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The Federal Reserve objects to capital distribution plans proposed by U.S. units of Deutsche Bank and Santander, barring the banks from issuing dividends or stock buybacks until it approves a new plan, the central bank said on Wednesday.
The Fed did not reject capital plans for the remaining 29 banks evaluated in the second part of its annual stress test. Bank of America's approval is contingent on it submitting a revised capital strategy by the end of September.
Even with the Fed's requirement that it resubmit its capital plan, BofA was still permitted to launch a $4 billion buyback. The company acknowledged, though, that the Fed could restrict its buybacks and dividends if it does not fix the identified weaknesses.
Many banks responded to the approval by tweaking their buybacks and dividends:
In BofA's case, the central bank identified deficiencies including "weaknesses in certain aspects of Bank of America's loss and revenue modeling practices and in some aspects of the (bank holding company's) internal controls." The bank has until Sept. 30 to resubmit its plan.
Bank of America shares fell in extended trading on Wednesday.
Stress tests, adopted in the wake of the 2008 financial crisis, gauge big banks' ability to manage risk and plan for a potential economic shock. Wednesday's announcement follows last week's assessment that the 31 banks' capital cushion could withstand a hypothetical crisis.
Generally, big banks have reduced risk since the first tests in 2009, the Fed said. The common equity capital ratio—which compares "high-quality capital" to risk-weighted assets for the 31 banks—more than doubled from the first quarter of 2009 to the fourth quarter of 2014.
"While [bank holding companies] have better practices in place today than they did before the crisis, many continue to have challenges in fully meeting supervisory expectations for capital planning," the Fed said in a release.
The Fed objected to Deutsche Bank and Santander's U.S. unit capital strategies because of "widespread and critical deficiencies" in gauging risk, among other factors. The central bank emphasized that it made the decision because of qualitative, rather than quantitative concerns.
"Deutsche Bank is committed to strengthening and enhancing its capital-planning process," the company said in a release.
Santander plans to address the qualitative concerns that prompted the results, it said in a release.
"These results confirm that Santander Holdings USA maintains capital well above regulatory minimums throughout the severe stress environments presented by the Federal Reserve. However, the qualitative assessment highlights that we still have meaningful work to do to meet our regulator's expectations and our own standards of excellence," Santander Holdings USA CEO Scott Powell said in a release.
The banks can only distribute capital once new plans are "expressly permitted" by the Fed.
The results are not likely to derail any plans for shareholder rewards this year - Deutsche Bank said it didn't request any dividend payments anyway, and Santander has permission to keep a dividend payout announced earlier this year.
"Our capital plan review helps ensure that the capital distribution plans of large banks will not compromise their ability to continue lending to businesses and households even during a period of serious financial stress," said Federal Reserve Gov. Daniel K. Tarullo in a release.
It marked the second consecutive year the Fed objected to Santander's capital plan.