Citigroup's Resolution Planning Shortcomings
Plus, other observations on the G-SIB feedback letters
Earlier today the Federal Reserve Board and the FDIC announced the results of their review of the resolution plans filed in summer 2021 by the eight U.S. G-SIBs. This post offers a few observations on the agencies’ feedback and related developments.
Citigroup Shortcoming
Background
Under the resolution plan rule,1 the Board and FDIC are required to review and jointly assess whether a resolution plan submitted by a banking organization includes any “deficiencies” or “shortcomings.” For purposes of the rules:
A deficiency is “a weakness that individually or in conjunction with other aspects could undermine the feasibility of” a resolution plan
A shortcoming is “a weakness or gap that raises questions about the feasibility of a covered company's resolution plan, but does not rise to the level of a deficiency”
A finding of a deficiency kicks off a process in which a banking organization is required to resubmit its resolution plan. If the resubmitted plan does not adequately remedy the deficiencies, a firm “shall be subject” to (unspecified) “more stringent capital, leverage, or liquidity requirements, or restrictions on [its] growth, activities, or operations.”
If, even after the imposition of such requirements, a firm fails within the next two years to remediate the deficiencies, the agencies may force the firm to make divestitures if the agencies conclude, in consultation with the Financial Stability Oversight Council, that “the divestiture of such assets or operations is necessary to facilitate an orderly resolution” of the firm under the bankruptcy code were it to fail.
The Agencies’ Feedback to Citi
In the feedback provided earlier today the agencies did not identify any deficiencies or shortcomings in the plans submitted by seven of the eight U.S. G-SIBs.
For Citigroup, however, the Board and FDIC “identified weaknesses in [Citi’s] processes and practices for producing certain data that could materially impact the firm’s resolution capabilities sufficient to constitute a shortcoming.”
In particular, the agencies in their feedback letter noted issues previously identified in Citi’s 2020 consent order with the Board, and observed that these issues “raise questions about [Citi’s] ability to produce accurate financial information during stress conditions and with respect to the firm’s resolution plan.” According to the agencies in the letter, this “could undermine the feasibility of” Citi’s resolution plan.
Should This Have Been A Deficiency?
In a statement released today, CFPB Director Rohit Chopra (who sits on the FDIC’s board and therefore gets a vote on these matters) stated that he “would have supported classifying Citigroup as having a ‘deficiency.’”
Director Chopra believes this would have been justified because the outstanding Board and OCC consent orders involving Citi have already found that “Citigroup has material issues estimating its capital and liquidity needs in the ordinary course of business.” Thus, in Director Chopra’s mind, “[i]t is not reasonable to expect that the firm could reliably and accurately estimate its capital and liquidity needs while experiencing material financial distress prior to and after filing for bankruptcy, as outlined in its resolution plan.”
There is not a detailed analysis in the feedback letter itself as to why the agencies determined that Citi’s data issues constitute a shortcoming and not a deficiency.
In fact, there is a kind of odd thing in the letter in that the agencies say the issues they found “could undermine the feasibility of” Citi’s resolution plan. This “undermine the feasibility of” language appears only once in the resolution planning rule, and it is in the context of the definition of deficiency as quoted earlier in this post, not in the definition of a shortcoming.
The agencies explained in 2019 that the purpose of adopting definitions of shortcoming and deficiency in a formal rule, rather than in less formal statements as previously, was to provide “a clearer articulation of the standards the agencies apply in identifying deficiencies and shortcomings.” If that was the goal, I am not sure how well it has been achieved, given that language specifically adopted to describe deficiencies is now being used to describe shortcomings.
I am cautious about making too much of this, however, because as explained below it is not clear that in this case there would have been much practical difference between a deficiency finding and the finding of a shortcoming.
Lots of Work For Citi to Do in Not Much Time
Under its 2020 consent order with the Federal Reserve Board, Citi was required to “conduct a gap analysis of its enterprise-wide risk management framework and internal controls systems (the ‘Gap Analysis’) to determine the enhancements that are necessary” to meet the Federal Reserve Board’s requirements for risk management related to capital, liquidity and compliance risk.
Then, once that Gap Analysis had been accepted by the Federal Reserve Board’s Director of the Division of Supervision and Regulation, Citi was required to produce a “Gap Analysis Remediation Plan” (GARP) explaining how Citi planned to address any identified gaps and their root causes, along with timelines for doing so.
Now, in the context of the resolution plan shortcoming, the agencies are requiring Citi to again take the GARP and complete the following tasks by January 31, 2023.
