The Fed just handed an embarrassing smackdown to 2 European banks
Deutsche Bank offices in London. REUTERS/Luke MacGregor
The Federal Reserve has failed Deutsche Bank Trust Corp. and Santander Holdings under themandated Dodd-Frank stress tests.
Morgan Stanley received a conditional non-objection and must resubmit its plan. The bank has until December 29 to do so.
The test measures the ability to respond to an event similar to the financial crisis, and examines 33 financial institutions with more than $50 billion in assets in the US.
Both European-based banks passed the quantitative section of the test, meaning that under the high-stress scenario, they would theoretically have enough capital to survive.
The problem came in the qualitative review of the banks' processes.
The Federal Reserve said in a release:
"The Federal Reserve objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. because of broad and substantial weaknesses across their capital planning processes, and insufficient progress these firms have made toward correcting those weaknesses and meeting supervisory expectations."
The Fed said that while there were improvements in certain aspects of capital planning at Deutsche Bank Trust Corp., the firm has "material unresolved supervisory issues."
Here's the excerpt on Deutsche Bank:
"The Federal Reserve determined that the assumptions and analysis underlying the capital plan of DBTC, and the capital adequacy process of DBTC, are not reasonable or appropriate. In particular, the Federal Reserve identified deficiencies in the risk management and control infrastructure at DBTC, including risk measurement processes; stress testing processes; and data infrastructure."
DBTC is made up of the US transaction bank and US wealth-management business at Deutsche Bank.
"The capital adequacy of Deutsche Bank Trust Corporation has never been in doubt," said Bill Woodley, CEO of DB USA Corp. and deputy CEO of Deutsche Bank Americas, in a release following the stress-test results.
Here's what the Fed had to say about Santander:
"The assumptions and analysis underlying the capital plan, and the capital adequacy process, are not reasonable or appropriate. The Federal Reserve's review of the capital planning processes at Santander revealed ongoing deficiencies in the risk management framework, including important features of the risk measurement and monitoring function; stress testing processes; and internal controls, governance, and oversight functions."
This is the second year in a row that the American holding side of Deutsche Bank and Santander have failed the test.
Each year the Fed changes the scenario in which the banks have to prove their adequacy. This year, the test included negative interest rates and unemployment near 10%.
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