Citigroup shocked by Fed’s new warning, blow on consent orders

U.S. regulators have asked Citigroup to make urgent changes to the way it measures the default risk of its trading partners and the bank’s own auditors have found that it lacked a plan to improve internal oversight, developments that have come as the chief executive Can hinder Jane’s plans. Fraser to revive the bank’s fortunes.

Late last year, the Federal Reserve (Fed) sent Citi three notices ordering it to address in the coming months how it would handle the risk of default by counterparties in derivatives transactions, said a source with direct knowledge of the matter. How does it measure?

Separately, Citi’s internal audit unit said more work was needed in at least one case to address issues previously raised by regulators, according to an email seen by Reuters. The action was in response to enforcement actions, called consent orders, which lasted until October 2020.

According to the email, in December the internal audit unit found that some of the work done to improve risk management across the bank was inadequate. The audit unit also found that Citi failed to meet the requirement of having processes in place to ensure that the board of directors and senior management received a full report on risks across the company.

Another banking regulator, the Office of the Comptroller of the Currency, also conducted examinations in September and October to assess whether Citi had made as much progress on data integrity as it claimed, said a source with direct knowledge of the matter who declined to be named. Said while requesting to print. Discuss. Discuss confidential information. Citi failed those tests, the source said, leading to additional work.

The regulatory notices come as the bank is dealing with two 2020 consent orders in which the Fed and OCC ordered the bank to correct widespread and long-standing deficiencies in its risk management, data governance and internal controls Is. The enforcement action follows Citigroup’s failed transfer of nearly $500 million to creditors of cosmetics company Revlon in 2020. Thousands of City employees are focused on solving these issues.

Read more: They report that Citigroup has started eliminating management positions

The issues with the Fed working separately around notice and consent orders have not been previously reported. Reuters was unable to determine what impact these issues had on Citi’s overall efforts to resolve its regulatory problems.

The new details highlight the complexity of the task facing Chief Executive Fraser as she leads the bank’s biggest turnaround in decades to boost profits and shares, which have lagged behind its peers. The third-largest lender in the United States is selling businesses and laying off thousands of employees to simplify the bank’s structure.

In a statement, Citi said meeting the expectations of its regulators was its top priority and that it was “making continued progress in simplifying and modernizing our bank.”

“Like any multi-year effort of this scale, progress is not linear and the ways we are incorporating our efforts include areas of regulatory reporting, infrastructure and data improvements,” the bank said. ,

Citigroup shares fell nearly 1% to $53.51 in morning trading Monday, versus a more than 1% rise in the KBW index.

Regulatory notices and examinations are standard practices in banking supervision, said a source close to Citigroup, requesting anonymity to discuss confidential regulatory matters.

The Fed and OCC declined to comment.

Progress on its regulatory issues is important for the Bank. For example, regulators have the power to limit Citi’s growth and require changes to senior management or the board if the bank does not comply with agreed orders in a timely manner.

University of Alabama School of Law professor Julie Hill called regulators’ demands for immediate action and incomplete compliance with prior consent orders a serious problem for any bank, which could result in stricter enforcement. And expensive. Hill was speaking about the regulatory process generally and not about Citi specifically.

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Fed issues notice to Citi to satisfactorily complete audit

Three Fed notices sent to Citi late last year called matters requiring immediate attention. The requests generally relate to deficiencies and banks may have several of these requests pending at any time, but they are confidential and rarely revealed publicly.

The contents of the deficiencies were described by a source with direct knowledge of them. His tenure ranges from six months to one year, the source said. They direct Citi to improve its data and governance regarding how it reserves capital for counterparty credit risks.

Banks measure the risk of their derivatives businesses to help determine how much capital they need to reserve to withstand potential losses.

One of Citigroup’s shortcomings dates back six months and is data-related, the source said, exposing more than a dozen problems the bank needs to fix.

The terms of the other two are one year. One relates to how Citi uses metrics to calculate counterparty credit risk when data is not available, and the other relates to governance failures, particularly who is responsible across the bank’s different legal entities. There is lack of clarity on this. The source said.

Citi’s two consent orders outline a number of key issues the bank must resolve, and break down the work into smaller steps. According to two sources familiar with the matter, problems at any of the steps could leave the bank unable to resolve the core issue, even if it has made progress in other areas.

The emails show that the findings by Citi’s internal audit unit are related to a “corrective action plan” by the bank to address an issue that appears in both consent orders, which called on leaders to better oversee the bank. Has gone. Electronic.

The audit email also reveals how the work was delayed. The original due date on the case was June 30, 2022, but it was revised to September 30, 2023. Under the column titled “Status”, it said “Reopen”.

The City later set a target date of July 31, 2024, to approve the audit, according to a source.

With information from Reuters

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