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Deutsche Bank, Santander Fail Federal Stress Test

Deutsche Bank, Santander  Fail Federal Stress Test  Deutsche Bank, Santander  Fail Federal Stress Test

Nearly all large US banks have passed the Federal Reserve’s annual stress test, with only US units of Deutsche Bank and Banco Santander SA failing.

The test is designed to judge whether banks operating in the US can weather a major economic downturn, BBC reported.

Santander Holdings and Deutsche Bank Trust Corp had already failed last year.

The Fed said that “broad and substantial weaknesses” persisted in the banks’ capital planning.

While all 31 large US banks passed the test, Morgan Stanley only got conditional approval and has to submit a new capital plan by the end of the year.

For Germany’s Deutsche Bank it was the second year that the subsidiary of the German lender failed the test while for Spain’s Santander it was the third time.

While the Fed noted improvements for the two banks, the regulator said there were continued substantial weaknesses.

The annual test looked at the 33 biggest banks in the US to see how they would be able to keep operating even in a severe financial crisis and economic downturn.

The tests were launched in the wake of the 2008 financial crisis.

  Raising Dividends

Banks that pass the test are effectively getting a green light to raise dividends or repurchase shares.

But these returns to investors cut into a banks’ capital reserves, and can make firms more vulnerable during an economic downturn.

Therefore, regulators like the Federal Reserve want to keep check on whether or not a bank is permitted to raise its dividend.

“The participating firms have strengthened their capital positions and improved their risk-management capacities,” Fed Governor Daniel Tarullo said. “Continued progress in both areas will further enhance the resiliency of the nation’s largest banks.”

  Shares at 30-Year Low

The IMF report helped send the Deutsche Bank’s stock Thursday to its lowest price in more than 30 years, as shares already were reeling from the UK’s vote to leave the European Union. Deutsche Bank, Germany’s biggest lender, is struggling to return to full-year profitability amid an overhaul to boost capital cushions and cut jobs and expenses.

The potential financial and economic upheaval from the Brexit vote could further complicate the bank’s efforts to sell assets and stabilize its core businesses.

Deutsche Bank shares closed down at €12.32 ($13.68), and are now down about 45% this year. Deutsche Bank and other banking shares had plummeted Friday and Monday in the aftermath of the UK referendum to leave the EU.

The IMF said that “among the (globally systemically important banks), Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse.”

The institution also said the German banking system poses a higher degree of possible outward contagion, compared with the risks it poses internally. The IMF assesses the stability of major economies’ financial sectors every five years as part of a broader oversight program called the Financial Sector Assessment Program. “In particular, Germany, France, the UK and the US have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking-sector shock in the source country,” the IMF said.

Financialtribune.com