WASHINGTON - The Federal Reserve rejected the capital plans of the US operations of Spanish bank Santander and Germany's Deutsche Bank, saying it saw serious problems in the planning processes of both.
The Federal Reserve, seen here, rejected Wednesday the capital plans of the US operations of Spanish bank Santander and Germany's Deutsche, saying it saw serious problems in the planning processes of both.
Capping the second phase of stress tests on the 31 largest US banks, the Fed also gave Bank of America's plan a qualified pass, while the other 28 gained full approval for their dividend and share buyback programs.
The three top investment banks JPMorgan Chase, Goldman Sachs and Morgan Stanley meanwhile all earned approvals after revising their capital plans in the wake of last week's first-phase results.
Explaining the rejections of Santander Holdings USA and Deutsche Bank Trust Corp, the Fed cited "widespread and substantial weaknesses across their capital planning processes."
It saw problems in governance, internal controls, risk assessment and other issues in both.
The effect of Wednesday's decision is that neither can distribute their profits to shareholders -- their parent banks -- without the express permission of the Fed, itself dependent on addressing the shortcomings that the Fed bank examiners highlighted.
Both are significant, though not dominant, arms of their parents. Santander Holdings USA is a business with $150 billion in assets and counts as 10 percent of the parent's global business, according to the Fed.
With about $54 billion in assets, Deutsche Bank Trust counts as 12-14% of Deutsche Bank's US business, a Fed official said.
The Fed also saw problems in Bank of America's capital planning process, specifically its loss and revenue modeling practices.
"These deficiencies warrant further near-term attention but do not undermine the quantitative results of the stress tests for the firm," the Fed said.
Bank of America has until September to remedy the problems, it said.
Overall, a senior Fed official told reporters, the banks continue to strengthen, as shown by all of them passing the first phase of the stress tests -- measurements of capital adequacy -- last week.
The 31 represent about 80% of the assets held by banks in the United States, some $14 trillion worth at the end of last year.
It was the first time in the five years of the tests that all banks passed the quantitative measure of capital.
All continue to add to their capital bases as well. This year together they plan to return 60% of net profits to shareholders, and retain the other 40%, the same ratio as last year, the Fed official said.
"Strong capital levels act as a cushion to absorb losses and help better ensure that banking organizations have the ability to lend to households and businesses even in times of stress," the Fed said in a statement.