Citigroup Inc.

Regulatory Capital Standards DevelopmentsThe prospective regulatory capital standards for financial institutions arecurrently subject to significant debate, rulemaking activity and uncertainty,both in the U.S. and internationally. See “Risk Factors” below.Basel II and III. In late 2005, the Basel Committee on BankingSupervision (Basel Committee) published a new set of risk-basedcapital standards (Basel II) that would permit banking organizations,including Citigroup, to leverage internal risk models used to measurecredit, operational, and market risk exposures to drive regulatory capitalcalculations. In late 2007, the U.S. banking agencies adopted these standardsfor large banking organizations, including Citigroup. As adopted, thestandards require Citigroup, as a large and internationally active bankingorganization, to comply with the most advanced Basel II approaches forcalculating credit and operational risk capital requirements. The U.S.implementation timetable consists of a parallel calculation period under thecurrent regulatory capital regime (Basel I) and Basel II, followed by a threeyeartransitional period.Citi began parallel reporting on April 1, 2010. There will be at least fourquarters of parallel reporting before Citi enters the three-year transitionalperiod. The U.S. banking agencies have reserved the right to change howBasel II is applied in the U.S. following a review at the end of the second yearof the transitional period, and to retain the existing prompt corrective actionand leverage capital requirements applicable to banking organizations inthe U.S.Apart from the Basel II rules regarding credit and operational risks, inJune 2010, the Basel Committee agreed on certain revisions to the market riskcapital framework that would also result in additional capital requirements.In December 2010, the U.S. banking agencies issued a proposal that wouldamend their market risk capital rules to implement certain revisionsapproved by the Basel Committee to the market risk capital framework.Further, as an outgrowth of the financial crisis, in December 2010,the Basel Committee issued final rules to strengthen existing capitalrequirements (Basel III). The U.S. banking agencies will be requiredto finalize, within two years, the rules to be applied by U.S. bankingorganizations commencing on January 1, 2013.Under Basel III, when fully phased in on January 1, 2019, Citigroup wouldbe required to maintain risk-based capital ratios as follows:Tier 1 Common Tier 1 Capital Total CapitalStated minimum ratio 4.5% 6.0% 8.0%Plus: Capital conservationbuffer requirement 2.5 2.5 2.5Effective minimum ratio 7.0% 8.5% 10.5%While banking organizations may draw on the 2.5% capital conservationbuffer to absorb losses during periods of financial or economic stress,restrictions on earnings distributions (e.g., dividends, equity repurchases, anddiscretionary compensation) would result, with the degree of such restrictionsgreater based upon the extent to which the buffer is utilized. Moreover,subject to national discretion by the respective bank supervisory or regulatoryauthorities, a countercyclical capital buffer ranging from 0% to 2.5%,consisting of common equity or other fully loss absorbing capital, wouldalso be imposed on banking organizations when it is deemed that excessaggregate credit growth is resulting in a build-up of systemic risk in a givencountry. This countercyclical capital buffer, when in effect, would serve as anadditional buffer supplementing the capital conservation buffer.As a systemically important financial institution, Citigroup may alsobe subject to additional capital requirements. The Basel Committee andthe Financial Stability Board are currently developing an integratedapproach to systemically important financial institutions that could includecombinations of capital surcharges, contingent capital and bail-in debt.Under Basel III, Tier 1 Common capital will be required to be measuredafter applying generally all regulatory adjustments (including applicabledeductions). The impact of these regulatory adjustments on Tier 1 Commoncapital would be phased in incrementally at 20% annually beginning onJanuary 1, 2014, with full implementation by January 1, 2018. During thetransition period, the portion of the regulatory adjustments (includingapplicable deductions) not applied against Tier 1 Common capital wouldcontinue to be subject to existing national treatments.Moreover, under Basel III certain capital instruments will no longer qualifyas non-common components of Tier 1 Capital (e.g., trust preferred securitiesand cumulative perpetual preferred stock) or Tier 2 Capital. These instrumentswill be subject to a 10% per-year phase-out over 10 years beginning on January1, 2013, except for certain limited grandfathering. This phase-out periodwill be substantially shorter in the U.S. as a result of the so-called “CollinsAmendment” to the Dodd-Frank Wall Street Reform and Consumer ProtectionAct of 2010, which will generally require a phase out of these securities overa three-year period also beginning on January 1, 2013. In addition, the BaselCommittee has subsequently issued supplementary minimum requirements tothose contained in Basel III, which must be met or exceeded in order to ensurethat qualifying non-common Tier 1 or Tier 2 Capital instruments fully absorblosses at the point of a banking organization’s non-viability before taxpayers areexposed to loss. These requirements must be reflected within the terms of thecapital instruments unless, subject to certain conditions, they are implementedthrough the governing jurisdiction’s legal framework.Although U.S. banking organizations, such as Citigroup, are currentlysubject to a supplementary, non-risk-based measure of leverage for capitaladequacy purposes (see “Capital Ratios” above), Basel III establishes a moreconstrained Leverage ratio requirement. Initially, during a four-year parallelrun beginning on January 1, 2013, banking organizations will be requiredto maintain a minimum 3% Tier 1 Capital Leverage ratio. Disclosure of suchratio, and its components, will start on January 1, 2015. Depending upon theresults of the parallel run test period, there could be subsequent adjustmentsto the definition and calibration of the Leverage ratio, which is to be finalizedin 2017 and become a formal requirement by January 1, 2018.63