Citigroup: a case study in managerial and regulatory failures

This article by Arthur Wilmarth from George Washington University Law School uses Citigroup as a case study to demonstrate the question of whether bank executives and regulators are able to supervise and control today’s complex megabanks.

The study shows that post-mortem evaluations of Citigroup’s near-collapse revealed that neither Citigroup’s managers nor its regulators recognized the systemic risks embedded in the bank’s far-flung operations. Thus, Citigroup was not only too big to fail but also too large and too complex to manage or regulate effectively. Citigroup’s history raises deeply troubling questions about the ability of bank executives and regulators to supervise and control today’s megabanks.

According to the article, Citigroup’s original creators – John Reed of Citicorp and Sandy Weill of Travelers – admitted in recent years that Citigroup’s universal banking model failed, and they called on Congress to reinstate the Glass-Steagall Act’s separation between commercial and investment banks. As Reed and Weill acknowledged, the universal banking model is deeply flawed by its excessive organizational complexity, its vulnerability to culture clashes and conflicts of interest, and its tendency to permit excessive risk-taking within far-flung, semi-autonomous units that lack adequate oversight from either senior managers or regulators.

The paper can be downloaded here