Morgan Stanley, Deutsche Bank and Santander Stress Under Fed’s Test

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The unemployment rate is 10 percent, the stock market is worth half its value and short-term treasury rates are negative making investors pay the US government to hold their money.

This was the Fed’s hypothetical scenario for this year’s stress test for big banks, and all but three of 33 banks passed. 

Wednesday’s stress test announcement pertained to the Fed’s evaluation of how well big banks planned for risk and allocated capital under stress. The first part of the tests announced last week, examined and monitored whether big banks had sufficient capital to sail through economic turbulence, which all 33 banks passed.

Deutsche Bank, Banco Santander and Morgan Stanley were among 33 banks that felt the stress during the second round. The regulator objected to the capital distribution plans put forth by the US subsidiaries of Deutsche Bank and Banco Santander and stopped them from issuing dividends or making share buybacks and asked Morgan Stanley to submit a revised plan for “qualitative reasons.” The banks who passed the test will be able to pay out as much as two thirds of the projected net income for the next four quarters and can also continue to retain capital.

Deutsche Bank has failed the test two years in a row and Santander for three. The Fed is concerned about the banks’ ability to measure risk but in practice, the Fed’s rejection means that these banks cannot send US profits back home until they pass the test.

Santander blamed its regulatory trouble on “growing pains” and said that the bank is building up a holding company to oversee the banking unit and consumer-lending subsidiary.

In part, these capital restrictions placed on big banks under Dodd Frank is what bolsters the alternative non-bank lending sector where lenders pride themselves on being lean and agile. While the industry is still negotiating its relationship with Wall Street, total insulation from bank capital for now seems like a distant dream. Santander is an investor in Atlanta-based small business lender Kabbage and also uses its technology to underwrite loans for small businesses quickly.

Last modified: April 20, 2019
Srividya KalyanaramanSrividya's work has appeared in publications like Money magazine, Advertising Age, FirstPost and The Economic Times. She has also dabbled in business intelligence solutions, and holds a Masters degree in Business and Economic Reporting from NYU.

Category: Regulation

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