Citibank 2012 Annual Report Download - page 297

275
Maximum potential amount of future payments
In billions of dollars at December 31, 2011 except carrying value in millions
Expire within
1 year
Expire after
1 year
Total amount
outstanding
Carrying value
(in millions of dollars)
Financial standby letters of credit $ 25.2 $ 79.5 $ 104.7 $ 417.5
Performance guarantees 7.8 4.5 12.3 43.9
Derivative instruments considered to be guarantees 9.8 40.0 49.8 2,686.1
Loans sold with recourse — 0.4 0.4 89.6
Securities lending indemnifications (1) 90.9 — 90.9 —
Credit card merchant processing (1) 70.2 — 70.2 —
Custody indemnifications and other — 40.0 40.0 30.7
Total $ 203.9 $ 164.4 $ 368.3 $ 3,267.8
(1) The carrying values of securities lending indemnifications and credit card merchant processing are not material, as the Company has determined that the amount and probability of potential liabilities arising from these
guarantees are not significant.
Financial standby letters of credit
Citigroup issues standby letters of credit which substitute its own credit
for that of the borrower. If a letter of credit is drawn down, the borrower is
obligated to repay Citigroup. Standby letters of credit protect a third party
from defaults on contractual obligations. Financial standby letters of credit
include guarantees of payment of insurance premiums and reinsurance risks
that support industrial revenue bond underwriting and settlement of payment
obligations to clearing houses, and also support options and purchases of
securities or are in lieu of escrow deposit accounts. Financial standbys also
backstop loans, credit facilities, promissory notes and trade acceptances.
Performance guarantees
Performance guarantees and letters of credit are issued to guarantee a
customer’s tender bid on a construction or systems-installation project or to
guarantee completion of such projects in accordance with contract terms.
They are also issued to support a customer’s obligation to supply specified
products, commodities, or maintenance or warranty services to a third party.
Derivative instruments considered to be guarantees
Derivatives are financial instruments whose cash flows are based on a
notional amount and an underlying instrument, where there is little or
no initial investment, and whose terms require or permit net settlement.
Derivatives may be used for a variety of reasons, including risk management,
or to enhance returns. Financial institutions often act as intermediaries for
their clients, helping clients reduce their risks. However, derivatives may also
be used to take a risk position.
The derivative instruments considered to be guarantees, which are
presented in the tables above, include only those instruments that require Citi
to make payments to the counterparty based on changes in an underlying
instrument that is related to an asset, a liability, or an equity security held by
the guaranteed party. More specifically, derivative instruments considered to
be guarantees include certain over-the-counter written put options where the
counterparty is not a bank, hedge fund or broker-dealer (such counterparties
are considered to be dealers in these markets and may, therefore, not hold
the underlying instruments). However, credit derivatives sold by the Company
are excluded from the tables above as they are disclosed separately in Note 23
to the Consolidated Financial Statements. In addition, non-credit derivative
contracts that are cash settled and for which the Company is unable to assert
that it is probable the counterparty held the underlying instrument at the
inception of the contract also are excluded from the tables above.
In instances where the Company’s maximum potential future payment is
unlimited, the notional amount of the contract is disclosed.
Loans sold with recourse
Loans sold with recourse represent the Company’s obligations to reimburse
the buyers for loan losses under certain circumstances. Recourse refers to the
clause in a sales agreement under which a lender will fully reimburse the
buyer/investor for any losses resulting from the purchased loans. This may be
accomplished by the seller taking back any loans that become delinquent.
In addition to the amounts shown in the tables above, Citi has recorded
a mortgage repurchase reserve for its potential repurchases or make-whole
liability regarding representation and warranty claims. The repurchase
reserve was $1,565 million and $1,188 million at December 31, 2012 and
December 31, 2011, respectively, and these amounts are included in Other
liabilities on the Consolidated Balance Sheet.
Repurchase Reserve—Whole Loan Sales
The repurchase reserve estimation process for potential residential mortgage
whole loan representation and warranty claims is based on various
assumptions which are primarily based on Citi’s historical repurchase
activity with the GSEs. The assumptions used to calculate this repurchase
reserve include numerous estimates and judgments and thus contain a level
of uncertainty and risk that, if different from actual results, could have a
material impact on the reserve amounts.
As of December 31, 2012, Citi estimates that the range of reasonably
possible loss for whole loan sale representation and warranty claims in excess
of amounts accrued could be up to $0.6 billion. This estimate was derived
by modifying the key assumptions discussed above to reflect management’s
judgment regarding reasonably possible adverse changes to those
assumptions. Citi’s estimate of reasonably possible loss is based on currently
available information, significant judgment and numerous assumptions that
are subject to change.