The puzzle of Citigroup

This month’s reputational risk feature (page 16) raises an interesting point -- why isn’t Citigroup suffering more from the various problems it’s encountered over the past three years? It was involved in Enron/ Worldcom, it’s had its private client business closed in Japan, and German regulators are investigating a group of its bond traders. And that’s just the big stuff.

And yet Citigroup revenues were up 11% to a whopping $86 billion for 2004, with healthy gains for both corporate and retail banking. So what gives?

In 2003, when Citigroup settled the Enron fiasco, it had an agreement with the Federal Reserve Bank of New York to put in place, among other things, a reputational risk management strategy. Indeed, regulators are now actively encouraging all banks to follow suit.

This creates an interesting contradiction. If firms put in place reputational risk programmes, will they lose the incentive to behave themselves? If they can spin themselves out of trouble with the right noises and gestures, then the logic behind Basel IIPillar III -- market discipline -- is likely to be much less effective. Stock prices won’t plummet and consumers won’t run away.

Regulators must ensure the long-term stability of a financial system by making sure large banks manage their reputations. But if they are managed, then are transgressions punished?