The Fed board’s unanimous objection to Deutsche Bank’s US capital plan marks another blow for the German lender, whose financial health globally has been under intense scrutiny in recent months.
Deutsche Bank last week easily cleared the Fed’s easier first hurdle that measures its capital levels against a severe recession scenario.
The Fed’s second test focuses on the bank’s capital plan.
“Concerns include material weaknesses in the firm’s data capabilities and controls supporting its capital planning process, as well as weaknesses in its approaches and assumptions used to forecast revenues and losses under stress,” the Fed said in a statement.
The Fed added it also found material weaknesses in the bank’s risk management functions and internal audit, which sent shares down 1% after hours.
While failing the US stress test would not likely affect the banks’ ability to pay dividends to shareholders, which are typically paid out at the group level, it will require Deutsche Bank to make changes to its US operations.
This will include substantial investment in technology, operations, risk management and personnel, as well as changes to its governance. It could also potentially result in the bank further paring back some of its US operations. It also means the bank would not be able to make any distributions to its German parent without the Fed’s approval.
In a statement on Thursday, Deutsche Bank said it had made significant investments to improve its capital planning capabilities as well as controls and infrastructure at its US subsidiary, DB USA Corp.
“DB USA continues to make progress across a range of programs and will continue to build on these efforts and to engage constructively with regulators to meet both internal and regulatory expectations,” the bank said.
The newly created US subsidiaries of six foreign lenders, Deutsche Bank, Credit Suisse Group AG, UBS Group AG, BNP Paribas SA, Barclays Plc and Royal Bank of Canada, went through the test for the second time this year had their results publicly released for the first time.
Deutsche Bank’s results cover DB USA Corp, a holding company with $133 billion in assets, according to Deutsche Bank’s March filings. This includes all of Deutsche Bank’s non-branch US assets, including its mortgage lending and debt financing subsidiary, and its sizable Wall Street broker-dealer trading business.
The test results follow months of turmoil for Germany’s largest lender, whose shares are down 43% this year in Frankfurt.
The bank abruptly reshuffled management in April after three consecutive years of losses. It then announced it would scale back its global investment bank and refocus on Europe and its home market after three consecutive years of losses. It has flagged cuts to US bond trading, equities, and the business that serves hedge funds.
But Thursday’s result will raise further questions among analysts and investors as to whether the German lender should more aggressively pare back its US operations.
Conditional approval
The Fed otherwise approved the capital plans for 34 lenders, allowing them to use the extra capital for stock buybacks, dividends and other purposes.
These included household names like JPMorgan Chase & Co, Citigroup Inc, Bank of America Corp and Wells Fargo & Co, as well as major regional lenders like Capital One Financial Corp, PNC Financial Services Group Inc and US Bancorp.
The country’s top regulator said it conditionally approved the capital plans for Goldman Sachs Group Inc, Morgan Stanley whose capital levels had been adversely affected during the test by last year’s changes to the US tax code.
Those banks will maintain their capital distribution levels inline with those paid in recent years to bolster their capital cushion, the Fed said.
The Fed also said it had conditionally approved the capital plan for State Street Corp, but that the bank needed to shore up its counterparty risk management and analysis.