“The Federal Reserve’s New York office indicated to Citigroup Inc. C +0.15% that the bank would have more time to fix certain “stress test” planning problems before Fed officials in Washington last month gave it a failing grade, said people close to the company.”

“The divergent messages from different parts of the Fed were a major reason why Citigroup executives were taken aback when the bank’s capital plan, which included dividend increases and more stock buybacks, was rejected on March 26, these people said. The surprise move sent Citigroup stock reeling, and the bank will likely miss a key profitability goal for next year because of the rejection.”

“The Federal Reserve Bank of New York had agreed to give Citigroup a 2015 deadline to address a series of shortcomings identified by the regulator in the wake of the 2013 test, the people said. The third-largest U.S. bank by assets last year passed the Fed’s annual stress tests of large banks’ financial health.”

“But Fed officials in Washington made the decision to reject Citigroup’s capital plan this year partly because the company hadn’t made enough progress on those same issues, they added.”

“Spokesmen for Citigroup and Fed officials in Washington and New York declined to comment on any conversations.”

“The episode is the latest in a series of communications problems surrounding the yearly assessment of the banking industry that have heightened tensions between the largest financial institutions and their overseers. Banks have complained privately for years about premature test leaks, misunderstandings about when certain information could be disclosed and wide gaps between the banks’ calculations and the Fed’s.”

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Read full Wall Street Journal article here.