The

Federal Reserve

has taken the handcuffs off

Citigroup

(C) - Get Report

.

Bank regulators formally notified the nation's biggest lender on Monday that it is now free to go about making acquisitions. Nearly a year ago, the Fed instructed Citigroup to refrain from making any "significant'' acquisitions while the bank worked to improve its internal compliance procedures.

But on Monday, William Rutledge, executive vice president of the Federal Reserve Bank of New York, sent a letter to Citigroup CEO Charles Prince informing him that the informal moratorium on the bank doing deals is no longer in effect.

"Citigroup has made significant progress in implementing its new compliance risk management program,'' Rutledge said. "Consequently, the understanding that you would refrain from significant expansion is no longer in operation.''

The lifting of the Fed's edict is a big victory for Prince, who has been working to clean up the bank's rogue image, given its involvement in most of the major corporate scandals on Wall Street. The bank has paid out more than $5 billion in civil settlements and regulatory fines over the past few years for its transgressions.

Most notably, Prince instituted a series of corporate governance reforms, dubbed Citigroup's Five Point Plan. The initiative was designed to instill a "commitment to the highest standards of integrity and professionalism'' throughout Citigroup's worldwide enterprise.

Last week, however, that effort hit a speed bump when Australian regulators charged Citigroup with engaging in improper insider trading in a corporate merger on which it was advising. The Australian Securities and Investments Commission contends that Citigroup's traders used confidential information in making "substantial'' proprietary trades in shares of

Patrick Corp.

, just days before

Toll Holdings

announced a $4.6 billion takeover bid for the cargo-shipping company.

Investment bankers from Citigroup are serving as advisers to Toll in its hostile takeover bid, which is still pending. Citigroup has denied the allegations and intends to contest them.

With Citigroup free to consider making big acquisitions, a new round of speculation about bank mergers could be about to kick off. Up until now, the banking sector hasn't been a big player in the recent wave of corporate dealmaking.

Citigroup, however, is the proverbial 800-pound gorilla in the banking world, given its market cap of $237 billion. Citigroup's size makes it one of the few U.S. banks capable of pulling off a megadeal.