Feds Change Annual Test to Include Asia

The Federal Reserve changed its annual set of tests for the largest banks to include the risk of a deeper slump in Asia. This would be challenging for Citigroup because it has a bigger presence in the region than its competitors.

According to the new test, Fed’s severely adverse scenario will include recessions in the UK, euro region, Japan, and China. Citigroup, the third largest bank in the US, employs thousands of people in Asia. Former Chief Executive Officer Vikram Pandit pushed for a bigger presence in the continent. He offered credit card, corporate and personal loans in China, Singapore and India.

Pandit was pushed out by the board when the bank failed to get its capital plan approved by the Fed after the last stress tests. Michael Corbat, the next CEO after Pandit, said that the bank will submit a new capital plan to the Fed by January 5.

According to analysts, the focus on Asia was the biggest change to the Federal Reserve’s tests. Citigroup has 25 percent of its revenue from Asia. Goldman Sachs Group has a buy rating on the company. Citigroup’s total Asian assets increased 33 percent to $356 million in the last three years. Credit card and retail loans went up 33 percent to $89.3 billion. The unit’s profit was $12.4 billion during the period.

Citigroup must prove to the Fed that the assets in Asia are pristine and can withstand a downturn in the region. Investors view it as a good thing when a regulator doesn’t allow them to be blinded by growth.

According to some analysts, Citigroup would be able to withstand a severe slowdown in Asia. It could be a big blow to the bank but the slump would be manageable. Erika Penala, Bank of America analysts, said that banks should not worry about the Asia stress test.