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This is a question I’ve always wondered to myself, ever since the US financial system first teetered on the brink of mass bankruptcy in the fall of 2008. We know that the US Federal Reserve was ready to bail out some banks (not all banks), but many banks. We don’t know what the real criteria was for choosing which bank to save, but we do know some banks were too systemic to let fail.

Citibank is my first candidate for a bank too systemic to fail. Not just for the US system, but for many other countries as well. Unlike UBS or Credit Suisse, which source much of their deposits via their Switzerland operations, or BNP and Soc Gen, which source most of their deposits in France, Citigroup sources its deposits from all six continents.

It is the most transnational of all banks as far as setting up branches is concerned. So how does a systemic failure of a bank of this magnitude (and this geographical breadth) affect the world financial system? Very seriously, I would believe.

So if ever its US operations will have to face the music for all the dancing it’s done all these past years, will Citi’s foreign branches have to dance along?

US branches notwithstanding, Citibank branches the world over are among the most profitable of all banks. They tend to serve the biggest multinationals. In whatever pat of the world there is a Citibank, they serve the local elite, both on the deposit side, and on the borrowing side. And Citi branches usually have the most repertoire of profitable services of all banks in any jurisdiction. Most local banks are usually just playing catch up each time Citibank comes up with a new product offering.

Now each Citibank branch, having its own complete banking operations (including deposits) in many countries, definitely is accountable to its own set of regulators. The US parent cannot just transfer capital from its far flung branches, if ever the US arm starts experiencing hyperventilating bouts of insolvency (or could they?) Alert Central bankers the world over will probably sit up in attention if they notice their local Citibank repatriating large sums towards the parent. Capital controls (if they did not already exist in that jurisdiction) will surely dam the outflow before you can say ‘bank run’.

Is it possible that if the US parent becomes insolvent, it becomes insolvent by itself?

Now of course, the US parent retains majority equity ownership of its foreign branches. Even though these foreign branches may not be allowed by their respective central bankers to close, they will surely be tapped by Citibank as possible sources of funding to pay off any creditors in any theoretical insolvency.

And as sources of funding, these branches (I haven’t run any numbers) will surely prove rich pickings. I’m pretty sure, in many jurisdictions, local banks will salivate at the prospect of buying their local Citibank competitor, and subsuming it into their own operation. They will probably be willing to pay an arm and a leg in some cases (I am making a bold assumption here). After all, Citibank has a client list of the wealthiest retail clients (Citigold), the biggest companies, and the most multinational organizations. This beachhead should be worth a lot, and even more so, for a newby wannabe transnational bank. (You can list the banks I mentioned above in this group, plus JP Morgan, Deutsche, BofA, Barclays, etc.) The only other bank I know that has Citi’s retail footprint world-wide is HSBC. Because of the possible synergies that can be realized here, these branches have got to be bigger gems than what AIG’s foreign subsidiaries proved to be.

You might say that Citi’s huge global footprint serves as its insurance in a possible insolvency. Bundled altogether, or as separate regional bundles, they gotta be worth at least what Citibank currently seems to owe anyone (again a heroic assumption here). And I could see their value in more ways than one. Because, if your little boys are all systemically important in their respective bases, wouldn’t you think all central bankers the world over will stand at attention in case you, the parent, will ever need help? They’ll probably be forming into ad hoc action committees faster than you can say ‘moral hazard’.

In short, a Citi problem is a global problem. If Citi needs help, we may probably finally see that a global coordinated action is not entirely impossible. You’ll probably see reserves flowing from all central banks concerned (!) to help Citi out. (maybe they’ll even form a Citi global reserve fund) After all, if Citi closes in their jurisdiction, it probably will affect other parts of their system, rather than just Citi’s own retail clients there. Maybe in their jurisdiction, Citi acts as a central clearing authority of some sort, or maybe it’s the chief market maker in some vital sovereign issue. Maybe it’s not even hard to fathom that its local branch could be the main depositary bank of members of the central bank board of governors (Now wouldn’t that get them into code red alert at the first sign of Citi trouble).

Now I don’t claim to know much about the internal workings of Citibank, or have crunched a realistic recreation of its real and actual financials (who knows how they really look like). But as I have been a detached observer of Citi in several places, I could say that Citi is a close enough proxy for the global financial system.

If we ever let Citi fall down to its knees, we may very well have to figure out how to remake a new financial order from scratch. Now that’s a Citicatch22.