Germany’s Deutsche Bank AG’s US operations failed the US Federal Reserve’s annual stress test due to “widespread and critical deficiencies” in its risk management, the central bank said on Thursday.
The Fed gave a “conditional” pass to US investment behemoths Goldman Sachs Group Inc and Morgan Stanley, even though their capital backstops sank below required levels since that was due to one-time charges tied to December last year’s tax cuts, officials said.
However, the Fed “objected to the capital plan of DB [Deutsche Bank] USA Corp because of widespread and critical deficiencies across the firm’s capital planning practices,” the annual test results said.
Should Deutsche Bank hit hard times in an economic downturn or financial crisis, poor data capabilities and internal controls, bad forecasts for revenue and losses under stress, and substandard internal audits would leave the bank in danger, the Fed said.
The stinging rebuke for Deutsche Bank, Europe’s second-largest lender, came as shareholders continue to express serious doubts about the bank’s health.
The bank’s shares on Wednesday hit a two-year low in Frankfurt, Germany.
Deutsche Bank also failed similar stress tests in 2015 and 2016.
Fed Banking Supervision Vice Chairman Randal Quarles said the results showed the US banking sector was largely sound, given the passing grades to all but one of the 35 banks tested.
The results “demonstrate that the largest banks have strong capital levels and after making their approved capital distributions, would retain their ability to lend even in a severe recession,” Quarles said in a statement.
Passing banks are able to make payments to shareholders, but any Deutsche Bank dividends must be approved by the Fed.
However, this would only impact transfers back to its corporate parent in Germany.
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