Citibank 2013 Annual Report Download - page 116

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MARKET RISK
Market risk encompasses funding and liquidity risk and price risk, each
of which arise in the normal course of business of a global financial
intermediary such as Citi.
Market Risk Management
Each business is required to establish, with approval from Citi’s market risk
management, a market risk limit framework for identified risk factors that
clearly defines approved risk profiles and is within the parameters of Citi’s
overall risk tolerance. These limits are monitored by independent market
risk, Citi’s country and business Asset and Liability Committees and the
Citigroup Asset and Liability Committee. In all cases, the businesses are
ultimately responsible for the market risks taken and for remaining within
their defined limits.
Funding and Liquidity Risk
Adequate liquidity and sources of funding are essential to Citi’s businesses.
Funding and liquidity risks arise from several factors, many of which Citi
cannot control, such as disruptions in the financial markets, changes in key
funding sources, credit spreads, changes in Citi’s credit ratings and political
and economic conditions in certain countries.
Overview
Citi’s funding and liquidity objectives are to maintain adequate liquidity
to (i) fund its existing asset base; (ii) grow its core businesses in Citicorp;
(iii) maintain sufficient excess liquidity, structured appropriately, so that
it can operate under a wide variety of market conditions, including market
disruptions for both short- and long-term periods; and (iv) satisfy regulatory
requirements. Citigroup’s primary liquidity objectives are established by
entity, and in aggregate, across three major categories:
•฀ the parent entity, which includes the parent holding company (Citigroup)
and Citi’s broker-dealer subsidiaries that are consolidated into Citigroup
(collectively referred to in this section as “parent”);
•฀ Citi’s significant Citibank entities, which consist of Citibank, N.A. units
domiciled in the U.S., Western Europe, Hong Kong, Japan and Singapore
(collectively referred to in this section as “significant Citibank entities”);
and
•฀ other Citibank and Banamex entities.
At an aggregate level, Citigroup’s goal is to maintain sufficient funding
in amount and tenor to fully fund customer assets and to provide an
appropriate amount of cash and high-quality liquid assets (as discussed
further below), even in times of stress. The liquidity framework provides that
entities be self-sufficient or net providers of liquidity, including in conditions
established under their designated stress tests.
Citi’s primary sources of funding include (i) deposits via Citi’s bank
subsidiaries, which are Citi’s most stable and lowest cost source of long-
term funding, (ii) long-term debt (primarily senior and subordinated
debt) primarily issued at the parent and certain bank subsidiaries, and
(iii) stockholders’ equity. These sources may be supplemented by short-term
borrowings, primarily in the form of secured financing transactions.
As referenced above, Citigroup works to ensure that the structural tenor
of these funding sources is sufficiently long in relation to the tenor of its
asset base. The goal of Citi’s asset/liability management is to ensure that
there is excess tenor in the liability structure so as to provide excess liquidity
after funding the assets. The excess liquidity resulting from a longer-term
tenor profile can effectively offset potential decreases in liquidity that may
occur under stress. This excess funding is held in the form of high-quality
liquid assets, which Citi generally refers to as its “liquidity resources,” and is
described further below.