Dallas Fed's 2011 annual report: time to break up TBTFs

[Winehole23]

11 years on, little has changed, the TBTFs are bigger and more powerful than ever.

The Office of the Controller of the Currency just fined Citibank $400 million for being a really poorly run bank. The Fed also sanctioned Citigroup, the holding company, for being generally lousy and for violating past promises to stop laundering money, but the Fed’s punishment was more on the order of having Citi write ten thousand times on a blackboard, “I’m a very bad bank and I promise to do better.”

Oh, and probably more consequential to Citi is a ban on making new acquisitions until the regulators think Citi has sufficiently fixed its controls.

I’m not making that up. It sounds a lot like CalPERS, which is truly alarming for an ins ution of Citi’s scale and ability to generate financial black holes.
First, from the OCC’s press release:

The OCC took these actions based on the bank’s unsafe or unsound banking practices for its long-standing failure to establish effective risk management and data governance programs and internal controls….

The agency also issued a cease and desist order requiring the bank to take broad and comprehensive corrective actions to improve risk management, data governance, and internal controls. The order requires the bank to seek the OCC’s non-objection before making significant new acquisitions and reserves the OCC’s authority to implement additional business restrictions or require changes in senior management and the bank’s board should the bank not make timely, sufficient progress in complying with the order.

In other words, this action was a sighting shot. The normally bank-friendly OCC has warned it could go as far as ousting top executives and board members if Citi doesn’t get its house in order.
Even allowing for the fact that risk control at banks is designed to be eyewash, the OCC Cease and Desist Order makes it sound as if no one at Citi is controlling much of anything. For instance:

(4)The OCC has identified the following deficiencies, noncompliance with 12 C.F.R. Part 30, Appendix D, or unsafe or unsound practices with respect to the Bank’s data quality and data governance, including risk data aggregation and management and regulatory reporting:

(a)failure to establish effective front-line units, independent risk management, internal audit, and control functions as required by 12 C.F.R. Part 30, Appendix D;

(b)inability to develop and execute on a comprehensive plan to address data governance deficiencies, including data quality errors and failure to produce timely and accurate management and regulatory reporting; and

(c)inadequate reporting to the Board on the status of data quality and progress in remediating identified deficiencies.

The OCC added that senior management and board oversight were inadequate.

The Fed had similar problems with Citigroup and added a few others, like reneging on promises to stop money laundering and foreign exchange market rigging, which had resulted in nearly $1.3 billion in fines in 2015:

WHEREAS, the most recent supervisory assessment of Citigroup issued by the Federal Reserve Bank of New York (“Reserve Bank”) identified significant ongoing deficiencies in implementation and execution by Citigroup with respect to various areas of risk management and internal controls, including for data quality management and regulatory reporting, compliance risk management, capital planning, and liquidity risk management;

WHEREAS, Citigroup has not adequately remediated the longstanding enterprise-wide risk management and controls deficiencies previously identified by the Federal Reserve, including in the areas described above and those addressed in (i) the Consent Order issued by the Board of Governors on March 21, 2013 to remediate outstanding deficiencies in Citigroup’s anti-money laundering compliance program and (ii) the Consent Order issued by the Board of Governors on May 20, 2015 to remediate outstanding deficiencies in Citigroup’s compliance and control infrastructure relating to its foreign exchange program and designated market activities.

As Benjamin Lawsky demonstrated when he led the New York State Department of Financial Services, any foreign bank caught out money laundering, and particularly being a recidivist, got hit with serious fines. By contrast, the Fed is giving Citigroup lots of homework, including putting some items on the board’s desk:

Within 120 days of this Order, Citigroup’s board of directors shall submit a written plan acceptable to the Director of the Division of Supervision and Regulation that describes the actions it will take to execute its oversight of the matters identified in this Order. The plan shall include the following four items:

(a) actions that the board of directors will take to hold senior management accountable for executing effective and sustainable remediation plans by committed deadlines;
(b) actions the board of directors will take to ensure senior management improves, and thereafter maintains, effective and independent enterprise-wide risk management, and that internal audit findings are effectively remediated;
(c) actions that the board of directors will take to ensure that senior management incentive compensation is consistent with risk management objectives and measurement standards; and
(d) actions that the board of directors will take to ensure effective reporting to the board of directors that will enable it to oversee management’s execution of the matters identified in this Order.

