Citibank 2009 Annual Report Download - page 269

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SUPERVISION AND REGULATION
Proposed Legislation
In addition to the regulations and requirements discussed below, legislation
is from time to time introduced in Congress that may change banking
statutes and the operating environment of Citigroup and its subsidiaries
in substantial and unpredictable ways. This has been particularly true as
a result of the financial crisis beginning in late 2007. See “Risk Factors,”
above. Citigroup cannot determine whether any such proposed legislation
will be enacted and, if enacted, the ultimate effect that any such potential
legislation or implementing regulations would have upon the financial
condition or results of operations of Citigroup or its subsidiaries.
Bank Holding Company/Financial Holding Company
Citigroup’s ownership of Citibank, N.A. (Citibank) and other banks makes
Citigroup a “bank holding company” within the meaning of the U.S. Bank
Holding Company Act of 1956.
Bank holding companies are generally limited to the business of
banking, managing or controlling banks, and other closely related activities.
Citigroup is qualified as a “financial holding company,” which permits Citi
to engage in a broader range of financial activities in the U.S. and abroad.
These activities include underwriting and dealing in securities, insurance
underwriting and brokerage, and making investments in non-financial
companies for a limited period of time, as long as Citi does not manage the
non-financial company’s day-to-day activities, and its banking subsidiaries
engage only in permitted cross-marketing with the non-financial company.
If Citigroup ceases to qualify as a financial holding company, it could be
barred from new financial activities or acquisitions, and have to discontinue
the broader range of activities permitted to financial holding companies.
Regulators
As a bank holding company, Citigroup is regulated and supervised by
the Board of Governors of the Federal Reserve System (FRB). Nationally
chartered subsidiary banks, such as Citibank, are regulated and supervised
by the Office of the Comptroller of the Currency (OCC); federal savings
associations by the Office of Thrift Supervision; and state-chartered depository
institutions by state banking departments and the Federal Deposit Insurance
Corporation (FDIC). The FDIC has back-up enforcement authority for
banking subsidiaries whose deposits it insures. Overseas branches of Citibank
are regulated and supervised by the FRB and OCC and overseas subsidiary
banks by the FRB. Such overseas branches and subsidiary banks are also
regulated and supervised by regulatory authorities in the host countries.
Internal Growth and Acquisitions
Unless otherwise required by the FRB, financial holding companies generally
can engage, directly or indirectly in the U.S. and abroad, in financial
activities, either de novo or by acquisition, by providing after-the-fact notice
to the FRB. However, all bank holding companies, including Citigroup,
must obtain the prior approval of the FRB before acquiring more than 5%
of any class of voting stock of a U.S. depository institution or bank holding
company.
Subject to certain restrictions and the prior approval of the appropriate
federal banking regulatory agency, Citi can acquire U.S. depository
institutions, including out-of-state banks. In addition, intrastate bank
mergers are permitted and banks in states that do not prohibit out-of-state
mergers may merge. A national or state bank can establish a new branch in
another state if permitted by the other state, and a federal savings association
can generally open new branches in any state.
The FRB must approve certain additional capital contributions to an
existing non-U.S. investment and certain acquisitions by Citigroup of an
interest in a non-U.S. company, including in a foreign bank, as well as the
establishment by Citibank of foreign branches in certain circumstances.
Dividends
Citi’s bank holding companies and banking subsidiaries are limited in
their ability to pay dividends. See Note 21 to the Consolidated Financial
Statements. In addition to specific limitations on the dividends that
subsidiary banks can pay to their holding companies, federal regulators
could prohibit a dividend that would be an unsafe or unsound banking
practice. Further, pursuant to the various agreements Citigroup entered into
with the U.S. government during late 2008 and 2009, Citigroup is prohibited
from paying a dividend of more than $0.01 per share per quarter generally
so long as the U.S. Treasury or FDIC continue to hold any common stock
or trust preferred securities of Citigroup issued pursuant to Citi’s exchange
offers.
It is FRB policy that bank holding companies should generally pay
dividends on common stock only out of income available over the past
year, and only if prospective earnings retention is consistent with the
organization’s expected future needs and financial condition. In December
2009, the FRB advised bank holding companies to consult with FRB staff
before increasing dividends or taking other actions that could diminish the
bank holding company’s capital base. Moreover, bank holding companies
should not maintain dividend levels that undermine the company’s ability to
be a source of strength to its banking subsidiaries.