Deutsche Bank fails U.S. Fed stress test while three U.S. stumble lenders

WASHINGTON / NEW YORK (Reuters) – Deutsche Bank AG's U.S. subsidiary failed on Thursday the second part of the US Federal Reserve's annual stress tests due to "widespread and critical deficiencies" in the bank's capital planning controls.

The Fed's unanimous objection to Deutsche Bank's US capital plan marks another blow to the German lender, sending its shares down 1 percent after hours. Its financial health globally has been under intense scrutiny after S & P cut its rating and questioned its plan to return to profitability.

The Fed, on the other hand, passed the test. Goldman Sachs Group Inc. and Morgan Stanley can not increase their capital distributions and State Street Corp. needs to improve its counterparty risk management and analysis, the Fed said.

Deutsche Bank last week easily cleared the Fed's easiest first steps to a severe recession, the strictest ever run by the Fed.

Thursday's second test focuses on the bank's plan for that capital, such as dividend payouts and investments, stands up against the harsh scenarios.

"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.

While failing the U.S. stress test would not likely affect the bank's ability to pay dividends to shareholders, it would require Deutsche Bank to make substantial investment in technology, operations, risk management and personnel, and to change its governance.

It also means that it would be able to provide additional services to its customers.

In a statement on Thursday, Deutsche Bank said that it would have made significant investments in infrastructure capitalization capabilities and controls at the United States and would be working with regulators to "continue to build on these efforts." [19659004ThenewlycreatedUSsubsidiariesofsixforeignlendersDeutscheBankCreditSuisseGroupAGUBSGroupAGBNPParibasSABarclaysPlcandRoyalBankofCanadawentthroughthetestforthesecondtimeforthefirsttime

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-core U.S. assets, including its mortgage lending and debt financing subsidiary, and its sizable Wall Street broker-dealer trading business.

The test results follow for Germany's largest lender, and shares are down 43 percent this year in Frankfurt.

The bank abruptly reshuffled management in April after three consecutive years of losses. It would then be discounted to its global investment bank and refocus on Europe and its home market. It has flagged cuts to U.S. bond trading, equities and the business that serves hedge funds.

But Thursday will result in further questions among analysts and investors in the United States.

David Hendler, an independent analyst at New York-based Viola Risk Advisors, who specializes in risk management, said he was "astounded" that the results showed continued risk management and operational problems at the subsidiary of major global bank.

"It's a plane that is not safe to malfunctioning," he said.

The focus will now shift to European authorities and how they plan to tackle Deutsche's problems, he added.

CONDITIONAL APPROVALS

The Fed has approved the capital plans for 34 lenders, allowing them to use the 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., plus Capital Regional Financial Corp., PNC Financial Services Group Inc. and U.S. Bancorp.

The country's top regulator said it has conditionally approved the capital plans for Goldman Sachs and Morgan Stanley whose capital levels had been adversely affected during the test by last year's changes to the U.S. tax code.

Those banks will be able to maintain their capital cushions, the Fed said.

After the results were announced, Morgan Stanley said it will be $ 6.8 billion, in line with last year's payout.

Goldman Sachs said it would return up to $ 6.3 billion, including $ 5 billion through share buybacks and $ 1.3 billion in dividends, which will rise to a quarterly rate of 85 cents per share from 80 cents.