Deutsche Bank’s US subsidiary failed 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, Reuters reports.
The German bank last week easily cleared the Fed’s easier first hurdle that measures its capital levels against a severe recession, the strictest ever run by the US central bank.
Thursday’s second test focuses on how 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 was quoted as saying in a statement.
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, Reuters noted.
While failing the US stress test would not likely affect the bank’s ability to pay dividends to shareholders, it will require the lender to make substantial investment in technology, operations, risk management and personnel, as well as changes to its governance.
It also means the bank will not be able to make any distributions to its German parent without the Fed’s approval and could potentially result in the bank further paring back some of its US operations, the report said.
In a statement 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 and would work with regulators to “continue to build on these efforts.”
In other news, the Fed placed conditions on three banks that passed the test.
Goldman Sachs and Morgan Stanley cannot increase their capital distributions and State Street Corp must improve its counterparty risk management and analysis, the central bank said.
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