Citibank 2012 Annual Report Download - page 88

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require additional collateral based on these market perceptions or market
conditions, which could further impair Citi’s access to and cost of funding.
As a holding company, Citigroup relies on dividends, distributions and
other payments from its subsidiaries to fund dividends as well as to satisfy
its debt and other obligations. Several of Citigroup’s subsidiaries are subject
to capital adequacy or other regulatory or contractual restrictions on their
ability to provide such payments. Limitations on the payments that Citigroup
receives from its subsidiaries could also impact its liquidity.
For additional information on Citi’s funding and liquidity, including
Basel III regulatory liquidity standards, see “Capital Resources and
Liquidity—Funding and Liquidity—Liquidity Management, Measures and
Stress Testing” above.
The Credit Rating Agencies Continuously Review the
Ratings of Citi and Certain of Its Subsidiaries, and
Reductions in Citi’s or Its More Significant Subsidiaries’
Credit Ratings Could Have a Negative Impact on Citi’s
Funding and Liquidity Due to Reduced Funding Capacity,
Including Derivatives Triggers That Could Require Cash
Obligations or Collateral Requirements.
The credit rating agencies, such as Fitch, Moody’s and S&P, continuously
evaluate Citi and certain of its subsidiaries, and their ratings of Citi’s and
its more significant subsidiaries’ long-term/senior debt and short-term/
commercial paper, as applicable, are based on a number of factors, including
financial strength, as well as factors not entirely within the control of
Citi and its subsidiaries, such as the agencies’ proprietary rating agency
methodologies and assumptions and conditions affecting the financial
services industry and markets generally.
Citi and its subsidiaries may not be able to maintain their current
respective ratings. A ratings downgrade by Fitch, Moody’s or S&P could
negatively impact Citi’s ability to access the capital markets and other sources
of funds as well as the costs of those funds, and its ability to maintain certain
deposits. A ratings downgrade could also have a negative impact on Citi’s
funding and liquidity due to reduced funding capacity, including derivative
triggers, which could take the form of cash obligations and collateral
requirements. In addition, a ratings downgrade could also have a negative
impact on other funding sources, such as secured financing and other
margined transactions for which there are no explicit triggers, as well as on
contractual provisions which contain minimum ratings thresholds in order
for Citi to hold third-party funds.
Moreover, credit ratings downgrades can have impacts which may
not be currently known to Citi or which are not possible to quantify. For
example, some entities may have ratings limitations as to their permissible
counterparties, of which Citi may or may not be aware. In addition, certain
of Citi’s corporate customers and trading counterparties, among other clients,
could re-evaluate their business relationships with Citi and limit the trading
of certain contracts or market instruments with Citi in response to ratings
downgrades. Changes in customer and counterparty behavior could impact
not only Citi’s funding and liquidity but also the results of operations of
certain Citi businesses. For additional information on the potential impact of
a reduction in Citi’s or Citibank, N.A.’s credit ratings, see “Capital Resources
and Liquidity—Funding and Liquidity—Credit Ratings” above.
LEGAL RISKS
Citi Is Subject to Extensive Legal and Regulatory
Proceedings, Investigations, and Inquiries That Could
Result in Substantial Losses. These Matters Are Often
Highly Complex and Slow to Develop, and Results Are
Difficult to Predict or Estimate.
At any given time, Citi is defending a significant number of legal and
regulatory proceedings and is subject to numerous governmental and
regulatory examinations, investigations and other inquiries. These
proceedings, examinations, investigations and inquiries could result,
individually or collectively, in substantial losses.
In the wake of the financial crisis of 2007–2009, the frequency with
which such proceedings, investigations and inquiries are initiated, and the
severity of the remedies sought, have increased substantially, and the global
judicial, regulatory and political environment has generally become more
hostile to large financial institutions such as Citi. Many of the proceedings,
investigations and inquiries involving Citi relating to events before or during
the financial crisis have not yet been resolved, and additional proceedings,
investigations and inquiries relating to such events may still be commenced.
In addition, heightened expectations by regulators and other enforcement
authorities for strict compliance could also lead to more regulatory and other
enforcement proceedings seeking greater sanctions for financial institutions
such as Citi.
For example, Citi is currently subject to extensive legal and regulatory
inquiries, actions and investigations relating to its historical mortgage-
related activities, including claims regarding the accuracy of offering
documents for residential mortgage-backed securities and alleged breaches
of representation and warranties relating to the sale of mortgage loans or
the placement of mortgage loans into securitization trusts (for additional
information on representation and warranty matters, see “Managing Global
Risk—Credit Risk—Citigroup Residential Mortgages—Representations
and Warranties” below). Citi is also subject to extensive legal and regulatory
inquiries, actions and investigations relating to, among other things,
submissions made by Citi and other panel banks to bodies that publish
various interbank offered rates, such as the London Inter-Bank Offered Rate
(LIBOR), or other rates or benchmarks. Like other banks with operations
in the U.S., Citi is also subject to continuing oversight by the OCC and other
bank regulators, and inquiries and investigations by other governmental
and regulatory authorities, with respect to its anti-money laundering
program. Other banks subject to similar or the same inquiries, actions or
investigations have incurred substantial liability in relation to their activities
in these areas, including in a few cases criminal convictions or deferred
prosecution agreements respecting corporate entities as well as substantial
fines and penalties.