The U.S. Federal Reserve on Wednesday approved the capital plans for 25 major banks but denied its approval to five others, including that of Citigroup Inc. (NYSE:C), news reports said.

The Fed did not allow Citigroup, which was the largest American bank to have its capital plan rejected, to reward its investors with higher dividends and stock buybacks worth $6.4 billion, indicating that the bank is not ready to handle an economic crisis, as part of its annual stress test, which is conducted to measure a bank's ability to continue lending.

Meanwhile, HSBC North America, RBS Citizens Financial and Santander Holdings USA were reportedly noted by the Fed to have “qualitative” shortfalls in their capital foundations, while Zions Bancorp failed the stress tests because its basic capital ratio did not meet the minimum requirement.

The Fed said that these banks "are not permitted to implement their requested plans for increased capital distributions," adding that they "are required to resubmit their capital plans to the Federal Reserve following substantial remediation of the issues that led to the objections,” Agence France-Presse reported. 

This is the second time in three years that Citigroup has failed to get an approval for its capital plan from the Fed.

“Needless to say, we are deeply disappointed by the Fed’s decision regarding the additional capital actions we requested,” Michael Corbat, Citi’s CEO, said in a statement, adding: “We will continue to work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations and meet their standards on a qualitative basis as well.”

Tom Jalics, a portfolio manager at Key Private Bank, told the Wall Street Journal: "The Fed wasn't happy with the process Citi put together to read their risk,” adding, "It's a bit of a black eye for management, which has done a good job of cleaning up the balance sheets."

Other banks including J.P. Morgan Chase (NYSE:JPM), Wells Fargo & Co. (NYSE:WFC) and Morgan Stanley (NYSE:MS) had reportedly announced increased dividends after receiving the Fed’s approval.

"Both the firms and supervisors have more work to do as we continue to raise expectations for the quality of risk management in the nation's largest banks," Daniel Tarullo, a member of the Fed's Board of Governors, reportedly said in a statement on Wednesday, according to Reuters.

The five banks can continue shareholder payouts at current levels but will be required to change their proposals and resubmit them again if they want to increase the payouts, an option which Citigroup is reportedly considering.

"Citi needs to make this defeat into victory by improving the pace of restructuring," said Mike Mayo, an analyst at CLSA, according to Reuters. The bank's stock was down more than 6 percent in premarket trading on Thursday.