Citi’s travails come at a critical time for the banking industry
The push to let big institutions police themselves has observers worried
Brooke Masters
For Citigroup, the past few weeks have not exactly been kind. Just before Christmas, the US bank had to shell out $11.5m over a faulty data feed that caused its brokers to mislead retail customers about what analysts thought of specific stocks. For four solid years, Citi’s computer system spat out inaccurate or incomplete information on 1,800 stocks to its salespeople. In the worst cases, Citi brokers told investors that companies were rated “buy” when in fact they were considered “sell”.
A week later, the Office of the Comptroller of the Currency hit Citi with a $70m penalty for a completely different issue. It said the bank had failed to fix problems with its anti money laundering programmes, despite signing a consent order promising to do so back in 2012. The bank says it is precluded from discussing details, but Citi’s AML processes still are not up to scratch today.
To make matters worse, the bank’s leaders have also estimated that its profits will take a $20bn hit from new US tax law when it announces results next week — far more than most of its Wall Street competitors.
As enforcement cases go, the two recent ones are small potatoes. The fines are tiny when compared with the billions of dollars big banks have shelled out for rigging interbank lending rates and foreign exchange benchmarks. And the actual harm done is strictly limited. The analyst case brought by Finra, the industry regulator, includes $6m in customer compensation for mis-sold shares, and the real cost may be lower. The OCC case, meanwhile, does not include any allegations that actual money laundering occurred.
But Citi’s latest fine comes just eight months after it paid $100m and admitted to criminal violations for “wilfully” failing to maintain proper controls over international transfers between Mexico and one of its California-based subsidiaries, Banamex USA.
Similarly, the error-filled research feed comes against a backdrop of other small Finra fines. A review of the regulator’s Brokercheck system finds that Citigroup Global Markets had 20 enforcement actions last year, compared with 10 for Goldman Sachs and 13 for Bank of America’s Merrill Lynch arm.
Taken together, the recent string of problems calls into question the bank’s ability to get basic control issues right. That is no small concern, given that Citi required a $45bn taxpayer bailout during the 2008 financial crisis and failed the US Federal Reserve stress tests as recently as 2014.
In some ways it is unfair to single out Citi. Over the past few years, the OCC has also fined JPMorgan Chase and HSBC for failing to live up to the terms of past consent orders. And the $20bn hit to profits is largely an accounting issue: Citi’s results have long factored in plans to use its huge losses from the crisis to reduce the taxes it has to pay on future earnings. Now that corporate tax rates are going to be lower, the value of that deduction has dropped significantly.
Citigroup has come a long way since the dark days of 2008 or even 2014. The bank passed the 2016 tests with flying colours, and in July it set out a plan to return $60bn to shareholders in dividends and share buybacks over the next three years.
In another important milestone, Citi was the first of the really big US banks to win regulatory approval of its so-called living will, the plan that shows how it could be wound up in a crisis without requiring taxpayer support.
Bank spokesman Mark Costiglio makes this point clearly: “By any measure, Citi has become a simpler and stronger firm than it was before the crisis . . . In the past four years, we have added more than 9,000 employees dedicated to enhancing compliance and controls across the firm and we continue to invest in systems to prevent money laundering and otherwise protect the integrity of the financial system.”
But the flurry of small issues comes at a critical time for big US banks. After nearly a decade of providing rigorous oversight, the US bank and market watchdogs are dramatically paring back. President Donald Trump’s appointees at the Federal Reserve, Securities and Exchange Commission and elsewhere have made clear that they believe financial groups should be given more freedom to take risks to help the economy grow and to police themselves.
The Fed is considering conducting stress tests every two years, the SEC is reining in the issuance of subpoenas used to build enforcement cases, and Mr Trump has moved to defang the Consumer Financial Protection Bureau, which looks after retail customers harmed by banks.
Such shifts are common when a Republican president succeeds a Democrat. Historically, risk-taking shoots up and investment in compliance goes down. Given how much has been spent in recent years, many banking executives see that as a healthy correction and a welcome boost to their bottom lines.
But consumer groups and industry critics, who remember that the last big regulatory relaxation was followed by the financial crisis, are far less sanguine.
If banks like Citi are still getting the little stuff wrong after a decade of investment, what is going to happen if they stop feeling pressure to invest? Maybe this is a time when investors should be sweating the small stuff.
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