Create a “mapping document that identifies the actions in the GARP that are expected to improve the firm’s ability to accurately produce key data in a timely manner that would be relied upon to execute its resolution plan (Resolvability Data Mapping)”
Provide a “detailed description of how each of the actions identified in the Resolvability Data Mapping will improve the firm’s ability to accurately produce data in a timely manner integral to execution of the firm’s resolution strategy and which of these actions (either individually or in combination with other actions) [Citi] anticipates will result in the greatest material improvement to the firm’s resolution capabilities and that accordingly are a priority for the firm”
Provide a “detailed description of how [Citi] will demonstrate, to itself and the Agencies, that the improvements to its data governance program will result in more accurate and timely data integral to execution of the firm’s resolution strategy”
The agencies go on to pepper the letter with warnings that, if Citi does not meet the end-of-January deadline, or meets the deadline but makes submissions that are incomplete or unrealistic, the agencies are likely to find a deficiency. For example:
[I]f the Agencies jointly determine that either the Resolvability Data Mapping or Remediation Actions and Evaluations Descriptions are materially incomplete, are not reasonably likely to remediate the identified data-related weaknesses that are related to resolution, or are dependent on unrealistic or unreasonable timelines, the Agencies will jointly determine that the data issues giving rise to this shortcoming constitute a deficiency
[…]
If the Agencies jointly determine that the Covered Company has failed to complete the priority actions identified in the Resolvability Data Mapping or to demonstrate that the improvements to its data governance program have resulted in more accurate and timely data integral to execution of the firm’s resolution by the planned completion dates specified in the GARP, the Agencies will jointly determine that the data issues giving rise to this shortcoming constitute a deficiency.
Looking at all of this together, although I can understand Director Chopra’s preference to identify a deficiency, I am not sure the agencies’ choice to first categorize this as a shortcoming is going to make all that much practical difference:
If a deficiency had been identified, Citi would have needed to re-submit its resolution plan in 90 days and as part of that resubmission provide a gap analysis similar to the one the agencies have ordered.2 Then, if the agencies found that the resubmitted plan was still deficient, Citi would have been subjected to more stringent requirements or restrictions on its growth or activities.
Under the approach the agencies have chosen, Citi has roughly the next 70 days to perform the tasks described above in order to submit complete materials to the agencies by the end of January. Then, in July 2023, Citi must submit a full resolution plan on schedule with the other U.S. G-SIBs. True, Citi is not currently subject to restrictions on its growth or activities under the resolution plan rule, but that does not mean Citi is not currently subject to such restrictions.3 And, if you take the agencies' statements in the feedback letter at face value, nothing rules out a finding of a deficiency in the future.
In other words, regardless of the approach that was taken, Citi was going to have to soon submit a revised resolution plan, and will face further consequences if that resubmission is not viewed favorably.
A Hint As to Where Citi’s Broader Consent Order Remediation Effort Stands
As discussed recently on this blog, there have been rumblings that the Federal Reserve Board is unhappy with Citi’s progress in remediating the 2020 consent order, but there has not been concrete reporting on where exactly Citi is in the process. The feedback letter may give a few hints.
First, under the consent order and as discussed above, Citi was required to prepare and submit a Gap Analysis within 120 days of the consent order’s issuance in October 2020. Then, once that Gap Analysis was accepted, Citi was required within 60 days to prepare and submit a Gap Analysis Remediation Plan.
The reference in the consent order to the Gap Analysis needing to be “accepted” by the Federal Reserve Board was not a formality. As described in this House Financial Services Committee report, other banking organizations have struggled with submitting plans acceptable to the Federal Reserve Board and the other federal banking regulators, and have been required to resubmit those plans before the plans could be “accepted.”
We do not know how many resubmissions (if any) were required in this case, but in any case I read the feedback letter as saying that Citi has now moved on to the Gap Analysis Remediation Plan stage, which necessarily implies that the Gap Analysis has been accepted.
This represents progress of a sort, but I also read the feedback letter as saying that the GARP phase of the remediation work is still at a relatively early stage, without the Federal Reserve Board yet having made a determination as to whether the GARP is acceptable. Specifically, the letter says that “the Board will review the GARP pursuant to its normal supervisory process, and if the Board determines that the GARP is materially incomplete or insufficient, or is dependent on unreasonable timelines,” will take certain actions. And of course, once the GARP itself is found to be acceptable, there is still the matter of actually implementing, testing, etc. to the Board’s satisfaction the plans reflected therein.
I do not think any of this should be too surprising to those parsing Citi’s public statements about the multi-year nature of its transformation efforts, but I do think this reinforces the impression that there is still a long way to go. Citi said as much in its press release earlier today reacting to the agencies’ letter:
As part of the Transformation Citi has embarked upon, we are making significant investments in our data integrity and data management, as the letter notes. We will leverage that work to remediate the shortcoming identified today, as we acknowledge there is much more work to do.
