Citigroup Breaches Fed Rules on Liquidity

Citigroup has violated a regulatory rule designed to ensure the safety of banks and made several errors in its liquidity reporting, according to confidential sources.

Why it matters: The breaches raise concerns among regulators focused on ensuring that banks are resilient enough to withstand financial shocks and could result in intensified regulatory scrutiny and possible financial penalties for Citigroup.

The details:

• The breaches revolve around a failure to meet the stringent liquidity coverage ratio (LCR) requirements, which mandate that financial institutions must hold enough high-quality liquid assets to cover net cash outflows for 30 days during a stressed scenario.
• An examination of Citi’s liquidity practices uncovered inconsistencies in the bank’s internal models used to calculate its liquidity metrics.
• The exact extent of the errors remains unclear, but sources indicate that the breaches could result in intensified regulatory scrutiny and possible financial penalties.
• Citi faces significant pressure to overhaul its liquidity reporting and compliance procedures.

The liquidity coverage ratio became a focus for regulators globally following the 2008 financial crisis, which highlighted the need for banks to have robust liquidity buffers.

The background: This latest incident adds to a series of regulatory challenges Citi has faced in recent years, underscoring the complexity and importance of stringent compliance within major financial institutions.

• Last month, the company was penalized by U.S. bank regulators with a $136 million fine for failing to make adequate progress in fixing data management issues.
• In 2020, Citigroup was also fined $400 million after regulators found “ongoing deficiencies” in its handling of risk management and internal controls.

The response: A spokeswoman for Citigroup stated, “We are fully committed to complying with laws and regulations and have a strong Regulation W framework in place to ensure prompt identification, escalation, and remediation of issues in a timely manner.”

The stakes: These ongoing regulatory litigations are significant obstacles for the bank amid its attempts to transform and streamline its operations to boost its stock price.

What’s next: Citigroup has increased its compliance efforts significantly and aims to strengthen its regulatory and compliance functions. The bank faces pressure to address these issues as it works towards its goal of growing revenues and reducing costs by 2026.

Full story

Citigroup Inc. has violated a regulatory rule designed to ensure the safety of banks and made several errors in its liquidity reporting, according to confidential sources familiar with the issue. The breaches, which were identified during an internal review, revolve around a failure to meet the stringent liquidity coverage ratio (LCR) requirements.

LCR mandates that financial institutions must hold enough high-quality liquid assets to cover net cash outflows for 30 days during a stressed scenario. A detailed examination of Citi’s liquidity practices uncovered inconsistencies in the bank’s internal models used to calculate its liquidity metrics. These mistakes have raised concerns among regulators who are focused on ensuring that banks are resilient enough to withstand financial shocks.

The exact extent of the errors remains unclear, but sources indicate that the breaches could result in intensified regulatory scrutiny and possible financial penalties. As a result, Citi faces significant pressure to overhaul its liquidity reporting and compliance procedures. Citigroup’s spokesperson declined to comment.

The liquidity coverage ratio became a focus for regulators globally following the 2008 financial crisis, which highlighted the need for banks to have robust liquidity buffers. Since then, banks have been required to comply with strict standards aimed at promoting financial stability. This latest incident adds to a series of regulatory challenges Citi has faced in recent years, underscoring the complexity and importance of stringent compliance within major financial institutions.

Citigroup Inc. is again in the headlines for repeatedly breaching the Federal Reserve’s Regulation W, which limits intercompany transactions. These breaches led to discrepancies in the company’s internal liquidity reporting, according to an internal company document reported by Reuters.

Regulation W is in place to protect customer deposits and restrict the transactions between a bank and its affiliates to protect depositors whose funds are insured by the government. This violation is part of ongoing systemic inadequacies in Citigroup’s regulatory compliance practices. Last month, the company was penalized by U.S. bank regulators with a $136 million fine for failing to make adequate progress in fixing data management issues.

In 2020, Citigroup was also fined $400 million after regulators found “ongoing deficiencies” in its handling of risk management and internal controls.

Citigroup faces regulatory scrutiny

In response to these concerns, Citigroup has increased its compliance efforts significantly.

The bank has been ordered to draw up new review plans for the Operations Control Center, which might require hiring more employees and acquiring new technologies to comply with the requirements outlined in the original consent orders. A spokeswoman for Citigroup stated, “We are fully committed to complying with laws and regulations and have a strong Regulation W framework in place to ensure prompt identification, escalation, and remediation of issues in a timely manner.”

These ongoing regulatory litigations are significant obstacles for the bank amid its attempts to transform and streamline its operations to boost its stock price. In June, CFO Mark Mason referred to 2024 as an “inflection year” and stated that by 2026, Citi aims to grow its full-year revenues by at least $6 billion with a cost reduction of at least $500 million.

However, both Mason and Fraser admitted that the bank still needed to strengthen its regulatory and compliance functions. Over the past six months, shares of Citigroup have gained 16.8% compared with the industry’s growth of 20.4%. Currently, Citigroup carries a Zacks Rank #3 (Hold).

Citigroup Inc. (NYSE:C) reportedly breached U.S. Federal Reserve’s Regulation W, resulting in liquidity reporting errors. The bank faces several regulatory issues, including a $136 million fine for data management and a $78.5 million fine from British regulators.

Citigroup’s violation of a U.S. Federal Reserve rule on intercompany transactions has led to errors in its internal liquidity reporting. The document, covering the 2023 year-end, explains that the firm’s reaction to these breaches resulted in further liquidity reporting inaccuracies, according to Reuters. This issue is being reported for the first time.

Regulation W mandates that banks limit transactions, such as loans, with their affiliates to protect depositors whose funds are insured by the government up to $250,000. The recent violations reveal weaknesses in Citigroup’s ability to monitor and prevent similar breaches in the future. Additionally, proposed policy revisions do not provide sufficiently clear guidance for employees to ensure compliance.

A bank spokesperson stated, “We are fully committed to complying with laws and regulations and have a strong Regulation W framework in place to ensure prompt identification, escalation, and remediation of issues in a timely manner.”

In 2020, authorities criticized Citigroup’s risk practices as “unsafe and unsound,” and in 2023, the bank faced scrutiny over its assessment of counterparty risks. This month, Citigroup was fined $136 million for inadequate data management, and the bank reportedly agreed with the Bourse de Montreal to settle claims of failing to meet reporting requirements. In May, British regulators imposed a hefty fine of over $78.5 million on Citigroup for trading violations.

Despite these challenges, Citigroup stock has gained more than 36% over the past 12 months.