Daily Management Review

Deutsche Bank’s U.S. Arm Fails The U.S. Federal Reserve ‘Stress Test’


07/05/2018


Following the test Fed expressed concerns on Deutsche Bank’s “data capabilities”, control on “capital planning”, besides other weaknesses.



Last week, the U.S. subsidiary of Deutsche Bank failed to pass the second phase of the annual “stress tests” conducted by the U.S. Federal Reserve. The reason behind the failure is “widespread and critical deficiencies” present in the bank’s “capital planning controls”.
 
Moreover, the German lender faced yet another blow, as its “US capital plan” faced “unanimous objection” from the board of Fed. The bank has been under global scrutiny for its “financial health” following S&P’s rating reduction on this bank, whereby questioning its “plan to return to profitability”.
 
Three other banks passed Fed tests with conditions put on them, as “Goldman Sachs Group and Morgan Stanley” will not be able to “increase their capital distributions”, while State Street Corp will have to come up with a better “counterparty risk management and analysis”.
 
Earlier, Deutsche Bank cleared the “easier first hurdle” of Fed’s stress test, wherein the bank’s “capital levels against a severe recession” were measured. The second test, however, dealt with the bank’s capital plan’s resilience, including “dividend payouts and investments”, in the face of “harsh scenarios”. According to a Fed statement:
“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”.
 
Even though, Deutsche Bank will not face any problem in paying “dividends to shareholders” due to its failure in stress test but it will need to invest substantially in “technology, operations, risk management and personnel” besides changing its governance. Moreover, the subsidiary arm will also require Fed's approval before making “any distributions to its German parent”.
 
However, Deutsche Bank stated that it made “significant investments” for improving its “capital planning capabilities”, infrastructure and its controls at the U.S. subsidiary while collaborating with the regulators it will “continue to build on these efforts”. The six “newly created” subsidiary of foreign lenders in the U.S., namely “Deutsche Bank, Credit Suisse Group, UBS Group, BNP Paribas, Barclays and Royal Bank of Canada”, went through the stress test “for the second time this year”, while their results were made public “for the first time”.
 
Given Deutsche Bank’s recent turmoil filled history which even went through an abrupt management reshuffling and amid its present attempt of scaling back its “global investment bank”, the afore mentioned failure on bank’s part could instil doubt and questions among the investors and analysts. In the words of Viola Risk Advisors, David Hendler:
“It’s (Deutsche Bank) like a plane that isn't safe to fly because the flight systems are malfunctioning”.
 
According to Hendler, the European authorities will come under the focus for their next plan of tackling the problem at the German lender. Otherwise, the Fed has approved the “capital plans for 34 lenders”, including “JPMorgan Chase & Co, Citigroup, Bank of America Corp”, Wells Fargo & Co, “Capital One Financial Corp, PNC Financial Services Group Inc and US Bancorp”, for them to utilise “the extra capital” into “stock buybacks, dividends and other purposes”.
 
 
References:
thenational.ae







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