Continued Evolution of Resolution Planning Requirements
In the feedback letters released today, the agencies set expectations that the next resolution planning exercise will include not only a review of what the resolution plans say, but also “expanded testing of the firm’s resolution capabilities” on which the resolution plan is based. According to the agencies, this is the “next logical step” in the resolution planning process.4
Among other things, testing of resolution capabilities by the Covered Company and by the Agencies can help inform the firm and its management, as well as the Agencies, about strengths and weaknesses in the Covered Company’s resolution preparedness. Further, assessing the Covered Company’s ability to execute its plan is the next logical step as the firm’s resolution planning efforts have matured.
… The Agencies anticipate conducting additional capabilities testing and validation work as they continue assessing the Covered Company’s resolvability. Among other things, the Agencies are considering conducting focused evaluations during the review of the Covered Company’s 2023 Full Plan of (i) whether the firm’s reliability of data, data accuracy, and BAU data capabilities are adequate to support its resolution[] strategies and plans and (ii) the firm’s policies and expected practices for moving liquidity at various points along the stress continuum.
In the remaining time before the submission of resolution plans by July 1, 2023, the agencies “expect to engage” with firms to provide more clarity on what this expanded testing will involve.
Up Next: Super Regionals and Certain Foreign Banks
Under the resolution plan rules, feedback on the resolution plans submitted in December 2021 by large U.S. regional banks and certain foreign firms with significant operations in the United States5 is due on or around December 17, 2022.
Assuming the agencies provide feedback by this deadline,6 this may give us more clarity into how the Board is thinking about the resolvability of firms that are quite large but that are not U.S. G-SIBs,7 a topic that has been much discussed recently.
Other Stuff
Finally, a quick summary of other commentary I found notable:
In addition to taking issue with the Citi determination as discussed above, Director Chopra also in his statement expressed the view that “it is highly unlikely that any of [the U.S. G-SIBs], as currently constituted, could be resolved in a rapid and orderly manner under the bankruptcy code.” Director Chopra went on to call that idea a “fairy tale.”
A trade group responded by saying that Director Chopra’s comments are politically motivated and nothing more than theater.
Acting FDIC Chair Gruenberg and Acting Comptroller Hsu also released statements, although theirs were each comparatively more measured.
Given that Director Chopra is on the record as saying that he believes Citi’s resolution plan should have been found to be deficient, and given that there are currently only three members on the FDIC’s board of directors, I think this necessarily means that Acting Chair Gruenberg and Acting Comptroller Hsu disagreed with that conclusion.8
No member of the Federal Reserve’s Board of Governors provided an on-the-record statement, and the web page showing the Board’s votes has at the time of this writing not been updated to reflect today’s issuance. When the agencies voted in July to delay the issuance of the feedback finally released today, Governors Bowman and Waller dissented, and I’ll be interested to see if there were any noted dissents today.
The link is to the Board’s rule, but the FDIC’s rule is basically identical. All quotes in this background section come from the rule.
Specifically, the rule requires a resubmitted plan to identify “changes to the covered company's business operations and corporate structure that the covered company proposes to undertake to facilitate implementation of the revised resolution plan (including a timeline for the execution of such planned changes).”
For instance, to be permitted to engage in certain activities under the BHC Act, Citi and its bank subsidiary must be considered to be in satisfactory supervisory condition. Supervisory ratings are confidential and I do not know Citi’s ratings. But in general, it would be surprising if a firm subject to the public consent orders to which Citi has been subject recently was nonetheless rated as being in satisfactory condition.
I am quoting here from the JPMorgan feedback letter, but this section of the letter was substantially the same for all firms.
This is not guaranteed. The agencies were due to release the G-SIB feedback issued today by July 2022, but at the last minute issued a press release saying the feedback would be delayed to give the agencies more time to review the plans.
Or perhaps not. Due to various technicalities, one firm in this group had to submit its plan in September of last year rather than December. Accordingly, the deadline for the agencies to provide feedback was the end of September 2022, and the agencies met that deadline. The feedback to this firm does not identify any shortcomings or deficiencies, but does note areas for improvement. I expect the other regionals are hoping for a similar outcome.
I suppose the counterargument is that perhaps the full FDIC board wanted to identify this as a deficiency while the Federal Reserve Board believed it was better to identify it as a shortcoming, which meant the agencies defaulted to calling it a shortcoming. That possibility cannot be ruled out, but in prior instances where this has happened the agencies have stated their disagreements with each other on the record. Given that this did not happen here, what conclusions should be drawn?