Is Citigroup Inc. (C) Really the Safest Bank? – JPMorgan Chase & Co. (JPM), Goldman Sachs Group, Inc. (GS)

Citigroup Inc. (C)The results of the latest banking stress test were strange for many as the score sheets posted by the American central bank clearly marked Citigroup Inc. (NYSE:C) as safer than JPMorgan Chase & Co. (NYSE:JPM). This is a clear example of the fact that these money center banks have grown so much that they are too big for the regulator to understand. According to Bloomberg, the conclusions drawn from the latest score sheets are at odds with credit rating agencies, bond analysts and investors.

Overall, the Fed concluded that the banks are in a much better position to withstand a severe economic crisis than they were before the 2008 crisis. However, some of the figures the regulators published raised questions amongst analysts and banks executives. According to the stress test results, Citigroup Inc. (NYSE:C)’s Tier 1 common capital ratio will fall to 8.3% if the hypothetical stress persists for two years. The Tier 1 common capital ratio for JPMorgan Chase & Co. (NYSE:JPM) will dip to 6.3% under the same scenario. Despite the fact that the ratios for both the banks are well above the minimum regulatory threshold of 5%, Citigroup appears to have a bigger cushion to sustain losses. However, this is also at odds with the calculations most of the banks made themselves. According to the calculations at JPM, its ratio should fall to 7.6%, while Goldman Sachs Group, Inc. (NYSE:GS) thought its ratio to touch 8.6%. However, Fed reported Goldman’s ratio to reach 5.8%. Only Citigroup Inc. (NYSE:C)’s results tallied with that of the results of the latest stress test.

Citigroup is the same bank that required multiple bailouts during the crisis of 2008. The prices for credit default swaps show that the broader market views JPMorgan safer than Citigroup. Besides, JPMorgan Chase & Co. (NYSE:JPM) has a higher credit rating than Citigroup.

Let’s look at the reasons for such outperformance by Citigroup in the latest stress test.

Part of the reason for Citigroup Inc. (NYSE:C)’s outperformance was its third quarter 2012 Basel 1 Tier 1 common ratio of 12.7%. This is compared to 10.4% for JPMorgan.

The Fed intends to replace Basel 1 with Basel 3 regulations. Under Basel 3, Citigroup estimates its Tier 1 common ratio at 8.6%, just about the same as the 8.4% JPMorgan Chase & Co. (NYSE:JPM) estimated. Citigroup’s Basel 1 ratio falls as the Basel 3 regulations don’t treat the bank’s deferred tax assets as favorably.

Since the regulators regard capital market operations riskier than consumer banking business, Citigroup’s smaller capital markets operations compared to JPMorgan could be one reason for the bank’s outperformance.


I believe Citigroup Inc. (NYSE:C) is just as safe as JPMorgan Chase & Co. (NYSE:JPM) but not the safest bank in America. That I say based on Basel 3 regulations, which are considered more stringent and which the Fed intends to incorporate as soon as practical. Further, I believe the latest stress test results would be of little meaning once Basel 3 is adopted.

The article Is Citi Really the Safest Bank? originally appeared on and is written by Adnan Khan.

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