Santander, Deutsche Bank fail second round of Fed stress test

SANTANDER HOLDINGS USA AND DEUTSCHE BANK TRUST CORP. failed the second round of the Federal Reserve's stress test on Wednesday.
SANTANDER HOLDINGS USA AND DEUTSCHE BANK TRUST CORP. failed the second round of the Federal Reserve's stress test on Wednesday.

WASHINGTON – Santander Holdings USA was just one of two financial institutions to fail the second round of the Federal Reserve “stress test” Wednesday, suspending any increased dividend payments to its Spain-based parent or other shareholders.

All 31 of the largest U.S.-based holding companies tested passed the first round of the test last week, which was based on quantitative capital grounds. The second round was based on qualitative grounds, which evaluate internal controls at the banks.

The Fed’s so-called stress test measures how the institutions would handle a hypothetical economic crisis, comprising a deteriorating economy, fast-rising oil prices and weakening corporate credit.

Passing the test signals to banks they could give more money back to their shareholders this year.

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Bank of America Corp. received conditional approval, but the Fed is requiring it to re-submit its capital plan by the end of the third quarter. Citizens Financial Group Inc. passed and subsequently announced a quarterly dividend rate of 10 cents per share or 40 cents per share on an annualized basis for 2015.

Twenty-eight financial institutions passed the second part of the test, but the Fed rejected Santander Holdings, parent company of Boston-based Santander Bank NA, finding deficiencies in its internal controls.

The Fed rejection prevents Santander from paying out dividends on its common stock, but not its outstanding class of preferred stock. Any payment, however, is subject to Fed approval.

This is the second year in a row the Santander U.S. unit has failed the test and its newly-appointed CEO Scott Powell said in a statement that there’s work to be done.

“The qualitative assessment highlights that we still have meaningful work to do to meet our regulator’s expectations and our own standards of excellence,” Powell said.

Santander Holdings is a subsidiary of Banco Santander SA.

The Fed also rejected Deutsche Bank Trust Corp., U.S. unit of German-based Deutsche Bank AG, and is requiring Bank of America to re-submit a new capital plan by the end of the third quarter to “address certain weaknesses in its capital planning processes,” according to the Fed’s decision.

Following the results, Citizens Financial Group Inc. announced its capital distribution plan of $500 million over the course of 2015. It would come in the form of share repurchase transactions funded by preferred stock and subordinated debt issuances, according to the bank.

CEO Bruce Van Saun said in a statement that he was pleased with the results.

“Citizens has made great strides over the past year in many areas, though we recognize that there is more to do,” he said. “We will continue to stay focused on enhancing our capabilities going forward.”

“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 Fed Gov. Daniel K. Tarullo, in a statement. “It also provides a structured assessment of their risk management capacities.

Santander Holdings non-executive chairman T. Timothy Ryan Jr. said in a statement that change is on its way.

“We will continue to reinforce our governance and management to address our supervisor’s qualitative concerns. Changes in both areas are forthcoming,” Ryan said.

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