Citi's Tier 1 ratio is still above a 6% threshold considered by the Fed to assure that institutions are well capitalized. But its ratio- a key measure of a bank's capital cushion- is in a downtrend. It is now below the large banks' average Tier 1 ratios of about 8%.
Tier 1 ratio = Bank's capital divided by risk-weighted assets = a gauge of the banks ability to absorb huge losses
At the end of 3Q, the ratio was 7.3%, down from 8.6% a year earlier. This creates concern among investors whether or not further write-offs will hurt cash flow and the bank's liquidity. Citi has been hurt by losses stemming from the exposure to super senior CDOs that were thought to be shielded from volatility that hit riskier CDOs. By bailing out seven SIVs and bringing the assets to its balance sheet, Citi said that the move could erode that ratio by an additional 1.6 bps. Betsy Graseck, a Morgan Stanley analyst, who rated the stock "Underweight," predicted that Citi would need to cut dividends and take further steps to protect its capital position.
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