The Regulation W violations come as Citi works to resolve separate issues in its risk management and internal controls
Citigroup has repeatedly violated a U.S. Federal Reserve rule limiting transactions between companies, leading to errors in internal liquidity reporting, according to a December Citi document seen by Reuters.
Under Regulation W, banks must limit transactions such as loans to branches they control. The rule is intended to protect depositors whose money is insured by the government up to $250,000.
The Regulation W violations come as Citi continues to address separate issues in its risk management and internal controls.
Authorities called the bank’s risk practices “unsafe and flawed” in 2020 and criticized Citi for how it measured counterparty risk in 2023. This year, regulators criticized the bank’s resolution planning and recently fined it $136 million for failing to make sufficient progress in complying with rules.
According to the document, the firm’s “follow-up response to the breaches resulted in inaccurate liquidity reporting.” The document provides a snapshot of some of Citi’s regulatory work through year-end 2023.
“We are fully committed to regulatory compliance and have a strong Regulation W framework in place to ensure issues are identified, escalated and resolved in a timely manner,” a bank spokesperson said.
Reuters was unable to determine whether the violations have been remedied.
Regulation W was enacted by the Federal Reserve more than two decades ago. Its purpose is to prevent depository institutions from incurring losses from their related entities, known as affiliates, for example by dumping bad assets onto the institution’s balance sheet or making deals at preferential rates.
According to the document, the “persistent violations revealed weaknesses” in Citi’s “ability to identify, monitor, and prevent future violations of Regulation W.” Meanwhile, “proposed revisions to policies and procedures do not appear to provide sufficiently clear guidance to employees to ensure compliance with the regulations.”
Regulation W violations at Citi were also confirmed by a separate source with direct knowledge of similar violations who was not provided with the document. The source requested anonymity because they were not authorized to speak on the record.
The Federal Reserve declined to comment. The Office of the Comptroller of the Currency (OCC) said it does not comment on specific banks.
Protecting banks
Government regulators are testing banks for compliance with Regulation W. Lenders that violate the rule could face increased scrutiny and fines, compliance experts say. For Citi, which has been in the spotlight since late 2020 for deficiencies in its risk management and controls, any further action could only compound the problems.
Citi’s Regulation W violations were categorized in the document as a compliance risk, and more narrowly labeled as a prudential and regulatory risk. The internal classifications are used by the firm to comply with global banking standards, according to a source familiar with the document’s contents.
The breaches, which occurred “over an extended period of time,” involved an inter-affiliate clearing relationship, the document said. Clearing refers to the process of reconciling or confirming transactions before they are settled through the exchange of money or securities.
Reuters was unable to provide further details about the violations, including the identity of the subsidiary or the nature of the transactions.
According to Julie Hill, dean of the University of Wyoming School of Law, the consequences of Regulation W violations can vary depending on the frequency and severity of the violations. She spoke generally about Regulation W, not specifically about Citi.
Regulators can start by issuing minor warnings and private messages that become increasingly urgent and severe. Major violations can result in fines or public punishments known as consent orders, she added.
“The idea behind all the rules and restrictions is to make sure the bank’s profits aren’t siphoned off in a way” that endangers depositors or drains the government fund, Hill said.
Reuters could not determine whether regulators were aware of Citi’s Regulation W violations or liquidity reporting inaccuracies.
Compliance risk
Earlier this month, the Fed and the OCC fined Citi for “insufficient progress” in resolving data management issues and implementing controls to manage ongoing risks.
The bank has intensified its focus on regulatory compliance and increased its investment in it in recent months, CEO Jane Fraser said at the time.
The two regulators have been warning Citi since October 2020, when they imposed sanctions, known as consent orders, on regulators over the firm’s risk management practices.
Since then, Fraser has said her top priority is to transform the bank and follow the orders of regulators. Investors have rewarded her efforts, with a 28 percent rise in Citi’s shares this year, outpacing some rivals.
(Only the headline and image of this report may have been edited by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
First print: Jul 31, 2024 | 10:37 PM IST