Deutsche Bank fails the Fed's stress test as three US lenders stumble

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

The unanimous opposition of the Fed's board to the plan US investment of Deutsche Bank marks a new blow for the German lender, sending its shares down 1 percent after hours. His global financial health was the subject of close scrutiny after S & P reduced its rating and questioned its plan to return to profitability.

The Fed also placed conditions on three banks that passed the test. Goldman Sachs Group Inc. ( GS.N ) and Morgan Stanley ( MS.N ) can not increase their capital distributions and State Street Corp. STT.N ) needs to improve the management and analysis of counterparty risk, the Fed said.

Last week, Deutsche Bank easily crossed the Fed's first hurdle, measuring its capital levels against a severe recession, the most severe ever by the Fed.

Thursday's second test focuses on how the bank's plan for this capital, such as dividend payments and investments, stands against hard scenarios.

"Concerns include material weaknesses in the company'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". Although the failure of the US test does not affect the bank's ability to pay dividends to shareholders, Deutsche Bank will have to invest heavily in technology, operations, risk management and personnel, and change its governance .

This also means that the bank would not be able to make distributions to its German parent company without the approval of the Fed and could eventually cause the bank to further reduce some of its US operations.

In a statement Thursday, Deutsche Bank said it has made significant investments to improve its capital planning capabilities as well as the controls and infrastructure of its US subsidiary and work with regulators to "continue to s & # 39; 39, to support these efforts. " [19659004] The newly created US subsidiaries of six foreign lenders, Deutsche Bank, Credit Suisse Group AG ( CSGN.S ), UBS Group AG ( UBSG.S ), BNP Paribas SA ( BNPP.PA ), Barclays Plc ( BARC.L ) and the Royal Bank of Canada ( RY.TO ), passed the examination for the second time this year their results have been made public 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 filings in March. This includes all of Deutsche Bank's non-branch US assets, including its mortgage and debt financing subsidiary, as well as its large Wall Street brokerage business.

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

The bank suddenly overhauled management in April after three consecutive years of losses. He then announced that he would reduce his global investment bank and refocus on Europe and its domestic market. He has reported cuts in US bond trading, stocks and hedge fund activity.

But Thursday's result will raise further questions among analysts and investors as to whether regulators should take a tougher line and even push the bank to more aggressively reduce its US operations.

David Hendler, an independent analyst at Risk Risk Specialist Viola Risk Advisors in New York, said he was "stunned" that the results show continued risk management and operational problems in the company's subsidiary. a major world bank.

"It's like an airplane that's not sure to fly because the flight systems are not working properly," he said.

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

CONDITIONAL APPROVALS

The Fed also approved capital plans for 34 lenders, allowing them to use the additional capital for share repurchases, dividends and dividends. other purposes.

These included familiar names such as JPMorgan Chase & Co ( JPM.N ), Citigroup Inc. ( CN ), Bank of America Corp ( BAC.N )) and Wells Fargo & Co ( WFC.N ), as well as large regional lenders such as Capital One Financial Corp. ( COF.N ), PNC Financial Services Group Inc. (). PNC.N ) and US Bancorp ( USB.N ).

The country's supervisory authority said it had conditionally approved the investment plans for Goldman Sachs and Morgan Stanley whose capital levels had been negatively affected during the test by the changes in the capital. last year to the US tax code.

These banks will maintain their capital distribution levels in line with those paid in recent years to strengthen their capital buffer, the Fed said.

After the announcement of the results, Morgan Stanley announced that it would distribute $ 6.8 billion, in line with the payment of last year.

Goldman Sachs announced that it would reinvest up to $ 6.3 billion, including $ 5 billion through stock buybacks and $ 1.3 billion in dividends, which would pass from 80 cents to 85 cents per share.