Citi under regulatory heat over repeated breaches of fed rule

Citigroup Inc. has recently come under intense scrutiny for repeatedly breaching a critical U.S. Federal Reserve rule designed to safeguard customer deposits. The infractions pertain to Regulation W, which limits the transactions banks can conduct with their subsidiaries to protect depositors whose funds are insured by the government.

According to internal documents, Reuters reported, these breaches have led to significant errors in Citigroup’s internal liquidity reporting.

The inaccuracies in liquidity reporting have raised concerns about the bank’s ability to meet regulatory standards and maintain accurate financial records.

Despite Citigroup’s efforts to address these issues, the repeated violations have exposed weaknesses in the bank’s systems and controls for regulatory compliance.

The impact of Regulation W violations

Regulation W, established by the U.S. Federal Reserve, mandates that banks limit transactions with their affiliates to protect depositors and ensure financial stability.

Citigroup’s breaches of this regulation were extensive and occurred over an extended period. The infractions primarily involved intercompany transactions that exceeded the permissible limits set by Regulation W. These transactions included loans and other financial dealings with Citi’s subsidiaries, which should have been restricted to prevent undue risk to the bank’s depositors.

The internal document from December, cited by Reuters, revealed that Citigroup’s reaction to these breaches led to further complications. Specifically, the bank’s subsequent actions resulted in significant inaccuracies in its internal liquidity reporting. These inaccuracies compromised the reliability of Citigroup’s regulatory returns, making it difficult for authorities to accurately assess the bank’s liquidity and capital positions.

The breaches were not isolated incidents but rather indicative of systemic issues within Citigroup’s regulatory compliance framework. The document highlighted “longstanding breaches” that exposed weaknesses in the bank’s ability to identify, monitor, and prevent future violations of Regulation W.

Additionally, proposed revisions to Citigroup’s policies and procedures were found to lack clear guidance for employees, further exacerbating the compliance challenges.

The Federal Reserve and the Office of the Comptroller of the Currency (OCC) have been closely monitoring Citigroup’s compliance efforts.

Despite the bank’s claims of having a strong Regulation W framework, the repeated violations suggest otherwise. The breaches have been categorised as a compliance risk, with potential prudential and regulatory implications.

Consequences and penalties

The UK Prudential Regulation Authority (PRA) imposed a substantial fine of £44 million on Citigroup for its regulatory reporting governance failings.

The PRA’s investigation revealed that Citigroup’s systems and controls for regulatory reporting were neither effectively designed nor implemented. This led to widespread and serious errors over several years, undermining the reliability of the bank’s regulatory returns.

Despite Citigroup maintaining a surplus in liquidity and capital requirements, the inaccurate returns hindered the PRA’s ability to supervise the bank effectively.

In addition to the PRA’s fine, Citigroup faced further regulatory scrutiny from the Federal Reserve and the Office of the Comptroller of the Currency (OCC). The bank was ordered to pay $135.6 million for failing to make sufficient progress on 2020 consent orders related to its risk management practices.

This year, Citi was also fined $79 million by British regulators  for control failures in its trading systems, marking one of the largest penalties ever issued in the UK for breaches in trading.

Addressing the compliance challenges

Citi’s response to these breaches has been to intensify its focus on compliance efforts. CEO Jane Fraser has emphasised the bank’s commitment to transforming its risk management practices and addressing regulatory concerns.

“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,” a bank spokesperson said.

However, the road to full compliance is fraught with challenges. The document highlights that proposed revisions to policies and procedures do not provide sufficiently clear guidance for employees to ensure compliance with Regulation W.

This lack of clarity could lead to further violations and regulatory scrutiny.

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