Citigroup Inc.’s C plan to expand in China has met a snag with the U.S. regulators after the Federal Reserve imposed a penalty on the bank related to its data management and risk controls, per a Bloomberg report.
The bank is currently awaiting a clearance letter from the U.S. Federal Reserve, which is required by Chinese authorities to verify Citigroup's regulatory standing. Without this letter, the bank cannot proceed with its plans to set up a standalone securities firm in China.
The difficulties arose when Citigroup was fined $136 million in July 2024 for failing to address its data management issues adequately. The regulators stated that Citigroup made “insufficient progress” in dealing with the issues identified in 2020, which required Citi to fix these issues in its enterprise-wide risk management, compliance risk management, data governance and internal controls.
These fines complicated C’s ability to comply with China's licensing requirements, making its path to expansion more challenging.
However, according to a Bloomberg report, citing people familiar with the matter, the bank remains actively engaged in discussions with China's securities regulator regarding its application for the new business and has no intention to withdraw its application.
Citigroup’s Prior Regulatory Issues
Apart from the fine levied on the bank in July, Citigroup has been facing some other regulatory scrutiny as well. In August, the bank made the headlines for repeatedly breaching the Federal Reserve’s Regulation W, which limits intercompany transactions. Those breaches led to discrepancies in the company’s internal liquidity reporting. This was reported by Reuters, citing an internal company document.
In May, Citigroup was fined $78.4 million by a pair of British regulators due to the bank’s deficiencies in the systems and controls. These flaws led a trader to make an inputting error that caused a flash crash in May 2022. The penalty amount consisted of £27.8 million from the Financial Conduct Authority and £33.9 million from the Bank of England’s Prudential Regulation Authority.
In June, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) stated that they had observed shortcomings in the ‘living wills’ of Citigroup, JPMorgan Chase JPM and Goldman Sachs GS. Per agencies, the shortcomings raise doubts about their plan's feasibility. JPM had minor problems that the Fed and the FDIC found, claiming that its systems for unwinding specific derivatives trades had not been thoroughly tested. GS was criticized for not providing ‘trade-level’ details on its derivatives transactions.
The FDIC chastised Citigroup, stating that the bank's resolution plan was either not credible or would not enable a smooth bankruptcy process following U.S. laws. Apart from the problem with its derivatives portfolio, the regulators stated that the company had neglected to address concerns regarding its "resolution data integrity and data management issues."
These ongoing regulatory litigations and penalties are significant obstacles for the bank, potentially increasing costs and impacting bottom-line growth.
Over the past six months, shares of C have gained 2% compared with the industry’s growth of 8.8%.
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Currently, C carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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