Citigroup Inc.

Risk Aggregation and Stress TestingWhile Citi’s major risk areas are described individually on the followingpages, these risks also need to be reviewed and managed in conjunction withone another and across the various businesses.The Chief Risk Officer, as noted above, monitors and controls majorrisk exposures and concentrations across the organization. This meansaggregating risks, within and across businesses, as well as subjecting thoserisks to alternative stress scenarios in order to assess the potential economicimpact they may have on Citigroup.Comprehensive stress tests are in place across Citi for mark-to-market,available-for-sale and accrual portfolios. These firm-wide stress reportsmeasure the potential impact to Citi and its component businesses of verylarge changes in various types of key risk factors (e.g., interest rates, creditspreads, etc.), as well as the potential impact of a number of historical andhypothetical forward-looking systemic stress scenarios.Supplementing the stress testing described above, Citi risk management,working with input from the businesses and finance, provides periodicupdates to senior management on significant potential areas of concernacross Citigroup that can arise from risk concentrations, financial marketparticipants, and other systemic issues. These areas of focus are intended tobe forward-looking assessments of the potential economic impacts to Citi thatmay arise from these exposures. Risk management also reports to the RiskManagement and Finance Committee of the Board of Directors, as well as thefull Board of Directors, on these matters.The stress testing and focus position exercises are a supplement tothe standard limit-setting and risk-capital exercises described below, asthese processes incorporate events in the marketplace and within Citi thatimpact the firm’s outlook on the form, magnitude, correlation and timingof identified risks that may arise. In addition to enhancing awarenessand understanding of potential exposures, the results of these processesthen serve as the starting point for developing risk management andmitigation strategies.Risk CapitalRisk capital is defined as the amount of capital required to absorb potentialunexpected economic losses resulting from extremely severe events over aone-year time period.• “Economic losses” include losses that are reflected on Citi’s ConsolidatedIncome Statement and fair value adjustments to the ConsolidatedFinancial Statements, as well as any further declines in value not capturedon the Consolidated Income Statement.• “Unexpected losses” are the difference between potential extremely severelosses and Citigroup’s expected (average) loss over a one-year time period.• “Extremely severe” is defined as potential loss at a 99.9% and a 99.97%confidence level, based on the distribution of observed events andscenario analysis.The drivers of economic losses are risks which, for Citi, as referencedabove, are broadly categorized as credit risk, market risk and operational risk.• Credit risk losses primarily result from a borrower’s or counterparty’sinability to meet its financial or contractual obligations.• Market risk losses arise from fluctuations in the market value of tradingand non-trading positions, including the changes in value resulting fromfluctuations in rates.• Operational risk losses result from inadequate or failed internal processes,systems or human factors or from external events.These risks, discussed in more detail below, are measured and aggregatedwithin businesses and across Citigroup to facilitate the understandingof Citi’s exposure to extreme downside events as described under “RiskAggregation and Stress Testing” above. The risk capital framework isreviewed and enhanced on a regular basis in light of market developmentsand evolving practices.82