Citigroup Breaches Federal Reserve’s Regulation W, Reporting Errors

Citigroup has repeatedly violated a U.S. Federal Reserve rule known as Regulation W, which limits intercompany transactions and results in errors in the bank’s internal liquidity reporting. This issue, disclosed in a December document seen by Reuters, marks the first time these infractions have been reported.

Regulation W and Its Importance:

Regulation W, established by the Federal Reserve over two decades ago, is designed to prevent depository institutions from suffering losses from transactions with their affiliates. The rule restricts transactions such as loans to affiliates controlled by the bank, aiming to protect depositors whose funds are insured up to $250,000 by the government. The regulation helps prevent affiliates from unloading bad assets onto the bank’s balance sheet or making deals at favorable rates that could harm the bank’s financial health.

Citigroup Breaches and Consequences:

The document revealed that Citigroup’s “longstanding breaches” highlighted deficiencies in the bank’s systems for identifying, monitoring, and preventing future Regulation W violations. The resulting reaction to these breaches led to inaccuracies in Citigroup’s liquidity reporting. The document also indicated that the proposed revisions to the bank’s policies and procedures might not offer sufficient guidance for employees to ensure compliance with the regulation.

A Citigroup spokesperson stated, “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 promptly.”

It remains unclear whether these violations have been fully addressed. The Federal Reserve and the Office of the Comptroller of the Currency (OCC) declined to comment.

Ongoing Compliance and Regulatory Challenges:

This issue with Regulation W is part of a broader set of challenges Citigroup faces regarding risk management and internal controls. In 2020, regulators labeled the bank’s risk practices as “unsafe and unsound,” in 2023, the bank faced criticism over how it measured counterparty risks. Recently, Citigroup was fined $136 million for insufficient progress on compliance issues.

Citigroup’s ongoing efforts to address these regulatory concerns and improve its internal controls and risk management systems are crucial as the bank restores confidence among regulators and stakeholders.