Citigroup Inc. is grappling with a new wave of compliance issues after repeatedly breaching the Federal Reserve's Regulation W, which limits transactions between banks and their subsidiaries. This revelation comes from an internal company document, as reported by Reuters. The bank's troubles with Regulation W are the latest sign that Chief Executive Officer Jane Fraser's efforts to turn around the struggling financial giant may not be as straightforward as investors had hoped.
Regulation W, established over two decades ago, is designed to protect customers' insured deposits by limiting the transactions banks can make with their affiliates. According to Citigroup, the breaches resulted in inaccuracies in its internal liquidity reporting. A spokeswoman for the bank stated in an emailed response, "We are fully committed to complying with laws and regulations and have a strong Regulation W framework in place to ensure prompt identification, escalation, and remediation of issues in a timely manner."
This commitment to compliance comes as Citigroup faces broader regulatory challenges. Earlier this month, the bank agreed to pay nearly $136 million in fines to bank regulators for making "insufficient progress" on resolving a pair of consent orders issued by the Federal Reserve and the Office of the Comptroller of the Currency (OCC) in 2020. These orders required Citigroup to address deficiencies in its risk management and internal controls. As part of the settlement, Citigroup must now complete a resource review plan for the OCC, which may necessitate hiring additional staff or investing in new technologies.
Citigroup's work on addressing Regulation W violations is separate from its efforts to comply with the 2020 consent orders. A person familiar with the matter, who spoke on the condition of anonymity, emphasized that the bank's efforts to comply with Regulation W are distinct from its broader regulatory compliance initiatives.
Fraser, who has made regulatory compliance a cornerstone of her leadership, acknowledged the bank's struggles during a recent meeting with analysts. "We've been public this year about the fact that we were behind in this particular area and that we had increased our investment as a result," Fraser said. "Addressing these areas is the primary goal of our transformation, our No. 1 priority."
The latest breaches of Regulation W have exposed weaknesses in Citigroup's ability to identify, monitor, and prevent future violations. This is particularly concerning given the bank's ongoing regulatory challenges. Last year, Citigroup and three of its rivals were ordered by top U.S. regulators to improve their blueprints for a hypothetical wind-down after weaknesses were found in their plans.
Citigroup's shares showed little change in early New York trading following the news of the Regulation W breaches. The bank's ability to address these compliance issues effectively will be crucial to its broader turnaround efforts.
In addition to the Regulation W breaches, Citigroup has faced other significant regulatory hurdles. Last year, the Federal Reserve issued three notices to the bank, ordering it to improve how it assesses the risk of default by counterparties in derivative transactions. These notices underscored the ongoing challenges Citigroup faces in enhancing its risk management practices.
The compliance issues at Citigroup are not isolated incidents. The bank has a history of regulatory challenges, including a $400 million fine in 2020 for longstanding deficiencies in its risk management and internal controls. The recent fines and orders add to the financial and operational pressures the bank is facing as it seeks to rebuild its reputation and stabilize its operations.
In response to these challenges, Citigroup has been making efforts to strengthen its compliance and risk management frameworks. The bank's increased investment in these areas is a step towards addressing the systemic issues that have plagued it in recent years. However, the path to full compliance and operational stability remains fraught with obstacles.
