Citibank 2013 Annual Report Download - page 145

127
Redenomination and Devaluation Risk
As referenced above, the ongoing Eurozone debt crisis and other
developments in the EMU could lead to the withdrawal of one or more
countries from the EMU or a partial or complete break-up of the EMU (see
also “Risk Factors—Market and Economic Risks” above). If one or more
countries were to leave the EMU, certain obligations relating to the exiting
country could be redenominated from the Euro to a new country currency.
While alternative scenarios could develop, redenomination could be
accompanied by immediate devaluation of the new currency as compared to
the฀Euro฀and฀the฀U.S.฀dollar.
Citi, like other financial institutions with substantial operations in
the EMU, is exposed to potential redenomination and devaluation risks
arising from (i) Euro-denominated assets and/or liabilities located or held
within the exiting country that are governed by local country law (“local
exposures”), as well as (ii) other Euro-denominated assets and liabilities,
such as loans, securitized products or derivatives, between entities outside of
the exiting country and a client within the country that are governed by local
country law (“offshore exposures”). However, the actual assets and liabilities
that could be subject to redenomination and devaluation risk are subject to
substantial legal and other uncertainty.
Citi has been, and will continue to be, engaged in contingency planning
for฀such฀events,฀particularly฀with฀respect฀to฀the฀GIIPS.฀Generally,฀to฀the฀
extent that Citi’s local and offshore assets are approximately equal to its
liabilities within the exiting country, and assuming both assets and liabilities
are symmetrically redenominated and devalued, Citi believes that its risk
of loss as a result of a redenomination and devaluation event would not be
material. However, to the extent its local and offshore assets and liabilities
are not equal, or there is asymmetrical redenomination of assets versus
liabilities, Citi could be exposed to losses in the event of a redenomination
and devaluation. Moreover, a number of events that could accompany
a redenomination and devaluation, including a drawdown of unfunded
commitments or “deposit flight,” could exacerbate any mismatch of assets
and liabilities within the exiting country.
Citi’s฀redenomination฀and฀devaluation฀exposures฀to฀the฀GIIPS฀as฀of฀
December 31, 2013 are not additive to the risk exposures to such countries
described above. Rather, Citi’s credit risk exposures in the affected country
would generally be reduced to the extent of any redenomination and
devaluation of assets.
As of December 31, 2013, Citi estimates that it had net asset exposure
subject to redenomination and devaluation in Italy, principally relating to
derivatives contracts. Citi also estimates that, as of such date, it had net asset
exposure฀subject฀to฀redenomination฀and฀devaluation฀in฀Spain,฀principally฀
related to offshore exposures related to held-to-maturity securitized retail
assets฀(primarily฀mortgage-backed฀securities)฀(see฀“Retail,฀Small฀Business฀
and Citi Private Bank” above) and government bonds. However, as of
December 31, 2013, Citi’s estimated redenomination and devaluation
exposure to Italy was less than Citi’s net current funded credit exposure to
Italy (before purchased credit protection) as reflected in the table above.
Further, as of December 31, 2013, Citi’s estimated redenomination and
devaluation฀exposure฀to฀Spain฀was฀less฀than฀Citi’s฀net฀current฀funded฀credit฀
exposure฀to฀Spain฀(before฀purchased฀credit฀protection)฀as฀reflected฀under฀in฀
the table above. As of December 31, 2013, Citi had a net liability position in
each of Greece, Ireland and Portugal.
As referenced above, Citi’s estimated redenomination and devaluation
exposure does not include purchased credit protection. As described above,
Citi has purchased credit protection primarily from investment grade, global
financial฀institutions฀predominantly฀outside฀of฀the฀GIIPS.฀To฀the฀extent฀the฀
purchased credit protection is available in a redenomination/devaluation
event, any redenomination/devaluation exposure could be reduced.
Any estimates of redenomination/devaluation exposure are subject to
ongoing review and necessarily involve numerous assumptions, including
which assets and liabilities would be subject to redenomination in any
given case, the availability of purchased credit protection and the extent
of any utilization of unfunded commitments, each as referenced above.
In addition, other events outside of Citi’s control-such as the extent of any
deposit flight and devaluation, the imposition of exchange and/or capital
controls,฀the฀requirement฀by฀U.S.฀regulators฀of฀mandatory฀loan฀loss฀and฀other฀
reserve requirements or any required timing of functional currency changes
and the accounting impact thereof could further negatively impact Citi in
such an event. Accordingly, in an actual redenomination and devaluation
scenario, Citi’s exposures could vary considerably based on the specific facts
and circumstances.