- The Office of the Comptroller of the Currency (OCC) and the Federal Reserve are considering reprimanding Citi for failing to improve its risk management system — a prospect that accelerated CEO Michael Corbat's plan to retire and hand the reins to Jane Fraser, The Wall Street Journal reported Monday.
- The bank will resume job cuts this week — a move expected to affect less than 1% of its global workforce, Citi said Monday in a statement. Citi's headcount stood at about 204,000 at the end of the second quarter, Bloomberg reported. Given that figure, staff reductions should top out at around 2,000. However, the bank has hired 26,000 people this year, it said, so overall personnel numbers likely won't drop.
- "We are completely committed to improving our risk and control environment," a Citi spokeswoman said, according to the Journal. "However, while we have made significant and demonstrable progress ... we recognize that we are not yet where we need to be and that has to change."
Regulators have been pushing Citi privately for years to update its risk management system, sources told The Wall Street Journal. A public rebuke such as a consent order would cast a spotlight on improvements the bank needs to make in that area.
Citi's errant transmission of $900 million last month to creditors of cosmetics firm Revlon exposed some of the bank's risk management shortcomings. Citi's loan operation software, for example, debuted in 1997. The bank last year committed to replacing the system, but the transition isn't complete.
Citi made significant investments in risk management and governance improvements this year. It announced in January it would hire 2,500 coders to work on the technology used by the bank's traders and investment bankers. Citi also named a new chief compliance officer in June, and added former Bank of New York Mellon President Karen Peetz to its staff. As chief administrative officer, Peetz would bring "consistency and clarity" to communications with regulators, Corbat said at the time.
But for regulators, Citi's pace of change may not be fast enough. At issue is the patchwork of systems the bank uses — some a legacy from a time before Citi's ascent.
Many of Citi's units run on their own systems with varying methods of tracking customers and transactions. Regulators require banks to track customers across all of their operations to prevent money laundering, fraud and other issues.
But customers who do business with multiple units could have more than one identification code. Regulators are concerned that leaves Citi vulnerable to risks that banks with a unified or more updated system aren't vulnerable to, sources told the Journal.
"One thing has become very clear to me ... we need to think about infrastructure and controls very differently," Corbat wrote to Citi employees last month, according to the Journal. "We can't think of them as just something that is important to our regulators."
Corbat had been planning to retire next year — "It was always Mike's plan to retire in 2021," Jennifer Lowney, a Citi spokeswoman, told Bloomberg in an emailed statement — but he hadn't discussed a specific timeline with Fraser or the bank's board, sources told the Journal. As pressure from regulators mounted, Corbat thought it best to leave risk management's transformational effort to Fraser.
"This will be a multiyear effort, and I believe it is best for the firm for my successor to lead this important work from the beginning," Corbat wrote in a memo to staff Thursday announcing his retirement, according to American Banker.
Fraser, too, touched on risk management in a separate memo the same day. "We need to ensure that we have a culture which demands excellence in these areas because it will ultimately make us more competitive and improve our ability to serve our customers and clients," she wrote.
A third Citi executive, CFO Mark Mason, speaking Monday at the virtual 2020 Barclays Global Financial Services Conference, stressed the bank's commitment toward improving risk management.
"I cannot emphasize enough there is no greater priority for the entire management team than getting to what we would characterize as a best-in-class risk-and-control environment," he said. "Fundamentally transforming our operating environment and strengthening our infrastructure risks and controls is a strategic priority for the firm."
Mason noted the Revlon transaction in his speech, calling it a "manual breakdown in our operations."
"We recognize that errors like this are unacceptable, and we also recognize that eliminating these types of manual touch points is a significant opportunity for us," he said.
It is unclear exactly what shape the penalty from regulators will take. Citi is operating under consent orders from 2012 and 2013 that required it to bolster its anti-money laundering processes. Failure to comply with the 2012 order resulted in a 2017 fine from the OCC.
Risk assessment has cost Citi before. That was the reason the Fed gave the bank a failing mark on its 2014 stress test. The bank revamped its risk models and hired more compliance employees.
Meanwhile, Citi joins Wells Fargo among the ranks of U.S. banks resuming job cuts after Corbat announced in March he was suspending them as the coronavirus pandemic took hold. A source told Bloomberg at the time that the move was temporary.
"The decision to eliminate even a single colleague role is very difficult, especially during these challenging times," Citi said in the statement, according to Bloomberg. "We will do our best to support each person, including offering the ability to apply for open roles in other parts of the firm and providing severance packages."
Mason said Monday that while revenue from fixed-income and equities trading is expected to increase in the third quarter, revenue will likely fall. The bank expects to set aside loan loss reserves but at a lower rate than the $7 billion and $7.9 billion the bank saved in the first and second quarters.