UK PRA hits Citigroup with record fine over mis-reporting


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It appears that basic errors rather than deliberate attempts to game the system lay behind Citi’s large miscalculations of UK RWAs and CET1.


Euromoney has read through the UK Prudential Regulation Authority’s (PRA) 44-page final notice on the £44 million fine imposed on the UK operations of Citigroup for regulatory reporting failures, so that you don’t have to.

Between 2015 and 2017, the three legal organizations – Citigroup Global Markets Ltd (CGML), Citibank NA London branch and Citibank Europe Plc UK branch – that the PRA supervises had to resubmit a substantial number of returns due to errors in original submissions, some of these multiple times over.

For example, in October 2016, CGML itself told the PRA it had been mis-reporting its liquidity coverage ratio between October 2015 and June 2016 by up to 47%.

That struck Euromoney as quite the error for a global systemically important bank. No surprise then that the PRA insisted it bring in a skilled person to assess its reports and the processes, and governance around them. This skilled person reported 106 findings in October 2017.

Here are the big numbers

The potential cumulative impact of the errors identified in CGML’s capital return resulted in an understatement as at December 2016 of $15.4 billion of its risk-weighted assets (RWAs). These should have been reported at $119.2 billion instead of at $103.8 billion: an error that allowed CMGL to report a common equity tier-1 ratio (CET1) of 11.8% when it should have been 10.3%.

This seems to have been the result of cock-up rather than conspiracy.

Citigroup also managed to understate its liquidity coverage ratio by between 36% to 41%. So, while it may have assigned incorrect risk categories to some assets, it was doing much better than it reported on maintaining high-quality liquid assets to see it through any financial system stress.

The PRA had told Citigroup in 2015 that the governance structure needed to reflect the complexities of the operating structure it had chosen in the UK, which was amongst the most complex of its peers 

All this matters because Citigroup’s broker dealer in London is a big business, which had assets of $192 billion at the end of 2017, alongside another $193 billion in the London branch.

Together with the much smaller European branch in London ($13.6 billion of assets), these three UK firms account for 15.6% of Citigroup’s group assets and 9.1% of group revenues, according to the PRA.

The PRA had told Citigroup in 2015 that the governance structure needed to reflect the complexities of the operating structure it had chosen in the UK, which was amongst the most complex of its peers.

Here’s the telling detail

While CGML’s UK finance function had responsibility for submitting regulatory returns, these were actually prepared by its regulatory reporting team in Budapest. Meanwhile, those for the London bank branches came from the finance and risk shared service team in Mumbai.

Preparing and checking seems to have been a surprisingly manual process. This didn’t work well.

The PRA reports: “In addition to general human resourcing pressures (particularly due to high staff turnover), a high degree of reliance was placed on a single member of the Budapest team.

“In relation to CGML’s liquidity returns, there was significant dependency on this individual for the design of LCR EUC tools, technical interpretations of LCR DA requirements, review and challenge of liquidity return data prepared by the Mumbai team, variance analyses and reconciliations (ie the validation of all other minimum control standards for CGML’s liquidity returns).”

The PRA does not make any criticism of the individual in question.

Euromoney was glad to hear this. Because we have all been that guy.