2 of Europe's biggest banks just got slammed by the Fed
Two of Europe's biggest investment banks performed miserably in the Federal Reserve stress tests this year, the results of which were announced Wednesday.
The US arms of Deutsche Bank and Santander, the biggest investment banks in Germany and Spain respectively, failed to reach the bar. It was actually Santander's second time failing the Fed's stress test.
The review basically means the Fed has to approve the bank's capital plan — the regulators compare the assets each institution owns to the expenditures it plans to have, including dividends. They then put the institutions through a variety of stressful economic scenarios to ensure a minimum requirement of high-quality capital is left in each. Without a pass, banks aren't allowed to hike payments to shareholders.
US operations of Deutsche, Germany's largest bank, and Santander, the biggest bank in Spain, were found to have serious deficiencies in capital planning and risk management, according to a senior Fed official.
The official said that any bank with chronic problems in those areas could eventually face a cease-and-desist order, compelling them to make specific changes or pay financial penalties.
The Wall Street Journal, which reported late in February that the two European banks' US arms were likely to fail the tests, has a good breakdown of why banks could fail the tests, along with this snippet on how the Fed is constantly increasing the required standard:
The message to all banks is that the bar is going to keep rising, and they won't be able to stand still to keep up. Banks have privately chafed at this. "It's like doing a high jump in the dark. You clear the bar and then it gets raised a little bit for the next jump," but the banks can't see exactly how high the bar has been reset, Mark Levonian, a managing director with consulting firm Promontory Financial Group, said in an interview last month. "So you jump as high as you can."
The two banks passed their European Central Bank stress tests late in 2014, but the tests are based on different sets of criteria, and the Fed is concerned only with the health of the US unit.
Investors don't seem to care too much Thursday morning: Deutsche Bank's share price was up 0.07% 10 minutes after markets opened, while Santander's dropped 0.45%.