Citibank 2010 Annual Report Download - page 303

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SUPERVISION AND REGULATION
Citigroup is subject to regulation under U.S. federal and state laws, as well as
applicable laws in the other jurisdictions in which it does business.
General
As a registered bank holding company and financial holding company,
Citigroup is regulated and supervised by the Board of Governors of the
Federal Reserve System (FRB). Citigroup’s nationally chartered subsidiary
banks, including Citibank, N.A., are regulated and supervised by the Office
of the Comptroller of the Currency (OCC), its federal savings associations by
the Office of Thrift Supervision, and its state-chartered depository institutions
by state banking departments and the Federal Deposit Insurance Corporation
(FDIC). The FDIC also 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.
A U.S. financial holding company and the companies under its control
are permitted to engage in a broader range of activities in the U.S. and
abroad than permitted for bank holding companies and their subsidiaries.
Unless otherwise limited 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. These financial 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.
Citi is permitted to acquire U.S. depository institutions, including out-of-
state banks, subject to certain restrictions and the prior approval of federal
banking regulators. 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 also 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. 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. The FRB must also 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.
For more information on U.S. and foreign regulation affecting Citigroup
and its subsidiaries, see “Risk Factors” above.
Changes in Regulation
Proposals to change the laws and regulations affecting the banking and
financial services industries are frequently introduced in Congress, before
regulatory bodies and abroad that may affect the operating environment of
Citigroup and its subsidiaries in substantial and unpredictable ways. This
has been particularly true as a result of the recent financial crisis. Citigroup
cannot determine whether any such proposals 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. For additional information regarding
recently enacted and proposed legislative and regulatory initiatives, see
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Executive Summary – 2011 Business Outlook,” “Capital
Resources and Liquidity” and “Risk Factors” above.
Other Bank and Bank Holding Company Regulation
Citigroup and its banking subsidiaries are subject to other regulatory
limitations, including requirements for banks to maintain reserves
against deposits, requirements as to risk-based capital and leverage (see
“Capital Resources and Liquidity” above and Note 20 to the Consolidated
Financial Statements), restrictions on the types and amounts of loans that
may be made and the interest that may be charged, and limitations on
investments that can be made and services that can be offered. The FRB
may also expect Citigroup to commit resources to its subsidiary banks in
certain circumstances. Citigroup is also subject to anti-money laundering
and financial transparency laws, including standards for verifying client
identification at account opening and obligations to monitor client
transactions and report suspicious activities.
Securities and Commodities Regulation
Citigroup conducts securities underwriting, brokerage and dealing activities
in the U.S. through Citigroup Global Markets Inc., its primary broker-dealer,
and other broker-dealer subsidiaries, which are subject to regulations of the
SEC, the Financial Industry Regulatory Authority and certain exchanges,
among others. Citigroup conducts similar securities activities outside
the U.S., subject to local requirements, through various subsidiaries and
affiliates, principally Citigroup Global Markets Limited in London, which is
regulated principally by the U.K. Financial Services Authority, and Citigroup
Global Markets Japan Inc. in Tokyo, which is regulated principally by the
Financial Services Agency of Japan.
Citigroup also has subsidiaries that are members of futures exchanges and
are registered accordingly. In the U.S., CGMI is a member of the principal
U.S. futures exchanges, and Citigroup has subsidiaries that are registered
as futures commission merchants and commodity pool operators with the
Commodity Futures Trading Commission (CTFC).
CGMI is also subject to Rule 15c3-1 of the SEC and Rule 1.17 of the CTFC,
which specify uniform minimum net capital requirements. Compliance with
these rules could limit those operations of CGMI that require the intensive
use of capital, such as underwriting and trading activities and the financing
of customer account balances, and also limits the ability of broker-dealers to
transfer large amounts of capital to parent companies and other affiliates.
See also “Capital Resources—Broker-Dealer Subsidiaries” and Note 20 to
the Consolidated Financial Statements for a further discussion of capital
considerations of Citigroup’s non-banking subsidiaries.
Dividends
Citigroup is currently subject to restrictions on its ability to pay common
stock dividends. See “Risk Factors” above. For information on the ability
of Citigroup’s subsidiary depository institutions and non-bank subsidiaries
to pay dividends, see “Capital Resources—Capital Resources of Citigroup’s
Depository Institutions” and Note 20 to the Consolidated Financial
Statements above.