Oh, and Citi has to talk to the Fed often about its progress.

Now, you can blame the disconnect between the pretty serious-sounding deficiencies and more-bark-than -bite regulatory action to the business-friendly Trump Administration. Or you could attribute it to the lack of high profile stories of harm resulting from these gaping control failures. The Fed and OCC may be telling themselves they got to Citi before it did a Wells Fargo to itself.
However the other reason for soft gloves treatment is that Citi is a bomb that can’t be disarmed. Citi controls a unique payments system that is critical for all but the very largest companies doing business overseas. The really big boys can afford to have multiple foreign banks in their major offshore markets. For the others, a system called GTS provides essential plumbing. As we explained in 2010, when the press and pundits were still debating what to do about Citi:

GTS [Global Transaction Services] is a big cash management/information service. It is also a bread and butter earner for Citi. Per the Journal:

Otis Otih, the treasurer of candy maker Mars Inc., uses GTS to handle most payments to employees and vendors of Mars operations in 68 countries. “Citibank is the only truly, truly global company for us — I don’t see any alternative,” he says.

As an example of what the unit allows multinationals to do, an Asian subsidiary of a European company can deposit funds with Citigroup locally and the money will instantly show up on the ledger of the parent a continent away. The system makes it easier for corporate treasurers to manage their finances, and many corporate and government clients outsource a wide range of other finance work to GTS….

Executives told officials with the Treasury Department and the Fed that GTS’s technology and presence in more than 100 countries made it too dangerous for the U.S. to let Citigroup collapse….

While Citigroup is primarily known for its retail banking and credit-card businesses, the GTS unit is increasingly integral to the parent company’s functioning. Clients that move funds through GTS leave a lot of cash on deposit at the unit, which funnels the money to other parts of Citigroup for lending or other uses. GTS’s deposit-gathering muscle has grown more important since the financial crisis began, now providing about 40% of Citigroup’s $800 billion of deposits.

Yves here. GTS is a big piece of what makes Citi a difficult to disarm bomb. One of the swords of Damocles that the big bank had over the officialdom is that, prior to the crisis, it had $500 billion of uninsured foreign deposits. If Citi looked wobbly, sensible depositors would withdraw funds, and that could quickly morph into a run. Moreover, the any other international bank with meaningful cross border deposits could come under scrutiny…

The Journal argues that GTS is essential to Citi. This is rubbish. GTS is a sophisticated payments system and a source of low-cost deposits. It may provide a foot in the door, and help deepen some relationships, but let us face it, cash management and payments systems are at best assistant treasurer relationships at big companies. Proof of the pudding: it is a no-brainer that companies like Goldman, Morgan Stanley, Barclays, and UBS are doing complex, high margin transactions at companies that are also using GTS.

As we explained in later posts, due to crisis liquidity measures, Citi’s dependence on GTS-supplied deposits plunged. There was a window when it would have been feasible to force GTS to be spun out but the officialdom lacked either the alertness or the will to recognize that.

https://www.nakedcapitalism.com/2020...l-problem.html

[RandomGuy]

11 years on, little has changed, the TBTFs are bigger and more powerful than ever.


https://www.nakedcapitalism.com/2020...l-problem.html

They are beginning to act as a cartel.

Nothing will happen until we get a handle on the ocean of cash flowing into campaigns from Citizens.

.

[Winehole23]

[Winehole23]

The US Congress, Barack Obama and the Federal Reserve finished off capitalism in 2008-9, tbh.

In a capitalistic system insolvent firms are allowed to fail and get liquidated. Capitalism also has a crucial feature called price discovery that a decade of QE and zero-bound interest rates keep short circuiting.