Citi Faces Possible OCC, Fed Reprimand Over Risk Controls

Federal regulators are weighing taking actions againstCitigroup Inc. over deficiencies in the bank’s risk and control functions that have persisted even after the lender spent an additional $1 billion on those areas this year.

The Office of the Comptroller of the Currency along with theFederal Reserve have weighed publicly reprimanding the bank, a move that could involve a consent order, according to people familiar with the matter, who asked not to be identified discussing regulatory matters. The bank remains in discussions with both overseers and any action isn’t imminent, the people said.

Citigroup shares fell Monday after the report, and following comments by Chief Financial Officer Mark Mason who warned that revenue would drop and the bank would set aside more in reserves to cover potential losses in the current quarter. He acknowledged the need for improvements to controls after the recent error by Citigroup in which $900 million was mistakenly sent to a group of hedge funds that were acting as lenders to the cosmetics giant Revlon Inc.

“Citi has several remediation projects underway to strengthen our controls, infrastructure and governance,” Citigroup said in a statement. “However, while we have made significant and demonstrable progress in each of these areas, we recognize that we are not yet where we need to be and that has to change.”

The Wall Street Journal earlier reported that regulators were weighing action against the bank. Representatives from the Fed and the OCC declined to comment.

Citigroup dropped 5.6% to $48.15 in regular New York trading, the worst performance in the 66-company S&P 500 Financials Index.

Mason told investors at a conference on Monday that the bank has invested an additional $1 billion in improving its infrastructure and controls this year, including to bolster data architecture and upgrade the operations platform. He called the payment error unacceptable, saying the firm accelerated plans for new software to handle such payments.

“These investments have served us well as we manage today through the impact of Covid-19,” Mason said.

Citigroup, the world’s largest credit-card issuer, increased reserves by roughly $10.5 billion in the first six months of the year as unemployment soared during the coronavirus pandemic and millions of Americans sought relief on their bills from banks. While the third-quarter reserve build will be “meaningfully lower” than it was in the first two quarters of this year, the bank now expects a slower recovery than it did at the end of June, Mason said.

“That’s really due to a slower pace of rehiring,” Mason said. He also mentioned “a slower pace of recovery in terms of consumer behavior and buying activity.”

Mason said Citigroup expects revenue from fixed-income and equities trading to climb by a percentage in the low double digits in the third quarter. Still, firmwide revenue will probably fall by a percentage in the high single digits because those increases will be countered by lower interest rates, less consumer spending and muted investment-banking activity, he said.

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