Fed flags Morgan Stanley, Deutsche, Santander in stress tests; 30 other banks OK
The Federal Reserve objects to capital distribution plans proposed at Deutsche Bank Trust and the Santander U.S. operation, meaning that the banks cannot issue dividends or make share buybacks until they establish a new plan, the central bank said Wednesday.
Further, regulators are requiring Morgan Stanley to submit a new capital plan by the end of the fourth quarter of 2016, but said they did not object to the bank's capital plan.
The Fed's Wednesday announcement of the results of its Comprehensive Capital Analysis and Review marks the second and final portion of the annual, two-part stress tests aimed at gauging Wall Street's ability to adequately respond to an economic crisis.
There were only three objections out of 33 institutions tested.
The Fed's objections to Santander Holdings USA and Deutsche Bank Trust, the bank's U.S. transaction bank and wealth management business, mark the second consecutive year regulators flagged both banks.
"The capital adequacy of Deutsche Bank Trust Corporation has never been in doubt," Bill Woodley, CEO of DB USA and deputy CEO of Deutsche Bank Americas, said in a statement. "We appreciate the Federal Reserve's recognition of our progress, and we will implement the lessons learned this year in order to strengthen our capital planning process for future CCAR submissions."
Santander's U.S. unit also saw objections from the Fed in its 2014 stress test, however. A senior central bank official said Wednesday that "serious deficiencies remain in a number of areas" for each of the companies' U.S. units.
"If a firm were to have a repeat [fail], it would be serious," David Wright, managing director of banking and securities at Deloitte, who previously held various roles within the Fed, said before test results were announced. "Multiple objections are something to be avoided."
The tests were adopted in the wake of the 2008 global financial crisis to measure the biggest banks' ability to respond to economic and market turbulence.
"Over the six years in which CCAR has been in place, the participating firms have strengthened their capital positions and improved their risk management capacities," Federal Reserve Governor Daniel Tarullo said in a statement. "Continued progress in both areas will further enhance the resiliency of the nation's largest banks."
Wednesday's stress test announcement pertained only to regulators' evaluation of how well big banks planned for risk and allocated capital in various situations of systemic stress.
The first part of banks' stress tests, which was announced last week, examined and monitored whether big banks had sufficient capital to offset economic turbulence. Each of the 33 banks the Fed tested last week passed that portion of the exam.
The Fed announced that it did not object to the capital plans of the companies which include Ally Financial, American Express, BancWest, Bank of America, BMO Financial, BB&T, BBVA Compass Bancshares, Bank of New York Mellon, Capital One, Citigroup, Citizens Financial, Comerica, Discover Financial, Fifth Third Bancorp, Goldman Sachs, HSBC North America Holdings, Huntington Bancshares, JPMorgan Chase, Keycorp, M&T Bank, MUFG Americas Holding, Northern Trust, PNC Financial Services, Regions Financial, State Street, SunTrust, TD Group US Holdings, U.S. Bancorp, Wells Fargo and Zions.
M&T Bank met minimum capital requirements "on a post-stress basis after submitting an adjusted capital action," the Fed said in its announcement Wednesday.
It means those firms can proceed with dividend and buyback plans, which depend on regulatory approval through the annual exams. One analyst said it's a smart time for banks to take advantage of depressed equity valuations.
"The battering of stock prices will make share buybacks more appealing," said Joo-Yung Lee, Fitch Ratings' head of North American financial institutions.
Still others believe that big banks should hold off on capital distribution; especially as regulators including Tarullo are pushing for a "" in the amount of cash held by big banks to offset losses. Tarullo is the chairman of the Federal Financial Institutions Examination Council.
"The system would be safer if the disbursement of capital remains limited," said Kim Schoenholtz, professor of management practice in the New York University economics department. "The level of capital requirements is too low."
Despite widely approving big banks' management strategy, experts and analysts recognize that it is not a sign of regulators' easing up on Wall Street nearly a decade removed from the beginning of the global financial crisis.
"The Fed continues to raise the bar," said Lee. "You have to continue to show improvement."