Citigroup Fears Run on the Bank

Citigroup (C), that large banking behemoth that we have all come to love, recently sent out a notice to its checking account customers informing them of new changes to the rules associated with withdrawals of deposits.

The notice states that Citi has the right to require account holders to provide advance notice before withdrawing any money on their accounts. As per the notice, Citi says, “Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change”.

To any thinking man such a change has two adverse effects. The first is that I cannot withdraw my money in an emergency and may have to wait for it for seven days, should Citi decide to exercise this option, while the second could be more sinister – is Citi looking to restrict the amount of cash it can lose on any one day if ever there were to be a good old-fashioned bank run?

It’s not such a far fetched idea. Citi has only recently emerged from a massive government bailout which saw the United States take a majority stake in the company. Citi lost about 92% of it’s market capitalization since that period and the government still holds its equity stake. The firm was essentially worthless and would have collapsed had it not been for the government intervention that occurred. Had such an event materialized, Citi checking account owners would have flocked to the bank demanding repayment of their checking account funds, thereby worsening the situation and forcing Citi into bankruptcy even sooner.

The new regulations allow Citi to avoid this scenario by making clients wait seven days in the worst case scenario. Such protection is good for the bank but obviously bad for the customer.

Citi itself has said that the notice is just a technical requirement imposed by the FDIC as part of banking law changes that happened when that institution started offering unlimited account protection last year. It’s also worth noting that not only Citi falls under these new regulations and is not the only bank to have sent out “scary” notices. The changes have also occurred at Bank of America (BAC) and JP Morgan (JPM), amongst many other banks.

While there’s no need to be alarmist and stuff your money under your mattress, be warned that banks have numerous legal rights and caveats to keep your money for longer than you might anticipate.