Citigroup's Record British Fine Is a Bad Look for Bankers

(Bloomberg Opinion) -- In the aftermath of the financial crisis, we've become accustomed to banks being slapped with sanctions running into the billions. So at the equivalent of $57 million, Citigroup Inc.'s new fine for reporting failures could well go unnoticed. That would be a mistake.

The third-largest U.S. bank, with assets in excess of $2 trillion, inaccurately reported its capital and liquidity in the U.K. because of dysfunctional systems, governance and controls, the Bank of England's Prudential Regulation Authority said this week. This is not what Britain expects of a systemically important bank, the PRA added, explaining why it was imposing a record fine.

While the Wall Street giant's measures of financial strength remained above the U.K.'s regulatory requirements during the four years in question, that's little comfort given the magnitude of the flaws and the bank's inadequate oversight.

If Citi's key financial figures can be repeatedly off the mark, what else might they be getting wrong? As the regulator noted in its 44-page assessment of how the errors came about, “firms that do not produce timely, complete and accurate data during periods of relative stability are less likely to produce it under stress.”

The U.K. is Citi's biggest market outside the U.S., accounting for about 16% of its total assets and about 9% of revenue; its trading activities there run across cash and derivatives markets. The securities unit is one of Europe's biggest investment banks on a standalone basis.

Because of the errors, which happened between June 2014 and Dec. 2018, the biggest of Citi's three British entities at one point was reporting a common equity Tier 1 capital ratio of 11.8% when it should have been 10.3%. While the ratio was at 11% when allowing for differing interpretations of how to calculate risk-weighted assets, this was still a material divergence.

In October 2016, the same unit (Citi's U.K. broker dealer) informed the regulator that between October 2015 and June 2016 it had misreported its liquidity coverage ratio by a whopping 47%. While the figure was actually better than the bank had reported, in some months the bank's short-term ability to fund potential outflows was significantly worse than first reported.

At the root of the mistakes were loose controls which failed to meet the bank's requirements, even though internal red flags were raised. Reports, which should have been closely monitored, were often prepared manually by teams in Mumbai and Budapest and the bank used the wrong currency for settling some positions.

Most alarming, the bank's top executives and governance committees had a limited understanding of the reporting requirements and which senior managers were responsible.

In fairness, the bank stressed that it had “cooperated fully with the PRA throughout the process, and in 2019 a leading independent accountancy and audit firm confirmed that Citi had remediated the material issues identified.” By working with the regulator the lender qualified for a 30% rebate on the penalty.

But the cascade of errors under seemingly careless management points to a cavalier attitude in global finance that hasn't been fixed entirely. Banks' books are far from being as safe as houses.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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