Citigroup’s Latest Rejection is Unsurprising

The Federal Reserve and FDIC recently announced that Citigroup’s 2021 “living will” plan has a flaw.

The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have detected a “shortcoming” in Citigroup’s 2021 resolution plan, or “living will,” which describes how the bank would be liquidated if a catastrophic economic shock forced it into bankruptcy.

Living wills are a major feature of banking regulation enacted following the Great Recession, and are necessary for the eight largest and most complicated institutions in the United States. Citigroup was the only bank discovered to have a flaw in this newest batch of living wills. A shortcoming, according to the Fed and the FDIC, is “a weakness that raises issues about the viability of the plan and may result in additional requirements if not remedied, but is not as serious as a defect.”

While I would like Citigroup, not the only bank to have a flaw, this does not impact my optimistic long-term outlook on the company. This is why.

The problems are not new.

In their letter to Citigroup, the Fed and FDIC stated that the insufficiency is due to the bank’s inability to deliver essential financial information and statistics during a period of severe economic conditions. Failure to produce such data in an accurate and timely manner could jeopardize the bank’s ability to carry out its resolution plan, according to the two regulators.

The Fed and FDIC also stated in their letter that Citigroup corrected a flaw recognized by the agencies in its 2019 living will, and other large banks had had deficiencies in the past.

Following the publication of the allegations, Citigroup issued a statement in which it stated that it is making major expenditures as part of its transformation plan to address regulators’ data concerns. “We remain confident that we can fix this without using taxpayer cash or having a negative systemic impact,” the bank added.

While the worries voiced by authorities are valid, they aren’t exactly novel. Citigroup was slammed with a $400 million punishment and various consent orders from banking authorities in 2020, citing long-standing failures in compliance, data, and risk management.

The Fed and FDIC indicated in their letter to Citigroup addressing the insufficiency in the living will that several issues previously stated in a cease-and-desist order given to the bank in 2020 are related to doubts they have about the living will plan.

In 2020, the Fed requested that Citigroup submit a strategy outlining how management would build an enterprise-wide data quality management program capable of producing timely and accurate data.

Earlier this year, media outlets reported that authorities were dissatisfied with the speed with which Citigroup was fixing regulatory problems. Additional regulatory steps may be taken if the flaws are not resolved in a timely way, according to news reports quoting unidentified sources.

Regulators are understandably frustrated at this time, given that the concerns revealed in the consent orders in 2020 already span nearly a decade. Furthermore, it is obvious that Citigroup’s lack of appropriate internal controls resulted in major errors.

Citigroup unintentionally wired $900 million to the wrong creditors in 2020, before the consent orders, due to a manual error and out-of-date software. Citigroup made headlines yet again earlier this year when one of its traders was responsible for a flash crash that caused havoc in European stock markets.

The bull case is still ongoing.

“While I don’t know how angry regulators are with Citigroup, I do know that the 2020 consent decree has had an impact on Citigroup’s financial results.”

The bank forecasts spending to rise 7% to 8% year on year in 2022, with 2 percentage points of that increase going toward modernizing the bank and increasing risk management, as well as data governance and remediation.

Another thing to keep in mind is that these living wills appear to have been submitted in 2021, so much progress could have been achieved since then. The bank now has 10,000 people working on its transformation strategy.

Could Citigroup face more regulatory action for failing to move quickly enough? Although it is not uncommon for bank consent orders to continue for three or four years, it is feasible. However, with the stock currently trading at 60% of its tangible book value, or net worth, I believe that much of the negative has already been priced in.

For More Investment News, Click Here.

Get Your Free Actionable Trading Report Each DaySubscribe to the
I’m a Stock Trader
mailing list and get interesting stuff and updates to your email inbox.

Latest Newsletters

On this website we use first or third-party tools that store small files (cookie) on your device. Cookies are normally used to allow the site to run properly (technical cookies), to generate navigation usage reports (statistics cookies) and to suitable advertise our services/products (profiling cookies). We can directly use technical cookies, but you have the right to choose whether or not to enable statistical and profiling cookies. Enabling these cookies, you help us to offer you a better experience.