Citigroup (C.N) has repeatedly breached a U.S. Federal Reserve rule designed to safeguard banks by limiting intercompany transactions, leading to inaccuracies in its internal liquidity reporting, according to a document from December seen by Reuters. This is the first time Reuters has reported these infractions. The rule, known as Regulation W, mandates that banks restrict transactions such as loans between themselves and their affiliated entities to protect depositors whose funds are insured up to $250,000 by the government.
These Regulation W violations come as Citi addresses other issues related to risk management and internal controls. In 2020, authorities deemed Citi’s risk practices “unsafe and unsound,” and in 2023, the bank faced criticism over its methods for assessing counterparty risks. More recently, Citi was fined $136 million for failing to make sufficient progress on compliance matters.
The document indicates that Citi’s response to the Regulation W breaches resulted in errors in its liquidity reporting. It highlights that the breaches, which were persistent over a long period, exposed weaknesses in Citi’s ability to identify, monitor, and prevent future violations of Regulation W. Proposed updates to policies and procedures were found to lack clear guidance, potentially failing to ensure compliance.
A separate source with direct knowledge of similar infractions, who requested anonymity, confirmed the breaches. The Federal Reserve declined to comment, and the Office of the Comptroller of the Currency (OCC) stated it does not comment on specific banks.
Regulation W, implemented by the Federal Reserve over two decades ago, is intended to prevent depository institutions from incurring losses due to transactions with affiliated entities. This includes avoiding scenarios where bad assets are transferred onto the institution’s balance sheet or deals are made at preferential rates.
Breaches of Regulation W can lead to heightened scrutiny and potential fines. For Citi, which has been under regulatory scrutiny for risk management deficiencies since late 2020, further violations could exacerbate existing challenges. The document categorized Citi’s Regulation W violations as a compliance risk and a prudential and regulatory risk, reflecting the company’s ongoing efforts to meet global banking standards.
The breaches were associated with an inter-affiliate clearing relationship, a process involving the reconciliation or confirmation of transactions before settlement through the exchange of money or securities. However, specific details regarding the affiliates involved or the nature of the transactions were not disclosed.
Consequences for Regulation W violations vary based on the frequency and severity of the infractions. Regulators might begin with minor warnings and escalate to more severe actions such as fines or public consent orders. The underlying purpose of these regulations is to prevent the siphoning of bank profits in ways that could jeopardize depositors or drain government insurance funds.
Earlier this month, Citi was fined by the Fed and the OCC for “insufficient progress” in addressing data management issues and implementing controls for managing ongoing risks. Citi has since intensified its compliance efforts and increased investments in this area, according to CEO Jane Fraser. Since October 2020, when the regulators issued consent orders over Citi’s risk management practices, Fraser has prioritized transforming the bank to meet regulatory demands. This focus has contributed to a 28% increase in Citi’s stock price this year, outperforming some of its competitors.
