Citi, the most international of banks, handles $4 trillion of financial flows every day and manages the funds of the world’s biggest companies. It has tried to simplify its business since the financial crisis to make it easier to understand. And yet it keeps getting in trouble. American regulators this month reprimanded the firm for failing to establish adequate risk-management oversight, data governance and internal controls. In addition to a $400 million fine, Citi must now seek the U.S. government’s approval for major acquisitions and correct its deficiencies.
This is at least the third time the bank has drawn regulatory scrutiny for weak internal oversight since 2005. Pieced together from several acquisitions, Citi has struggled to integrate and upgrade its operating systems. Worryingly, the company’s vast size makes it a conduit of risk to the entire banking system.
Investors and customers may draw some comfort from departing CEO Mike Corbat’s reassurances that the failings didn’t involve fraud or harm to clients, unlike some of the lapses at rivals. Corbat is also confident that the bank has coped well during the pandemic. On Tuesday, it reported third-quarter net income of $3.2 billion, beating expectations because of lower-than-expected provisions and another bumper quarter for trading.
But the magnitude of Fraser’s task is becoming clearer. As Corbat put it, “This won’t be a quick or easy fix.”
The CEO said the bank had got its strategy and financials right over the past decade (even though Citi’s profitability and share price has trailed those of JPMorgan Chase & Co. and Bank of America Corp,). He acknowledged that he wasn’t quick enough to address how it operates. In two mishaps under Corbat’s watch, the bank this summer inadvertently wired $900 million to Revlon Inc.’s lenders and last year it was fined by British regulators for inaccurately reporting its capital and liquidity.
Citi had failed to take a holistic view of risk and compliance, but it’s on the way to fixing things, Corbat said. The company has hired thousands of employees to address those failings. “It’s everyone’s responsibility to get this right,” he added.
Looking at the experience of other lenders — Deutsche Bank AG, for example — such a culture change can take years. It starts with the board, and Citi’s accountability will need to improve. For starters, the directors are going to have to tell the U.S. Federal Reserve how executive compensation will be “consistent with risk management objectives.”
All those new risk and compliance staff will be expensive, too. While Chief Financial Officer Mark Mason declined to put an overall number on it, Citi has allocated an extra $1 billion a year to cover the expenses. The bank is promising to keep improving its profitability, nonetheless.
How it will do that remains unclear. Fraser wasn’t on the earnings call to answer questions. It will be up to her to review the strategy and decide whether to exit businesses and reallocate investments. The bank has a giant institutional franchise, a global credit card business and a subscale U.S. retail network. A large presence in Mexico doesn’t necessarily support the rest of the business. In investment banking, Citi’s equities trading is dwarfed by its fixed-income activities.
Fraser will need a sense of urgency. Even in a pandemic, managing risk effectively must be her priority. How to do this while increasing profit will be the real challenge.
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.