Federal Reserve

Stress tests puts focus on Citigroup's Asia assets

PUBLISHED : Saturday, 17 November, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 2:05pm


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The US Federal Reserve changed its annual set of tests for the 30 largest US banks to incorporate the risk of a deeper slump in Asia, where Citigroup has a bigger presence than its competitors.

Recessions in the euro zone, Britain and Japan are features of the Fed's "severely adverse" scenario in the new test.

The main difference from last year is a more substantial slowdown in Asia, including "a sizeable weakening of economic activity in China", the Fed said on Thursday.

Citigroup, the third-biggest US bank, employs thousands of people across Asia. Former chief executive Vikram Pandit, originally from Nagpur, India, pushed into markets across the continent, making credit card, personal and corporate loans in China, India and Singapore.

"Citi has the most obvious gross exposure to a slowdown in Asia," said David Knutson, a Chicago-based credit analyst with Legal & General Investment Management America.

"My expectation is that Citi has gone a long ways over the last six to eight months to educate the Fed on the types of risks they're taking in international markets."

Asian assets in the bank's Citicorp division, which include consumer banking and trading, jumped 33 per cent to US$356 billion in the three years to September 30, Citi said last month. Credit card and retail loans also increased 33 per cent to US$89.3 billion. The unit's profit was US$12.4 billion in that span.

Citigroup must prove to the Fed that these are "pristine" assets that can withstand a downturn in Asia, Knutson said.

"That's what you want to hear as a regulator, that they didn't allow themselves to be led down a dark path in the name of growth."

A Citigroup spokesman declined to comment.

The central bank started the tests in 2009 to restore confidence in the financial system after the worst crisis since the Depression brought down Bear Stearns and Lehman Brothers.

"There will be pain for specific banks" with exposure to Asia, said Walter Young, a director at Deloitte & Touche who focuses on stress testing.

Still, most financial firms will fare "generally better than last year", Young said. Capital levels are higher, and banks are "learning how to operate with 8 per cent unemployment", he said.