Citigroup faces a new regulatory challenge that has impacted its will to live

The five-member board of Federal Deposit Insurance Corp. intends to vote on Thursday to downgrade its rating of Citi’s data management systems from “deficient” to “deficient,” according to people familiar with the matter. The FDIC and Federal Reserve reported this deficiency in 2022 after reviewing the resolution plan.

The Fed is not expected to join the FDIC in escalating its concerns about the bank’s plan, which was first unveiled in 2021, the people said.

Citi said Monday it was confident it would be able to properly wind down its operations if necessary, without using taxpayer funds.

“We continue to make significant investments in modernizing our infrastructure, including working to automate data processing and regulatory reporting processes,” the bank said in a statement. “We have rigorous, company-wide stress testing and resolution planning processes, and we are always working to improve and strengthen these capabilities.”

Large banks are required to file living wills to specify how they will wind down their operations in the event of a devastating financial crisis. Reports must be submitted every other year. Citi and its peers have filed their latest plans for 2023 and are awaiting feedback.

The FDIC’s problems with Citi’s systems cover some of the same ground as the consent orders issued by the Fed and the Office of the Comptroller of the Currency in 2020. Regulators are pleading with the bank to address long-standing problems over the way it manages and measures its data and risks .

By itself, the FDIC’s action this month would not result in additional penalties for Citi. But this move is another reminder that Citi’s long road out of regulatory favor is fraught with occasional setbacks and subject to several government agencies that don’t always act step by step.

Regulators can impose serious penalties for lapses in willpower, such as increasing the amount of capital a bank must hold or limiting its future growth. But the bank would only start down this path if both the FDIC and Fed agreed on a downgrade decision. In 2014, both regulators failed to implement all resolution plans for large banks.

Citi’s 2021 plan wouldn’t be the first time the FDIC and Fed have reached a joint decision on escalating deficiencies. In 2016, the FDIC failed Goldman Sachs and outperformed Morgan Stanley, while the Fed reached opposite conclusions in both cases.

In October 2020, the Fed and OCC imposed a $400 million penalty on Citi and released a wish list of fixes aimed at detecting problematic trades, risky trades and other potential trouble spots.

Citi began to address these concerns even before receiving the consent decision by seeking to expedite the appointment of Jane Fraser as CEO. Fraser, who replaced Mike Corbat in early 2021, called the bank’s plan to modernize systems his top priority, while acknowledging that the effort would take years and cost billions of dollars.

That work continues, Fraser said in April.

“Given its size and scale, the transformation is a multi-year effort to address issues that have spanned more than two decades,” she said during the bank’s quarterly earnings call. “We are making steady progress.”

Despite the FDIC’s vote expected Thursday, regulators generally support Fraser’s actions to restrict the bank’s international consumer banking business, according to people familiar with the matter. Those steps include multi-year plans to spin off Banamex, a Mexican consumer bank that has been hit by fraud allegations.

Write to Justin Baer at [email protected] and Andrew Ackerman at [email protected]