Citibank 2010 Annual Report Download - page 74

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for periodic stress tests (the first round of which is in the process of being
implemented). The Federal Reserve Board may also impose other prudential
standards, including contingent capital requirements, based upon its
authority to distinguish among bank holding companies such as Citigroup
in relation to their perceived riskiness, complexity, activities, size and other
factors. The exact nature of these future requirements remains uncertain.
Further, the so-called “Collins Amendment” reflected in the Financial
Reform Act will result in new minimum capital requirements for bank
holding companies such as Citigroup, and provides for the phase-out of trust
preferred securities and other hybrid capital securities from Tier 1 Capital for
regulatory capital purposes, beginning January 1, 2013. As of December 31,
2010, Citigroup had approximately $15.4 billion in outstanding trust
preferred securities that will be subject to the provisions of the Collins
Amendment. As a result, Citigroup may need to replace certain of its existing
Tier 1 Capital with new capital.
Accordingly, Citigroup may not be able to maintain sufficient capital
in light of the changing and uncertain regulatory capital requirements
resulting from the Financial Reform Act, the Basel Committee, and U.S. or
international regulators, or Citigroup’s costs to maintain such capital levels
may increase.
Changes in regulation of derivatives under the Financial
Reform Act, including certain central clearing and
exchange trading activities, will require Citigroup to
restructure certain areas of its derivatives business which
will be disruptive and may adversely affect the results of
operations from certain of its over-the-counter and other
derivatives activities.
The Financial Reform Act and the regulations to be promulgated thereunder
will require certain over-the-counter derivatives to be standardized, subject
to requirements for transaction reporting, clearing through regulatorily
recognized clearing facilities and trading on exchanges or exchange-
like facilities. The regulations implementing this aspect of the Financial
Reform Act, including for example the definition of, and requirements
for, “swap execution facilities” through which transactions and reporting
in standardized products may be required to be carried out, and the
determination of margin requirements, are still in the process of being
formulated, and thus, the final scope of the requirements is not known. These
requirements will, however, necessitate changes to certain areas of Citi’s
derivatives business structures and practices, including without limitation
the successful and timely installation of the appropriate technological and
operational systems to report and trade the applicable derivatives accurately,
which will be disruptive, divert management attention and require additional
investment into such businesses.
The above changes could also increase Citigroup’s exposure to the
regulatorily recognized clearing facilities and exchanges, which could build
up into material concentrations of exposure. This could result in Citigroup
having a significant dependence on the continuing efficient and effective
functioning of these clearing and trading facilities, and on their continuing
financial stability.
In addition, under the so-called “push-out” provisions of the Financial
Reform Act and the regulations to be promulgated thereunder, derivatives
activities, with the exception of bona fide hedging activities and derivatives
related to traditional bank-permissible reference assets, will be curtailed
on FDIC-insured depository institutions. Citigroup, like many of its U.S.
bank competitors, conducts a substantial portion of its derivatives activities
through an insured depository institution. Moreover, to the extent that
certain of Citi’s competitors conduct such activities outside of FDIC-insured
depository institutions, Citi would be disproportionately impacted by any
restructuring of its business for push-out purposes. While the exact nature
of the changes required under the Financial Reform Act is uncertain, the
changes that are ultimately implemented will require restructuring these
activities which could negatively impact Citi’s results of operations from
these activities.
Regulatory requirements aimed at facilitating the
future orderly resolution of large financial institutions
could result in Citigroup having to change its business
structures, activities and practices in ways that negatively
impact its operations.
The Financial Reform Act requires Citi to plan for a rapid and orderly
resolution in the event of future material financial distress or failure,
and to provide its regulators information regarding the manner in which
Citibank, N.A. and its other insured depository institutions are adequately
protected from the risk of non-bank affiliates. Regulatory requirements
aimed at facilitating future resolutions in the U.S. and globally could
result in Citigroup having to restructure or reorganize businesses, legal
entities, or intercompany systems or transactions in ways that negatively
impact Citigroup’s operations. For example, Citi could be required to create
new subsidiaries instead of branches in foreign jurisdictions, or create
separate subsidiaries to house particular businesses or operations (so-called
“subsidiarization”), which would, among other things, increase Citi’s legal,
regulatory and managerial costs, negatively impact Citi’s global capital and
liquidity management and potentially impede its global strategy.
While Citigroup believes one of its competitive advantages
is its extensive global network, Citi’s extensive operations
outside of the U.S. subject it to emerging market and
sovereign volatility and numerous inconsistent or
conflicting regulations, which increase Citi’s compliance,
regulatory and other costs.
Citigroup believes its extensive global network—which includes a physical
presence in approximately 100 countries and services offered in over
160 countries and jurisdictions—provides it a competitive advantage in
servicing the broad financial services needs of large multinational clients and
its customers around the world, including in many of the world’s emerging
markets. This global footprint, however, subjects Citi to emerging market and
sovereign volatility and extensive, often inconsistent or conflicting, regulation,
all of which increase Citi’s compliance, regulatory and other costs.