U.S. regulators have urged Citigroup (C.N) to promptly revise its methods for assessing default risk among trading partners, a matter that has drawn concern from the bank’s own auditors, potentially impeding CEO Jane Fraser‘s efforts to revitalise the bank’s prospects.
In recent months, the Federal Reserve dispatched three notices to Citi, stipulating the need to address how it gauges default risk in derivative transactions, as disclosed by a source familiar with the matter.
Meanwhile, Citigroup’s internal audit division highlighted deficiencies in the bank’s response to issues flagged by regulators, per an email viewed by Reuters.
This response pertains to enforcement actions dating back to October 2020.
The December audit revealed inadequacies in the bank’s risk management enhancements, alongside a failure to meet requirements for comprehensive risk reporting to the board and senior management.
Additionally, the Office of the Comptroller of the Currency (OCC) conducted examinations in September and October to scrutinise Citi’s progress on data integrity, revealing shortcomings that necessitated further remediation.
These regulatory directives coincide with Citi’s efforts to address two consent orders from 2020, which demanded remediation of longstanding deficiencies in risk management and data governance, stemming from a mishandled transfer in 2020.
Citi has deployed significant resources towards rectifying these issues.
The impact of these regulatory challenges on Citi’s broader remediation initiatives remains uncertain, with Reuters unable to ascertain their full implications.
These developments underscore the formidable task facing CEO Fraser as she undertakes a major overhaul to enhance profitability and market performance, involving divestitures and workforce reductions.
In response to queries, Citi affirmed its commitment to meeting regulatory expectations, emphasising ongoing progress in streamlining and modernising its operations.
Citigroup shares experienced a marginal decline in Monday trading, diverging from gains in the broader bank stocks index.
A source familiar with Citi’s operations, speaking on condition of anonymity, remarked that regulatory notices and examinations are standard procedures in bank oversight.
Progress in resolving regulatory issues is paramount for Citi, as regulators wield authority to impose growth restrictions or demand changes in senior leadership for non-compliance with consent orders.
Julie Hill, a legal scholar at the University of Alabama, underscored the gravity of regulators’ urgent directives and the bank’s incomplete adherence to prior consent orders, cautioning that such issues could lead to more stringent enforcement measures.
The Fed’s three notices, known as Matters Requiring Immediate Attention (MRIAs), highlight deficiencies in Citi’s data governance and capital allocation for counterparty credit risks.
These directives carry deadlines ranging from six months to a year.
Citi’s internal audit flagged delays in addressing corrective actions outlined in consent orders, with revised target dates stretching into 2024, indicative of ongoing challenges in meeting regulatory expectations.