Chief Financial Officer Mark Mason stated that the Citigroup Inc is pausing buybacks of its stock this quarter. This is because of the expected impact of a new capital rule related to derivatives risks. Mason said that the new rule, which the banks must adopt, will likely increase Citigroup’s risk weighted assets by $60 to $65 billion. Impact in its Common Equity Tier 1 (CET1) capital ratio by 50 to 60 basis points.
Speaking at an investor conference, Mason said that the bank is taking steps to mitigate the impact of the rule and will resume its buybacks. The Standardized Approach for Counterparty Credit Risk, is the new rule which is a complicated directive. This sets out how banks should tally some of the risk-weighted assets against which they must hold capital. The higher the tally, the more capital the banks must hold.
The impact varies by bank. And that influences the return on capital that they report, which is a key profit measure. Morgan Stanley said that it expected the rule would add about $40 billion to its risk weighted assets. But Bank of America Corp adopted the rule earlier and saw its RWA tally decrease. For Citigroup, having to suspend buybacks, even briefly, to build capital, is painful because its stock is cheap and has recently been trading for less than its book value.