Citi faces fresh Fed rebuke, consent order setbacks
February 12, 2024 – 7:46 AM PST
NEW YORK (Reuters) – U.S. regulators have asked Citigroup (C.N) for urgent changes to the way it measures default risk of its trading partners and the bank’s own auditors have found a plan to improve internal oversight to be lacking, developments that could hinder CEO Jane Fraser’s plans to revive the bank’s fortunes.
Late last year, the Federal Reserve sent Citi three notices directing the bank to address in the coming months how it measures risk of default by counterparties in derivative transactions, a source with direct knowledge of the matter said.
Separately, Citi’s internal audit unit said more work was needed in at least one instance to address problems previously raised by regulators, according to an email seen by Reuters. The work was in response to enforcement actions, called consent orders, that date back to October 2020.
In December, the internal audit unit found some of the work done to improve risk management across the bank to be inadequate, according to the email. The audit unit also found that Citi failed to meet a requirement that it have procedures in place to ensure the board and senior management receive comprehensive reports about risks across the company, the email showed.
Another banking regulator, the Office of the Comptroller of the Currency, also conducted exams in September and October to assess whether Citi had made as much progress on data integrity as it claimed, a source with direct knowledge of the matter said, requesting anonymity to discuss confidential information. Citi failed those exams, forcing it to do additional work, the source said.
The regulatory notices come as the bank works through two 2020 consent orders, in which the Fed and the OCC directed the bank to fix longstanding and widespread deficiencies in its risk management, data governance and internal controls. The enforcement actions followed Citi’s botched transfer of about $500 million to lenders of cosmetics firm Revlon in 2020. Citi has thousands of employees focused on resolving these issues.
The notices from the Fed and the problems with the separate work around the consent orders have not been previously reported. Reuters could not determine the impact these issues have had on Citi’s overall efforts to resolve its regulatory problems.
The new details provide insight into the complexity of the task facing CEO Fraser as she carries out the bank’s biggest overhaul in decades to boost profits and shares, which have lagged peers. The third-largest U.S. lender has been selling businesses and laying off thousands of employees to simplify the bank’s structure.
In a statement to Reuters, Citi said meeting its regulators’ expectations was a top priority, and it was “making steady progress simplifying and modernizing our bank.”
“Like any multi-year effort of this scale, progress isn’t linear and there are important learnings along the way that we’re incorporating into our efforts, including in the areas of regulatory reporting, infrastructure and data enhancement,” the bank said.
Citigroup shares fell almost 1% to $53.51 in Monday morning trading, contrasting with the KBW index (.BKX) of bank stocks, which gained more than 1%.
Regulatory notices and examinations are standard practices in bank supervision, said a source close to Citi who requested anonymity to discuss confidential regulatory matters.
The Fed and the OCC declined to comment.
Progress on its regulatory issues is crucial for the bank. Regulators have the authority, for example, to limit Citi’s growth and ask for changes in senior management or the board if the bank is not timely at complying with the consent orders.
Julie Hill, a professor at the University of Alabama School of Law, characterized the demand for urgent action from regulators and the incomplete compliance with prior consent orders as serious issues for any bank that could result in tougher and more costly enforcement. Hill was speaking generally about the regulatory process rather than specifically about Citi.
FED NOTICES
The three Fed notices sent to Citi late last year are called Matters Requiring Immediate Attention. The requests typically concern deficiencies and banks can have many outstanding MRIAs at any given time, but they are confidential and rarely come into public view.
The content of the three MRIAs was described to Reuters by a source with direct knowledge of them. They have deadlines of six months to a year, the source said. They instruct Citi to improve its data and governance around how it sets aside capital to account for counterparty credit risks, the source said.
Banks measure the riskiness of their derivatives business to help determine how much capital they need to set aside to withstand potential losses.
One of Citi’s MRIAs has a six-month deadline and relates to data, laying out more than a dozen issues that the bank needs to fix, the source said.
The other two have one-year deadlines. One relates to how Citi uses proxies in calculating counterparty credit risk when the data is not available, and the other relates to governance failings, specifically around lack of clarity over who is responsible in various legal entities of the bank, the source said.
Citi’s two consent orders lay out several major issues that the bank needs to resolve, with work further broken down into smaller steps. Problems with any of the steps can lead to the bank not being able to resolve the main issue even if it has made progress in other areas, according to two sources familiar with the matter.
The finding of Citi’s internal audit unit relates to a “corrective action plan” by the bank to address an issue that appears in both consent orders, calling for the leadership to have better oversight of the bank, the email showed.
The audit email also shows how the work had been delayed. The original due date on the matter was June 30, 2022, but had been revised to Sept. 30, 2023. Under a column titled ‘status’, it said, “Re-Open.”
