Fed Rejects Deutsche Bank and Limits Payouts of Goldman Sachs and Morgan Stanley After Stress Tests

The Federal Reserve completed its annual stress test and concluded Deutsche Bank for the third time in four years  The Fed also limited the payouts of Goldman Sachs and Morgan Stanley. State Street will have to give the Fed more information on counterparty exposure.

The Federal Reserve completed its annual stress test and concluded Deutsche Bank for the third time in four years  The Fed also limited the payouts of Goldman Sachs and Morgan Stanley. State Street will have to give the Fed more information on counterparty exposure.

Fed CCAR Stress Tests 2018

The announcement came after the conclusion of the annual stress-test exercise known as the Comprehensive Capital Analysis and Review of the 35 firms that hold about 80% of the total assets in the U.S. financial system.

Quantitative Assessment

The Fed said “In the supervisory post-stress capital assessment, the Federal Reserve estimates that the aggregate common equity tier 1 ratio for the firms participating in CCAR 2018 would decline in the severely adverse scenario from 12.3 percent in the fourth quarter of 2017 (the starting point for the exercise) to 6.3 percent at its minimum point over the nine-quarter planning horizon. This post-stress common equity tier 1 ratio is 1.1 percentage points higher than the firms’ aggregate common equity tier 1 ratio in the first quarter of 2009. (See tables 1 and 2 for more on the aggregate post-stress capital ratios for the firms that participated in CCAR 2018.)”

Deutsche Bank Fails Again

Deutsche Bank $DB was found to have “material weaknesses in the firm’s data capabilities and controls supporting its capital planning process, as well as weaknesses in its approaches and assumptions used to forecast revenues and losses under stress.”

Given Deutsche Bank is based in Frankfurt, Germany the results means the Fed will have to OK any dividend payments the U.S. arm would make to its parent. Deutsche Bank. The Fed said it’s “made significant investments to improve its capital planning capabilities as well as controls and infrastructure.” The U.S. arm cited by the Fed accounts for 7% of the total bank’s assets. $DB closed up +0.29%.

Goldman and Morgan Stanley Told To Maintain Capital Past Capital Distributions

Both Goldman Sachs $GS and Morgan Stanley $MS have been told to maintain capital distributions at levels they’ve paid in recent years

“Each firm’s capital ratios, under the capital plans they originally submitted and with the one-time capital reduction from the tax law changes, fell below required levels when subjected to the hypothetical scenario,” the Fed said.

The Fed did say the one-time reduction doesn’t reflect either firm’s performance under stress. Goldman Sachs said it will return $6.3 billion to investors, and Morgan Stanley will return $6.8 billion.  Goldman Sachs $GS closed  +0.01% and Morgan Stanley $MS, -0.29%.

State Street Needs To Provide More Information

State Street $STT receivied a “conditional non-objection” meaning the bank’s stress test “revealed counterparty exposures that produced large losses under the hypothetical scenario, which assumes the default of a firm’s largest counterparty under stress.” $STT  will have to “take certain steps regarding the management and analysis of its counterparty exposures under stress” before getting approval for buybacks and dividends.

AMEX, JP Morgan, Keycorp and M&T Bank Altered Capital Plans On Credit Card Exposure

American Epress Company AXP, +0.01% , JP Morgan Chase & Co. JPM, +1.68% Keycorp KEY, +0.31% and M&T Bank Corporation MTB, +0.12% altered their planned capital actions since they were going to have at least one minimum post-stress capital ratio lower than the minimum required regulatory capital ratios based on their original planned capital actions. The Fed did point out last week that rising credit-card balances were a factor that impacted post-stress capital ratios.

Fed CCAR Cap Ratio 2018

The Passes

The Federal Reserve did not object to the capital plans of  the following banks, with stock prices closes for the day.

  • Ally Financial, Inc. ALLY +1.82%
  • BB&T Corporation BBT -0.08%
  • BBVA Compass Bancshares, Inc. BBVA, +0.88% ;
  • BMO Financial Corp. BMO, +0.71% ;
  • BNP Paribas USA BNP, -0.26% ;
  • Bank of America Corporation BAC, +0.87% ;
  • The Bank of New York Mellon Corporation BK, +0.18% ;
  • Barclays US LLC. BCS, +1.51% ;
  • Capital One Financial Corporation COF, +0.01% ;
  • Citigroup, Inc. C, +1.75% ;
  • Citizens Financial Group CFG, -0.13% ;
  • Credit Suisse Holdings (USA) CS, +0.75% ;
  • Discover Financial Services DFS, +0.09% ;
  • Fifth Third Bancorp FITB, -0.03% ;
  • HSBC North America Holdings, Inc. HSBC, +0.79% ;
  • Huntington Bancshares, Inc. HBAN, +2.35% ;
  • MUFG Americas Holdings Corporation MUFG, +0.00% ;
  • Northern Trust Corp. NTRS, +0.30% ;
  • The PNC Financial Services Group, Inc. PNC, +0.20% ;
  • RBC USA Holdco Corporation RY, +0.54% ;
  • Regions Financial Corporation RF, +0.73% ;
  • Santander Holdings USA, Inc. SAN, +0.95% ;
  • SunTrust Banks, Inc. STI, +0.37% ;
  • TD Group US Holdings LLC TD, +0.44% ;
  • U.S. Bancorp USB, +0.16% ;
  • UBS Americas Holdings LLC UBS, +0.40% ;
  • Wells Fargo & Company WFC, +2.83%

The Fed said the 35 banks have built up an extra $800 billion in capital since the beginning of 2009. The central bank added that 24 of the 35 firms estimate their common equity will increase further between the third quarter of 2018 and the second quarter of 2019. The common equity capital ratio–which compares high-quality capital to risk-weighted assets–of the 35 bank holding companies in the 2018 CCAR has more than doubled from 5.2 percent in the first quarter of 2009 to 12.3 percent in the fourth quarter of 2017. This reflects an increase of more than $800 billion in common equity capital to more than $1.2 trillion during the same period.

Source: Marketwatch, Federal Reserve

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