Citigroup: Risky Business

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Every year, the Financial Stability Board publishes a list of banks ranked according to two major factors.–One is how much they would disrupt international markets by failing, and the second is how much risk there is of that happening.

These are referred to as systemic rankings, and banks take appropriate actions as their ranks move up and down each year. Banks with higher rankings are expected to increase the amount of capital they keep on hand to bail them out of crisis situations. They may also make changes to activity and infrastructure to reduce their risk, which can result in a decrease of the buffer capital for the following year.

The latest list was released on Monday, and Citigroup (NYSE: C) is sitting right at the top. As a result, Citi will now be required to hold a 3% systemic buffer. Bank of America and Wells Fargo filled out the other top three spots. According to the FSB, one of the criteria judged for the list is “the use of supervisory judgment”, so it’s a little surprising that Wells Fargo’s gigantic scandal didn’t shoot the bank straight to the number one spot.

On the other hand, banks such as Morgan Stanley, Barclays and HSBC have made efforts in the last year to reduce their risk, and have now been allowed to decrease the amount of capital they are required to hold. These changes may have been related to size, complexity, sustainability, cutting non-core assets or other circumstances.

Banks would greatly prefer not to hold any more capital than is absolutely necessary. A main source of revenue is derived from the investments they make with the deposits of their customers, so being required to maintain greater capital reserves reduces the size of their investment funds. It will be interesting to see, in the next twelve months, what actions Citibank will initiate to reduce its systemic ranking and, as a result, the amount of capital it is required to hold.