Citi to cut lending to buyout funds as new capital rules bite
Citigroup is slashing the amount it lends to asset managers, including private equity firms, as the U.S. bank rushes to meet tough new capital rules, according to people familiar with the matter.
The type of lending Citi is moving away from is known as underwriting financing, a niche but important business for Wall Street banks that want to develop strong ties with trading clients, especially private equity groups. investment.
Citi’s existing book totals about $65 billion and the bank is preparing to reduce it to about $20 billion in the coming months, one of the people said.
There is a high demand for loans from buyout groups in particular, who use money pledged by fund investors as collateral for short-term bank loans to strike deals before receiving money from their donors.
Citi declined to comment.
Citi’s move underscores the impact of new capital requirements put in place by the Federal Reserve that threaten to cut lending from major US banks. This week, Jamie Dimon, chief executive of JPMorgan, warned that the rules posed a “significant economic risk” that would restrict the flow of credit to American businesses and consumers.
Citi, like JPMorgan and Bank of America, is forced to increase its reserves this year because it has been designated a global systemically important bank, which requires it to hold more capital relative to its weighted assets. depending on the risks.
Banks can meet the requirements by retaining more earnings or raising new capital, but most choose to reduce the amount of assets on their balance sheets.
It comes amid a restructuring of the bank under chief executive Jane Fraser, who is also leaving many of the bank’s overseas retail operations. The lender is grappling with a 2020 consent order with US banking regulators under which it agreed to upgrade its processes and technology.
Citi has started alerting some of its biggest private equity clients to the impending changes, according to people briefed on the conversations.
A leading private equity firm said most major Wall Street banks are still engaged in subscription financing, but Citi – which has been one of the top three players in the sector – is cutting back.
Another buyout official interpreted the move as a sign that Citi may be embarking on a broader reconsideration of its role in the lucrative but risky market for providing credit to private equity groups.
Subscription lines carry minimal risk but do not tend to generate high returns. Instead, banks are offering them to cultivate relationships with buyout companies in hopes of winning more lucrative business later, the executive said.
“Citi was an outlier,” they said, adding that the bank had a large subscription line business but a smaller presence in buyout financing.
“As a ‘loss leader’ or safe, low-profit business for building relationships, it’s a great business.” But as a standalone business with no follow-up activity, it’s poor,” they said.