Fri, Mar 13, 2015 - Page 15 News List

Deutsche Bank, Santander fail second Fed stress test


The US Federal Reserve rejected the capital plans of the US operations of Spain’s Banco Santander SA and Germany’s Deutsche Bank AG, saying it saw serious problems in the planning processes of both.

Capping the second phase of stress tests on the 31 largest US banks, the Fed also gave Bank of America’s plan a qualified pass, while the other 28 gained full approval for their dividend and share buyback programs.

The three top investment banks, JPMorgan Chase & Co, Goldman Sachs Group Inc and Morgan Stanley, meanwhile all earned approvals after revising their capital plans in the wake of last week’s first-phase results.

Explaining the rejections of Santander Holdings USA and Deutsche Bank Trust Corp, the Fed cited “widespread and substantial weaknesses across their capital planning processes.”

Stressing that the problems were qualitative, not quantitative — that on paper both banks had adequate capital resources — the Fed said it saw problems in governance, internal controls, risk assessment and other issues in both.

The effect of Wednesday’s decision is that neither can distribute their profits to shareholders — their parent banks — without the express permission of the Fed, itself dependent on addressing the shortcomings that the Fed bank examiners highlighted.

Both are significant, though not dominant, arms of their parents. Santander Holdings USA is a business with US$150 billion in assets and counts as 10 percent of the parent’s global business, according to the Fed.

With about US$54 billion in assets, Deutsche Bank Trust counts as 5 percent of Deutsche Bank’s global business.

In a statement responding to the decision, Deutsche Bank said it was committed to strengthening its capital planning process, key to ensuring it maintains a sound financial footing in a crisis.

“Deutsche Bank has hired 1,300 employees dedicated to ensuring that its systems and controls are best in class and has hired over 500 employees across its various control functions in the US,” it said.

Santander USA chairman Timothy Ryan said in a statement that the bank “will continue to reinforce our governance and management to address our supervisor’s qualitative concerns. Changes in both areas are forthcoming.”

The Fed also saw problems in Bank of America’s capital planning process, specifically its loss and revenue modeling practices.

“These deficiencies warrant further near-term attention but do not undermine the quantitative results of the stress tests for the firm,” the Fed said.

Bank of America has until September to remedy the problems, it said.

Bank of America immediately announced that is board had approved a US$4 billion stock repurchase plan through the second quarter of next year, while acknowledging the Fed’s requirement for resubmitting its capital plan.

Overall, a senior Fed official told reporters, the banks continue to strengthen, as shown by all of them passing the first phase of the stress tests — measurements of capital adequacy — last week.

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