The inception of superpower economies resulted in the general growth of earth’s financial abilities, for a short while, there were world wars, and it led to a global recession that affected the world’s economies with an intense severity. In the mid-1920s, many economies were performing badly that the world nearly had a global meltdown (Ayadi et al. 2011). The effects rocked many economies, especially the superpowers. The recession was succeeded by the creation of a regulatory environment in which financial organization adhered to operate with to avoid a repeat of history. The arguments in this paper aim at discussing the regulatory environments guiding banks operations, and how recently introduced regulations are affecting Citibank’s functionality.
Das (2013) asserts that a regulatory environment subjects a bank to meet certain requirements, restrictions as well as guidelines as dictated by the central government. In the case of Citibank, these regulatory structures are aimed at creating transparency and accountability between banks and other corporations which are doing business in general (Worldbank 2015. Adherent supporters of these regulations feel that many financial institutions with commercial arms have absolute control over the economy (Davies and Green 2013). The implication is that in the wake of financial crisis, it is impossible for such systems to sustain the economic pressure associated with an economy when it is in recession. Proponents of this notion argue that without a government bailout, the collapsing banks would certainly be declared bankrupt, and more important, create a rippling effect that resonates throughout the entire economy creating a systemic failure (Ayadi et al. 2011).
According to Citibank (2005), the regulatory framework set up is aimed at achieving some objective for Citibank such as prudence, systematic risk reduction, protection of banks confidentiality, credit allocation, avoiding misuse of banks resources and rules about fair treatment of customers as well as offering cooperate social responsibility. Bessis and O’Kelly (2015) assert that the framework is meant to protect two aspects on any bank from any region of the world. First, it is supposed to protect the quantity and quality of capital a bank can have at any given one time. Secondly, the measures are aimed at reducing financial institutions liabilities. Therefore, the new regulations are aimed at protecting Citibank’s capital and reducing its liabilities. According to Kantor, Nolan and Sauvant (2011), this would prove helpful, especially in the international markets.
Prudency ensures that banks reduce the risk levels to which creditors are exposed (Bessis and O’Kelly 2015). It means that persons who deposit their money in the financial institutions are safeguarded against any unforeseen circumstances which an economy may suffer. The implication is that situations such as recess cannot affect depositors in any way (World Bank Group 2013). In the long run, prudence ensures that regardless of the state of a nation’s economy, the measures instituted safeguard not only the customer’s interest, but also Citibank as well.
While prudence protects depositors, systemic risk reduction tries to avert the likelihood of disruption resulting from inappropriate trading conditions for financial situations leading to the declaration of bankruptcy to such financial institutions (Van Greuning and Bratanovic 2009). The regulatory environment helps protects Citibank from reaching such a point where it can no longer be able to sustain its activities. Systemic reduction tries to control a bank's liability thus prevent it from insolvency; a matter, which would affect and hurt any economy significantly.
Amid the crisis that hit the world economy from 2007 to 2009, significant changes were affected as a means to strengthen and safeguard the banking sector (Worldbank 2015. In Europe and the U.S, the supervisory pressure is high on banks concerning capital, market infrastructure, disclosure, remunerations and financial crimes. Das (2013) established that most countries in Europe and the United States have established their frameworks that are meant to enhance capital and liquidity requirements. In the U.S, the Federal Reserve’s instituted its package dubbed “Dodd-Frank Wall Street Reform and Consumer Protection Act and Volcker Rule that prohibits banks from indulging in short-term proprietary trade”. Similarly, Europe instituted regulatory packages with the most recent being the Capital Requirements Directive CRD IV as well as European Infrastructure Regulations (Van Greuning and Bratanovic 2009). Banks feel the impact of the recent regulatory changes. The global regulatory agenda has resulted in significant costs to the financial institution and directly hinders their abilities to support credit growth as well as economic recovery as witnessed at Citibank.
The changes have impacted the lending volumes in both short term and a long term. In the short term basis, loan volumes are affected negatively as Citibank seek to lower high-risk weighted assets from its investment portfolio. The result is that sectors that need a high capital requirement are deprived of the boost they require. Industries majorly affected include corporate lending and commercial real estate. A long-term impact includes a lowering of Citibank’s capital as a result of improved risk portfolio as well as a lower risk premium for high-quality assets (Bessis and O’Kelly 2015). As a result, Citibank’s capital reserves will build up over the course of time, eventually improving credit margins. The effects would be primarily felt by universal banks than commercial banks. However, non-banks financial companies will not be affected, and therefore, will have a competitive advantage over banks and gain more at the expense of commercial banks.
The reforms also affect lending rates at Citibank. As higher capital and liquidity requirement hold the economy hostage; borrowing costs at Citibank is impacted, and the loan rates are increased, after taking into account higher capital costs and costs related to sourcing for funds. The after-tax weighted capital cost increases in direct proportion to equity of capital, which raises Citibank's overall assets. In the developed economies, these theories concerning the effect of increases in risk-weighted assets is relatively large for the U.S compared to either the European or Japanese banks combined (Worldbank 2015).
Despite these reforms, Citibank continue to operate even in the aftermath of the financial crisis recently witnessed. To shield itself from the tight regulations and prevent it running out of business, Citibank has resolved to resort its asset sales and make more out of such sales to increase its capital reserves. A move coupled, together with the downsizing of its noncore business as well as product portfolio rationalization and various other maneuvers to increase its credit spread and remain competitive in a very competitive market.
Reference ListTop of Form
Ayadi, R., Arbak, E., Ben Naceur, S. and Casu, B., 2011. Convergence of Bank Regulations on International Norms in the Southern Mediterranean: Impact on bank performance and growth.
Bessis, J. and O'Kelly, B., 2015. Risk management in banking. John Wiley & Sons.
Citibank (New York, N.Y.). (2005). Citibank's guide to building personal wealth: essential information for the Asia Pacific investor. Singapore, John Wiley & Sons (Asia).
Das, D. (2013). International Finance Contemporary Issues. Hoboken, Taylor and Francis.
Davies, H., & Green, D. (2013). Global Financial Regulation The Essential Guide (Now with a Revised Introduction). New York, NY, John Wiley & Sons.
Kantor, M., Nolan, M. D., & Sauvant, K. P. (2011). Reports of Overseas Private Investment Corporation determinations. Oxford, Oxford University Press.
Van Greuning, H. and Bratanovic, S.B., 2009. Analyzing banking risk: a framework for assessing corporate governance and risk management. World Bank Publications.
World Bank Group ed., 2013. Doing Business 2014: understanding regulations for small and medium-size enterprises. World Bank Publications.
