Deutsche Bank’s US unit fails Fed stress test

WASHINGTON/NEW YORK: Deutsche Bank AG’s United States subsidiary on Thursday failed the second part of the US Federal Reserve’s (Fed) annual stress tests due to “widespread and critical deficiencies” in the bank’s capital planning controls.

The Fed board’s unanimous objection to Deutsche Bank’s US capital plan marks another blow for the German lender, sending its shares down one per cent after hours. Its financial health globally has been under intense scrutiny after Standard & Poor’s (S&P) cut 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 and Morgan Stanley could not increase their capital distributions and State Street Corp must improve its counter-party risk management and analysis, said the Fed.

Deutsche 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 Fed.

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,” said the Fed.

While failing the US stress test would not likely affect the bank’s ability to pay dividends to shareholders, it will require Deutsche Bank to make substantial investment in technology, operations, risk management and personnel, as well as changes to its governance.

It also means the bank would 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.