Citibank 2008 Annual Report Download - page 198

25. CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk exist when changes in economic, industry or
geographic factors similarly affect groups of counterparties whose aggregate
credit exposure is material in relation to Citigroup’s total credit exposure.
Although Citigroup’s portfolio of financial instruments is broadly diversified
along industry, product, and geographic lines, material transactions are
completed with other financial institutions, particularly in the securities
trading, derivatives, and foreign exchange businesses.
In connection with the Company’s efforts to maintain a diversified
portfolio, the Company limits its exposure to any one geographic region,
country or individual creditor and monitors this exposure on a continuous
basis. At December 31, 2008, Citigroup’s most significant concentration of
credit risk was with the U.S. government and its agencies. The Company’s
exposure, which primarily results from trading assets and investments issued
by the U.S. government and its agencies, amounted to $93.7 billion and
$73.8 billion at December 31, 2008 and 2007, respectively. After the U.S.
government, the Company’s next largest exposures are to the Mexican and
Japanese governments and their agencies, which are rated investment grade
by both Moody’s and S&P. The Company’s exposure to Mexico amounted to
$35.0 billion and $32.0 billion at December 31, 2008 and 2007, respectively,
and is composed of investment securities, loans and trading assets. The
Company’s exposure to Japan amounted to $29.1 billion and $26.1 billion at
December 31, 2008 and 2007, respectively, and is composed of investment
securities, loans and trading assets.
26. FAIR-VALUE MEASUREMENT (SFAS 157)
Effective January 1, 2007, the Company adopted SFAS 157. SFAS 157 defines
fair value, establishes a consistent framework for measuring fair value and
expands disclosure requirements about fair-value measurements. SFAS 157,
among other things, requires the Company to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. In addition, SFAS 157 precludes the use of block
discounts when measuring the fair value of instruments traded in an active
market, which discounts were previously applied to large holdings of publicly
traded equity securities. It also requires recognition of trade-date gains
related to certain derivative transactions whose fair value has been
determined using unobservable market inputs. This guidance supersedes the
guidance in Emerging Issues Task Force Issue No. 02-3, “Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities” (EITF Issue
02-3), which prohibited the recognition of trade-date gains for such
derivative transactions when determining the fair value of instruments not
traded in an active market.
As a result of the adoption of SFAS 157, the Company has made some
amendments to the techniques used in measuring the fair value of derivative
and other positions. These amendments change the way that the probability
of default of a counterparty is factored into the valuation of derivative
positions, include for the first time the impact of Citigroup’s own credit risk
on derivatives and other liabilities measured at fair value, and also eliminate
the portfolio servicing adjustment that is no longer necessary under SFAS
157.
Fair-Value Hierarchy
SFAS 157 specifies a hierarchy of valuation techniques based on whether the
inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect the Company’s market assumptions. These
two types of inputs have created the following fair-value hierarchy:
• Level 1—Quoted prices for identical instruments in active markets.
• Level 2—Quoted prices for similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not active;
and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets.
• Level 3—Valuations derived from valuation techniques in which one or
more significant inputs or significant value drivers are unobservable.
This hierarchy requires the use of observable market data when available.
The Company considers relevant and observable market prices in its
valuations where possible. The frequency of transactions, the size of the
bid-ask spread and the amount of adjustment necessary when comparing
similar transactions are all factors in determining the liquidity of markets
and the relevance of observed prices in those markets.
Determination of Fair Value
For assets and liabilities carried at fair value, the Company measures such
value using the procedures set out below, irrespective of whether these assets
and liabilities are carried at fair value as a result of an election under SFAS
159, FASB Statement No. 155, Accounting for Certain Hybrid Financial
Instruments (SFAS 155), or FASB Statement No. 156, Accounting
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