Washington (AFP) – German banking giant Deutsche Bank’s American operations failed the US Federal Reserve’s annual stress test due to “widespread and critical deficiencies” in its risk management, the central bank said Thursday.
The Fed gave a “conditional” pass to US investment behemoths Goldman Sachs and Morgan Stanley, even though their capital backstops sank below required levels since that was due to one-time charges tied to December’s tax cuts, officials said.
But the Fed “objected to the capital plan of DB USA Corporation because of widespread and critical deficiencies across the firm’s capital planning practices,” according to the annual test results.
Should DB hit hard times in an economic downturn or financial crisis, poor data capabilities and internal controls, bad forecasts for revenue and losses under stress, and substandard internal audits would leave the bank in danger, the Fed announced.
The stinging rebuke for Deutsche Bank, Europe’s second-largest lender, came as shareholders continue express serious doubts about the bank’s health. The bank’s shares on Wednesday hit a two-year low in Frankfurt.
DB also failed similar stress tests in 2015 and 2016.
Randal Quarles, the Fed’s newly appointed vice chairman for banking supervision, said the results showed the US banking sector was largely sound, given the passing grades to all but one of the 35 banks tested.
The results “demonstrate that the largest banks have strong capital levels, and after making their approved capital distributions, would retain their ability to lend even in a severe recession,” he said in a statement.
Passing banks are able to make payments to shareholders, but any DB USA dividends must be approved by the Fed. However, this would only impact transfers back to its corporate parent in Germany.
Deutsche Bank will be required to address deficiencies identified by regulators, Fed officials told reporters.
Given the current robust health of the world’s largest economy, the Fed imposed a harsher testing scenario than in recent years, with unemployment shooting up to 10 percent, GDP shrinking and financial conditions worsening.
The first round of stress test results released last week — the quantitative test — found the banking sector generally ready to face a severe global recession. But this week’s qualitative test looked at capital planning, including share buybacks and dividend payments.