The Federal Deposit Insurance Corporation’s (FDIC’s) five-member board plans to vote on Thursday to downgrade its rating on Citigroup’s data-management systems to a “deficiency” from a “shortcoming,” according to a government official familiar with the matter who spoke to the WSJ.

The US Federal Reserve and the FDIC in 2022 had identified a shortcoming in Citi’s so-called living will that details how the firm would be unwound in the event of bankruptcy and how it handles and manages its data and risks. The reports are due every other year, and Citi and its peers had filed their latest plans in 2023 and were awaiting feedback on them. 

Escalating those concerns to a “deficiency” could kick-start a process where regulators order the bank to make changes to its operations, if both the Fed and FDIC agree to it. Regulators can issue serious penalties, such as lifting the amount of capital the bank must hold or capping its growth. (The Fed is not expected to join the FDIC in escalating its concerns about the bank’s plan, though, according to the officials.)

Living wills anticipate the total failure and dissolution of a large institution that must have an orderly plan to prepare for the failure in a way that will not require taxpayer-funded bailouts.

“We continue to make substantial investments to modernize our infrastructure, including the work we’re doing to automate data and regulatory reporting processes,” the bank said in a statement. “We have rigorous, firm-wide stress testing and resolution planning processes and we’re always working to improve and strengthen those capabilities.”

Living wills

Since the 2008 financial crisis and the Dodd-Frank Wall Street Reform and Consumer Protection Act to shore up the US banking system, big banks like Citi have been required to file living wills. Specifically, Section 165(d) of the Dodd-Frank Act requires “systemically significant” financial institutions to periodically report to the Fed, the FDIC and the Financial Stability Oversight Counsel a plan for the rapid and orderly resolution of their business in the event of material financial distress. 

The living wills are like other types of crisis planning that banks do, outlining a recovery plan that shows how they would recover from a material financial distress and manage liquidity in the event that something goes poorly and then recover and return to health. There’s stress-testing that the institutions conduct that simulates their performance in various hypothetical economic scenarios. And they include business continuity plans
that specify how their operations could continue in the event of something like a natural disaster or a cyberattack attack.

The living wills required of large banks go further than these things – they anticipate the total failure and dissolution of a large institution and are an orderly plan to deal with it in a way that will not require taxpayer-funded bailouts or cause widespread disruption to the financial system.

Data governance spotlight

In October 2020, the Fed and the OCC fined Citi $400m and sent it a list of fixes designed to detect problematic transactions, risky trades and other potential trouble spots that were not well-detailed in their living will reports. 

CEO Jane Fraser, who got the top spot in early 2021, has made the upgrade of Citi’s systems a top priority, but she acknowledges it will take time and cost billions of dollars. In an April earnings call, she said: “Given its magnitude and scale, the transformation is a multiyear effort to address issues that have spanned over two decades. We’ve made steady progress.”

In late 2022, all eight global systemically important institutions “passed” their 2021 targeted resolution plans. Six of them that were found to have shortcomings in them in 2019 relating to their ability to produce reliable data in stressed conditions were deemed to have adequately addressed those shortcomings in their 2021 plans. (Those banks were Bank of America, BNYMellon, Citi, Morgan Stanley, State Street, and Wells Fargo.)

But the Fed and the FDIC found that Citi continued to have a shortcoming related to data quality that was the subject of consent orders with bank regulators in October 2020.

Stressing data governance as a general theme, the bank regulators noted in all eight feedback letters in 2022 that they would expect ongoing improvements to “governance mechanisms, liquidity, and capital” including “liquidity resolution capabilities to reflect further actual stress conditions.”