Citigroup will close California banking subsidiary Banamex USA, formerly California Commerce Bank. The bank had been operating under consent orders from the FDIC and other regulators for three years because of money laundering and poor management practices at the bank. Regulators suspect the bank moved money and disguised transactions for terrorist groups and drug distributors. The bank promised to mend its ways, but a recent review by state regulators found that operations had deteriorated. The FDIC found that the bank had failed to hire a compliance officer and hinted that the bank was not taking its obligations seriously. Now Banamex USA will pay a $40 million fine to California, the largest bank fine ever assessed by that state, and an additional $100 million to the FDIC.
The combined penalty of $140 million is enormous for a bank with $700 million in deposits and $1 billion in assets. Few banks could absorb a penalty equal to 20 percent of deposits and continue to operate. However, the penalty does not seem disproportionate for a bank that served criminals and thumbed its nose at the law. The penalty does not include an order for Banamex USA to close, but it would be too costly for Citigroup to keep it open. A statement from Citigroup promised an orderly wind down. It did not specify a period for ending operations and returning deposits to depositors, but for a bank of this size wanting to minimize its costs, the process could take one to three months.
The more serious crime problem facing Citigroup is in Mexico, where its Banamex subsidiary is being investigated by at least six U.S.-based law enforcement and regulatory agencies, along with authorities in Mexico, for violations ranging from securities fraud to bribery. Banamex also provided the Mexican end of many, perhaps most, of the illicit money transfers seen at Banamex USA. Investigators are trying to find out how deeply Banamex was or is involved in the endemic corruption at one of its largest customers, the state-owned oil company in Mexico. Banamex is much larger than Banamex USA, providing nearly 10 percent of Citigroup’s revenue. If the situation at Banamex is half as bad as what was found at Banamex USA, that will be, in one form or another, a considerable financial blow to Citigroup.
Two executives received jail sentences for their roles in the collapse of Anglo Irish Bank, the bank that nearly broke Ireland in the last real estate bust. They were convicted of actions related to deceptive record-keeping. One executive was sentenced to three years in prison and another to two. A low-level manager was convicted in the same trial and was sentenced to 18 months. These are the first convictions in the Irish banking collapse and are notable mainly for how little the defendants had to do with the high-risk banking strategies that led to the spectacular collapse at Anglo Irish Bank.
Nothing has really been solved yet in six months of negotiations between Greece and Europe, so banks in Greece will stay in limbo for months, open but operating with severe restrictions. Greece says recapitalizing the banks this year is a priority, but the government’s optimistic plan of completing that before the end of the year will surely slip into 2016 as obstacles are encountered along the way.
Virtually no new banks or credit unions have opened in the United States in the last five years. Part of the reason is that bank investors are often able to buy up troubled or failed banks, a shortcut way to have an operating bank. The bigger issue, though, is that the banking industry as a whole is still overextended. It is hard for a new business to thrive in an category that is destined to shrink by at least another 15 percent in the coming years.
China has ordered its banks to add up their stock market exposure. It is thought that a stock market decline of more than 50 percent from its peak, a scenario that seems likely enough, will leave millions of loans without adequate collateral. That could put several banks at risk of insolvency, and authorities want to find out in advance which banks are facing that risk.