Citibank 2012 Annual Report Download - page 272

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24. 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, 2012, 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 $190.7 billion and
$177.9 billion at December 31, 2012 and 2011, respectively. The Japanese
and Mexican governments and their agencies, which are rated investment
grade by both Moody’s and S&P, were the next largest exposures. The
Company’s exposure to Japan amounted to $38.7 billion and $33.2 billion at
December 31, 2012 and 2011, respectively, and was composed of investment
securities, loans and trading assets. The Company’s exposure to Mexico
amounted to $33.6 billion and $29.5 billion at December 31, 2012 and
2011, respectively, and was composed of investment securities, loans and
trading assets.
The Company’s exposure to states and municipalities amounted to
$35.8 billion and $39.5 billion at December 31, 2012 and 2011, respectively,
and was composed of trading assets, investment securities, derivatives and
lending activities.
25. FAIR VALUE MEASUREMENT
ASC 820-10 (formerly SFAS 157) Fair Value Measurement, defines fair
value, establishes a consistent framework for measuring fair value and
requires disclosures about fair value measurements. Fair value is defined as
the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement
date. Among other things, the standard requires the Company to maximize
the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
Under ASC 820-10, the probability of default of a counterparty is factored
into the valuation of derivative positions and includes the impact of
Citigroup’s own credit risk on derivatives and other liabilities measured at
fair value.
Fair Value Hierarchy
ASC 820-10 specifies a hierarchy of inputs based on whether the inputs 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.
The Company’s policy with respect to transfers between levels of the fair
value hierarchy is to recognize transfers into and out of each level as of the
end of the reporting period.
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 or whether
they are required to be carried at fair value.
When available, the Company generally uses quoted market prices to
determine฀fair฀value฀and฀classifies฀such฀items฀as฀Level฀1.฀In฀some฀cases฀
where a market price is available, the Company will make use of acceptable
practical expedients (such as matrix pricing) to calculate fair value, in which
case฀the฀items฀are฀classified฀as฀Level฀2.