The Federal Reserve on Thursday announced that it rejected the capital plan of the U.S. arm of Deutsche Bank for the third time in four years as it also limited the payouts of Wall Street trading giants Goldman Sachs and Morgan Stanley.
The announcement came after the conclusion of the annual stress-test exercise known as the Comprehensive Capital Analysis and Review of the 35 firms that hold about 80% of the total assets in the U.S. financial system.
was found to have “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.”
Since Deutsche Bank is based in Frankfurt, Germany, the failure won’t necessarily limit the buybacks and dividends it makes to investors. The action means the Fed will have to sign off on any dividend payments the U.S. arm would make to its parent.
Deutsche Bank said it’s “made significant investments to improve its capital planning capabilities as well as controls and infrastructure.” The U.S. arm cited by the Fed accounts for 7% of the total bank’s assets.
Both Goldman Sachs
and Morgan Stanley
will have to maintain capital distributions at levels they’ve paid in recent years, the Fed said.
“Each firm’s capital ratios, under the capital plans they originally submitted and with the one-time capital reduction from the tax law changes, fell below required levels when subjected to the hypothetical scenario,” the Fed said. The central bank said the one-time reduction doesn’t reflect either firm’s performance under stress, and that post-tax earnings should rise going forward.
Goldman Sachs said it will return $6.3 billion to investors, and Morgan Stanley says it will give back about $6.8 billion.
The Fed also said State Street
will have to give the Fed more information after receiving what’s called a “conditional non-objection.”
State Street’s stress test “revealed counterparty exposures that produced large losses under the hypothetical scenario, which assumes the default of a firm’s largest counterparty under stress.” The custodian giant will have to “take certain steps regarding the management and analysis of its counterparty exposures under stress” before getting approval for buybacks and dividends.
Furthermore, American Express Company
, JP Morgan Chase & Co.
and M&T Bank Corporation
altered their planned capital actions since they were going to have at least one minimum post-stress capital ratio lower than the minimum required regulatory capital ratios based on their original planned capital actions.
The Fed did point out last week that rising credit-card balances were a factor that impacted post-stress capital ratios.
See earlier story: Fed says all banks met minimum capital requirements after stress tests
The Federal Reserve did not object to the capital plans of Ally Financial, Inc.
; BB&T Corporation
; BBVA Compass Bancshares, Inc.
; BMO Financial Corp.
; BNP Paribas USA
; Bank of America Corporation
; The Bank of New York Mellon Corporation
; Barclays US LLC.
; Capital One Financial Corporation
; Citigroup, Inc.
; Citizens Financial Group
; Credit Suisse Holdings (USA)
; Discover Financial Services
; Fifth Third Bancorp
; Goldman Sachs HSBC North America Holdings, Inc.
; Huntington Bancshares, Inc.
; MUFG Americas Holdings Corporation
; Northern Trust Corp.
; The PNC Financial Services Group, Inc.
; RBC USA Holdco Corporation
; Regions Financial Corporation
; Santander Holdings USA, Inc.
; SunTrust Banks, Inc.
; TD Group US Holdings LLC
; U.S. Bancorp
; UBS Americas Holdings LLC
; and Wells Fargo & Company
The Fed said the 35 banks have built up an extra $800 billion in capital since the beginning of 2009. The central bank added that 24 of the 35 firms estimate their common equity will increase further between the third quarter of 2018 and the second quarter of 2019.