19 April 2019
Deutsche Bank A.G. and other European lenders are facing challenges in meeting US risk management standards. Photo: WSJ
Deutsche Bank A.G. and other European lenders are facing challenges in meeting US risk management standards. Photo: WSJ

Foreign banks brace for Fed stress tests

Some of the world’s biggest banks could fail an upcoming stress test by the United States Federal Reserve.

These include Deutsche Bank A.G. and Banco Santander S.A., the Wall Street Journal reported Tuesday, citing people familiar with the matter.

The stress tests are expected to find shortcomings in risk management at the US units of some foreign banks when the Fed announces preliminary results on Thursday and full results on March 11.

Foreign banks are tripped up not by capital requirements but by what the Fed sees as flaws in how they measure and predict risks and losses in their sprawling operations, including businesses that have not been heavily regulated in the past.

In March, for example, the Fed found “widespread and significant deficiencies” in Santander’s stress testing and capital planning, including governance of its US operations.

The central bank restricted dividend payments by the firm’s US arm, but in a sign that governance remains a challenge, Santander’s US auto lending subsidiary later declared a dividend that violated the Fed’s order.

The potential stress-test failures would mark the second straight year multiple European firms didn’t meet the Fed’s expectations for the qualitative, rather than quantitative, part of the tests.

Overseas lenders such as Deutsche Bank, Barclays Plc., Credit Suisse A.G., and UBS A.G. are spending heavily and recruiting project managers, data experts and other staff needed to run the complex computer models involved in the Fed’s annual exercise.

The outlays are in addition to even larger sums devoted to compliance in Europe.

The US test assesses whether a bank could keep lending during a severe downturn and determines whether the central bank permits a firm to return capital to shareholders.

At HSBC Holdings Plc., whose US unit failed the Fed tests in 2014, global regulatory and compliance costs increased by US$774 million last year to US$2.4 billion, including investments needed to restructure the bank in Britain and to run US and European stress tests, executives said on a Feb. 23 conference call.

Stress testing around the world “is generally becoming significantly more intense than has ever been the case in the past”, said finance director Iain Mackay.

The Fed, concerned about a repeat of the 2008 financial crisis, last year began making the US operations of foreign firms subject to the same regulatory regime that has already forced US-based banks such as J.P. Morgan Chase & Co. to change the way they do business.

Overseas banks are required by the Fed to organize their US operations under a single holding company by mid-2016. By 2017, they must comply with a rule that will force them to maintain minimum capital levels here.

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