Shares of Citigroup (NYSE: C) fell more than 4 percent Wednesday after the Federal Reserve said the No. 3 U.S. bank flunked a "stress test" of its financial viability.

At the close, the shares of Citigroup, which owns Citibank, fell $1.24 to $35.21, down 3.4 percent, lowering its market capitalization to about $103 billion. By contrast, shares of JPMorgan Chase (NYSE: JPM), the largest bank, rose slightly after Tuesday's shapr gains while those of Bank of America (NYSE: BAC), ranked No. 2, rose 4 percent.

Based in New York, Citigroup not only controls the third-largest bank but thanks to its 1998 merger with Travelers Group (NYSE: TRV) became the world's biggest financial services company, with insurance, mutual funds and other services. It spun off Travelers in 2002.

Besides hurting shareholders, flunking the "stress test - a Federal Reserve look at how Citigroup would handle a severe global recession that included a 13 percent U.S. unemployment rate, huge declines in stock and housing prices and "market shock" that could be caused if a European bank collapsed - is a huge embarrassment.

The reason is that Citigroup wouldn't have been able to cope with the crisis and might need help from the Federal Reserve again. Its Tier 1 common capital ratio fell to 4.9 percent, below the required 5 percent. Its leverage ratio would be a mere 2.9 percent, the lowest of 19 banks examined by the Fed.

The weakness may further damage Citigroup's reputation with its corporate clients, who might prefer to borrow elsewhere, and panic its retail clients. Citibank reported approximately 200 million retail accounts in 160 countries as of Dec. 31.

Some of the banks that passed the stress tests easily, like JPMorgan Chase, were permitted to increase their dividends. The biggest bank boosted its dividend 20 percent to 30 cents a share from a quarter and also announced plans to buy back $15 billion worth of shares.

Citigroup Chairman Dick Parsons, 63, though, had predicted passage of the test and told the Financial Times last week, "We intend to move forward with some force in 2012."

Instead, Citigroup CEO Vikram Pandit, 55, wrote employees Wednesday, "We will work with the Federal Reserve to formulate a plan that returns meaningful capital while satisfying our regulators."

Pandit also wrote the Fed's decision  "was very disappointing."

To be sure, Citigroup wasn't the only bank that failed: the others were MetLife (NYSE: MET), Ally Bank and SunTrust Banks (NYSE: STI). MetLife shares plunged nearly 6 percent while SunTrust's were up about 5 percent at the close.

During the 2008 financial crisis, President George W. Bush and Treasury Secretary Henry Paulson devised a bank bailout that pumped $700 billion into the banking system and made the U.S. government a major bank shareholder.

The Treasury pumped $45 billion into Citigroup, which held millions of non-performing mortgages, and held its interest until Dec. 2010, when it sold its remaining shares for $10.5 billion.

Despite the bailout, Citigroup shares have been a disaster for long-term investors. While they have gained nearly 35 percent in 2012, over the past year, the shares have dipped 22 percent. Since 2007, they've plunged 93 percent and 92 percent over 10 years.

Citigroup reported 2012 net income rose slightly to $11.3 billion on revenue of $78.4 billion, from $10.6 billion on revenue of $86.6 billion in 2010.

For the bank, Citicorp, revenue fell 2 percent, to $64.6 billion because gains in consumer banking and transaction services were offset by declines in securities and banking revenue.