The Strategist

Deutsche Bank fails Fed's stress test

06/29/2018 - 10:34

The American division of Deutsche Bank AG failed the second part of the annual stress tests of the US Federal Reserve because of the "widespread and critical shortcomings" in controlling capital planning. This is reported by Reuters.

Lucas Kaufmann
Lucas Kaufmann
The Fed also set conditions for the three banks that passed the audit. Goldman Sachs Group Inc and Morgan Stanley cannot increase capital allocation, and State Street Corp should improve counterparty risk management and analysis, the US central bank said.

Last week, Deutsche Bank easily passed the first part of the stress tests. At this stage, the Fed checked whether the largest banks had enough capital to withstand a serious financial crisis.

On the second stage, on Thursday, the Fed checked the capital planning, in particular, dividend payments and investments for stability to stressful financial conditions.

"The problems include significant shortcomings in the firm’s capabilities and the controls that support its capital planning process, as well as weaknesses in its approaches and assumptions used to forecast income and losses under stress," the Fed said in a statement.

The failure is unlikely to affect the bank's ability to pay dividends to shareholders. However, this will require significant investments from Deutsche Bank in technology, operations, risk management and personnel, as well as changes in management.

This also means that the bank will not be able to make any payments to the parent company without approval of the Fed and this may potentially lead to the bank continuing to reduce some of its operations in the US.

In a statement on Thursday, Deutsche Bank noted that it made significant investments to improve its capital planning and control capabilities and infrastructure in its subsidiary in the US. The bank will work with regulators to "continue to increase these efforts."

Earlier, the international rating agency Standard & Poor's (S&P) lowered the long-term credit rating of the Deutsche Bank issuer from "A-" to "BBB +", the forecast is "stable".

While the management is taking "tough" actions to restore profitability, the bank "seems to have a period of sustained lagging behind competitors, many of whom have already completed restructuring," the agency noted.

On April 9, Christian Sewing became the new chief executive officer of Deutsche Bank. He replaced the British John Cryan, who could not reach the target cost indicator.

Sewing said in a letter to employees after the rating downgrade that the bank's financial strength "is unquestionable," although it must carry out its strategy "quickly and unswervingly".

S&P questioned the ability of the new CEO Deutsche Bank to implement a plan to reduce its global investment banking. As part of this plan, the bank should reorient to Europe and its domestic market after three years of losses in a row.