Capital plans drawn up by five leading banks thwarted by Federal Reserve

Capital plans drawn up by five leading banks thwarted by Federal Reserve

Citigroup, along with RBS Citizens and Santander, two banks that have significant numbers of customers in Massachusetts are now plagued by growing concerns about their ability to tide over financial calamities.

On Wednesday, the Federal Reserve instructed these three banks along with other such as Zions Bank and HSBC to resubmit proposals detailing how they intend to pay shareholders billions of dollars after their capital plans were found to be weak by the officials. Twenty five other banks which has also submitted their proposals pertaining to raise in the dividend payouts that were estimated to be in the range of $75 billion, to the Federal Reserve got them approved after a thorough review process.

Post the global economic crisis, Federal regulators have made it abundantly clear that banks should stock enough capital in the form of assets such as investor equity and others to protect them against heavy losses and avoid bailouts using taxpayer funds in the future. The regulators have been mandated by the Congress to conduct annual checks at banks and have given them the permission to prevent banks from using stock buybacks, dividends and other ways to make capital payouts.

With the deep cost cuts and an improving economy bolstering higher profits, banks are keen on lavishing their investors with excess capital. Officials at the Federal Reserve are being extremely cautious about these plans.

Daniel Tarullo, the Federal Governor, said that they have seen a significant improvement each year in the industry's potential to estimate the capital needs. He went on to say that the supervisors and officials at the banks have to continue working harder since the regulators have decided to raise their expectations so some of the largest banks in the country can be fully prepared in case of an economic crisis.