Citigroup facing new regulatory knock on its living will

The Federal Deposit Insurance Corp.’s five-member board intends to vote Thursday to downgrade its rating on Citi’s data-management systems to a “deficiency” from a “shortcoming,”. (Getty Images via AFP)
The Federal Deposit Insurance Corp.’s five-member board intends to vote Thursday to downgrade its rating on Citi’s data-management systems to a “deficiency” from a “shortcoming,”. (Getty Images via AFP)

Summary

A top U.S. banking regulator is preparing to hand Citigroup a failing grade on its living-will plan, the latest rebuke for the megabank that has struggled to stay in the government’s good graces.

A top U.S. banking regulator is preparing to hand Citigroup a failing grade on its living-will plan, the latest rebuke for the megabank that has struggled to stay in the government’s good graces.

The Federal Deposit Insurance Corp.’s five-member board intends to vote Thursday to downgrade its rating on Citi’s data-management systems to a “deficiency" from a “shortcoming," people familiar with the matter said. The FDIC and the Federal Reserve had flagged the shortcoming in 2022 after a review of the resolution plan.

The Fed isn’t expected to join the FDIC in escalating its concerns about the bank’s plan, which was first submitted in 2021, the people said.

Citi said Monday it was confident in its ability to wind down properly, without the use of taxpayer funds, if needed.

“We continue to make substantial investments to modernize our infrastructure, including the work we’re doing to automate data and regulatory reporting processes," the bank said in a statement. “We have rigorous, firm-wide stress testing and resolution planning processes and we’re always working to improve and strengthen those capabilities."

Big banks are required to file living wills to lay out how they would wind down their operations in the event of a debilitating financial crisis. The reports are due every other year. Citi and its peers filed their latest plans in 2023 and are awaiting feedback.

The FDIC’s issues with Citi’s systems cover some of the same ground as the consent orders the Fed and the Office of the Comptroller of the Currency issued in 2020. Regulators have been imploring the bank to address longstanding problems with the way it manages and measures its data and risks.

On its own, the FDIC’s action this month wouldn’t bring additional penalties to Citi. But the step does serve as another reminder that Citi’s long journey out of the regulatory doghouse is fraught with occasional setbacks and subject to several government agencies who don’t always move in lockstep.

Regulators can issue serious penalties over living will deficiencies, such as lifting the amount of capital the bank must hold or capping its future growth. But a bank would only start down that road if both the FDIC and the Fed are aligned on the decision to downgrade. In 2014, both regulators failed all of the large banks’ resolution plans.

Citi’s 2021 plan wouldn’t be the first to draw a split decision from the FDIC and the Fed on whether to escalate shortcomings. In 2016, the FDIC failed Goldman Sachs and passed Morgan Stanley while the Fed reached the opposite conclusion for each.

In October 2020, the Fed and the OCC fined Citi $400 million and presented a wish list of fixes designed to detect problematic transactions, risky trades and other potential trouble spots.

Citi began to address those concerns even before the consent orders arrived, moving to accelerate Jane Fraser’s appointment as chief executive. Fraser, who succeeded Mike Corbat in early 2021, has called the bank’s plan to upgrade its systems her top priority while also acknowledging the effort will take years and cost billions of dollars.

That work continues, Fraser said in April.

“Given its magnitude and scale, the transformation is a multiyear effort to address issues that have spanned over two decades," she said during the bank’s quarterly earnings call. “We’ve made steady progress."

Despite Thursday’s expected vote from the FDIC, regulators have generally backed the moves Fraser is making to scale back the bank’s international consumer banking, according to people familiar with the matter. Those steps include multiyear plans to spin off Banamex, its Mexican consumer bank that had been buffeted by fraud allegations.

Write to Justin Baer at justin.baer@wsj.com and Andrew Ackerman at andrew.ackerman@wsj.com

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