Subsequently, Citi set a target date of July 31, 2024, to clear the audit, according to one of the sources.
Reporting by Tatiana Bautzer, Saeed Azhar and Lananh Nguyen in New York; Additional reporting from Pete Schroeder in Washington and Stefania Spezzati in London; Editing by Megan Davies, Paritosh Bansal and Anna Driver
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What specific actions does Citi need to take to improve risk management, data governance, and internal controls as outlined in the consent orders from the Federal Reserve and the OCC?
, 2024, to address the issue, according to the email.
The email also highlights the need for comprehensive reports on risks across the company to be provided to the board and senior management. The audit unit found that Citi failed to meet this requirement, indicating a lack of transparency and oversight.
In addition to the notices from the Federal Reserve, Citi also faced examinations from the Office of the Comptroller of the Currency (OCC) in September and October. These exams assessed Citi’s progress on data integrity and found that the bank had not made sufficient progress. As a result, Citi had to do additional work to meet the OCC’s requirements.
These regulatory actions come as Citi continues to address longstanding deficiencies in risk management, data governance, and internal controls. The bank has been working to resolve these issues since the botched transfer of $500 million to lenders of cosmetics firm Revlon in 2020. Citi’s efforts to resolve these problems have involved thousands of employees and significant restructuring.
The impact of the regulatory notices and the challenges in compliance with the consent orders on Citi’s overall efforts is unclear. Reuters could not determine the extent to which these issues have hindered the bank’s plans to revive its fortunes under CEO Jane Fraser.
Citi acknowledged that meeting regulators’ expectations is a top priority for the bank. In a statement to Reuters, Citi said it is making steady progress in simplifying and modernizing its operations. However, Citi’s shares fell almost 1% in response to the news, highlighting investor concerns and the potential impact on the bank’s performance.
Regulatory notices and examinations are common practices in bank supervision. However, the urgency of the actions taken by regulators and the incomplete compliance with prior consent orders raise serious concerns for any bank. Failure to comply with regulatory requirements can result in stricter enforcement and increased costs for the bank.
The details provided in this report shed light on the complex challenges faced by CEO Jane Fraser as she leads Citi’s overhaul to boost profits and shares. The bank’s ongoing restructuring efforts, including the sale of businesses and layoffs, are part of the largest overhaul the bank has seen in decades.
Ultimately, Citi’s ability to address its regulatory issues is crucial for its future. Regulators have the authority to impose limitations on the bank’s growth and demand changes in senior management or the board if Citi fails to comply with consent orders in a timely manner.
Industry experts, such as Julie Hill, a professor at the University of Alabama School of Law, view the demand for urgent action from regulators and the incomplete compliance as serious issues that can result in tougher enforcement and greater costs for the bank. These concerns apply not only to Citi but to any bank facing similar challenges in regulatory compliance.
FED NOTICES
The three notices sent by the Federal Reserve to Citi in late 2023, called Matters Requiring Immediate Attention (MRIAs), highlight deficiencies and areas that require improvement. While MRIAs are confidential, the content of these notices was described by a source with direct knowledge of them.
The notices instruct Citi to improve its data and governance related to the measurement of counterparty credit risk in derivative transactions. This entails setting aside sufficient capital to mitigate potential losses. The MRIAs outline specific issues that Citi needs to address, including data management, the use of proxies in calculating counterparty credit risk, and governance failings.
The bank has been given deadlines ranging from six months to a year to address the issues highlighted in the MRIAs. Failure to comply with these deadlines can have significant implications for Citi’s operations and regulatory standing.
In addition to the MRIAs, Citi has consent orders from the Federal Reserve and the OCC that outline major issues the bank needs to resolve. These consent orders require Citi to take specific actions to improve risk management, data governance, and internal controls. Progress in these areas is essential for Citi to resolve its regulatory problems and meet the expectations of regulators.
The findings of Citi’s internal audit unit raise further concerns about the bank’s ability to address these issues effectively. The audit unit identified a “corrective action plan” meant to address a specific issue present in both consent orders, but the email shows that the work on this plan has been delayed. This delay indicates a lack of progress and raises questions about Citi’s commitment to resolving its regulatory problems.
The challenges faced by Citi highlight the complexity and importance of regulatory compliance in the banking sector. The bank’s ability to effectively address its regulatory issues will determine its future success and standing in the industry.
Overall, the regulatory notices and examinations faced by Citi underscore the need for effective risk management and compliance in the banking sector. These actions serve as reminders for other banks to prioritize regulatory compliance and address deficiencies promptly to avoid potential enforcement actions and costly consequences.
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