Why Did U.S. Units of Deutsche Bank, Banco Santander Fail the Stress Test?
By Ryan Tracy
When the Fed released its annual “stress test” results on Wednesday, it found all 31 banks had enough capital to survive a deep recession. Yet two banks still failed for “qualitative” reasons. So what happened? The Fed didn’t say much in the way of specifics about why the banks failed Wednesday, other than faulting them for widespread and significant problems and describing broadly the criteria it uses to evaluate firms. But the Fed has detailed its “qualitative” criteria in general terms. It’s these criteria that appear to have tripped up foreign-owned firms, especially at those banks taking tests for the first time, like Deutsche Bank this year and other foreign-owned firms in years past. Here are some examples of what the Fed is looking for: Strong Boards of Directors: The point of the tests, in the Fed’s view, is to make sure banks are constantly thinking about and planning for the risks they face. For bankers immersed in the daily work of trying to make a profit, that goal can get lost. The Fed wants boards of directors to make sure it doesn’t, by questioning executives about their assumptions and discouraging actions that put the firm at risk. For the stress tests, that means prodding management early on about how risks are being identified, measured and predicted. Foreign-owned firms in particular have typically had fairly quiet board rooms at their U.S. subsidiaries, but those boards “cannot approve [a stress test submission] in 25 minutes,” as some banks did in last year’s round of tests, said Karen Shaw Petrou, managing partner of the consulting firm Federal Financial Analytics, Inc.