffer in the coming quarters. On the other hand, Bank of America has yet to disclose its dividend plans, underscoring the significance of the ongoing discussions with the Federal Reserve to address the observed discrepancies.