CLSA analyst Mike Mayo called Citi's rejection "a shocker."

The Fed announcement caused investors to re-assess bank stocks across the board. Citigroup's stock was down more than 5 percent in after-hours trading.

CLSA analyst Mike Mayo called Citi's rejection "a shocker."

"Citi needs to make this defeat into victory by improving the pace of restructuring," Mayo wrote in a note. That would include selling off businesses and
holding managers more accountable, especially after executives had offered reassurances about how the bank is monitoring its finances, Mayo said.

The Fed said that the capital plans of Citigroup fell short in some areas, including its ability to forecast revenues and losses in parts of its global
operations, should they come under economic stress.

As with Citigroup, the Fed said it found deficiencies in the capital plans of HSBC North America Holdings, RBS Citizens Financial Group, Santander Holdings
USA and Zions Bancorp. The central bank, however, approved requests outright from the other 25 tested banks, which included JPMorgan Chase, Wells Fargo and
Morgan Stanley, in addition to Bank of America and Goldman Sachs

Before the financial crisis, Citigroup's dividend peaked at $5.40 per quarter in 2007. After eliminating its dividend altogether in 2009, it reinstated a
payout in June 2011 at a token penny per quarter, where it remains.

The dividends and share buybacks that the Fed weighed are important to ordinary investors, and banks. The banks know that their investors suffered big losses
in the financial crisis, and they are eager to reward them. Some shareholders, especially retirees, rely on dividends for a portion of their income.

But raising dividends costs money. The regulators don't want banks to deplete their capital reserves, making them vulnerable in another recession. Buybacks
also are aimed at helping shareholders. By reducing the number of a company's outstanding shares, earnings per share can increase.

A handful of banks that won approval from the Fed to raise dividends quickly announced plans to reward investors.