All 28 bank holding companies subjected to the Federal Reserve’s latest round of stress testing passed muster, more or less, but the Fed objected to the capital plans of two bank holding companies on qualitative grounds and issued a “conditional non-objection” to Bank of America’s capital plan.
This is the second consecutive year the Boston-based Santander Holdings USA (SHUSA) has failed the Comprehensive Capital Analysis and Review (CCAR) on qualitative grounds.
The Fed did not object to Santander’s capital plan on quantitative grounds and did not object to dividend payments on SHUSA’s outstanding class of preferred stock. As of Sept. 30 of last year, the company’s Tier 1 common ratio was 11 percent. Under the Fed’s severely adverse scenario used in this round of stress testing, that ratio would decline to a minimum of 9.4 percent.
However, the Fed did object to Santander’s plan based on what it characterized as “widespread and critical deficiencies across [its] capital planning processes.” More specifically, regulators zeroed in on deficiencies in governance, internal controls, risk identification and risk management, management information systems and assumptions and analysis supporting its capital planning process.
Santander’s management seemed unruffled by the news in a statement the company put out concerning the CCAR results.
“These results confirm that Santander Holdings USA maintains capital well above regulatory minimums throughout the severe stress environments presented by the Federal Reserve,” CEO Scott Powell said in the statement. “However, the qualitative assessment highlights that we still have meaningful work to do to meet our regulator’s expectations and our own standards of excellence.”
The Fed also objected to Deutsche Bank Trust Corp.’s capital plan on qualitative grounds, citing problems with the company’s risk-identification, measurement and aggregation processes, its approaches to loss and revenue projection and its internal controls.
Elsewhere in the CCAR results, the Fed issued a “conditional non-objection” to BofA’s capital plan. While the Fed didn’t technically object to the company’s capital plan, it is nonetheless requiring BofA to submit a new capital plan by the end of the third quarter to address weaknesses in its capital planning process. In the full CCAR results, the Fed specified problems with the company’s loss and revenue modeling practices and internal controls.
If BofA does not address those issues to the Fed’s satisfaction, the regulator warned, it expects to object to the resubmitted plan and potentially restrict the company’s capital distributions.
Under the Fed’s severely adverse scenario, BofA’s Tier 1 common ratio would fall to 6.8 percent.
The Fed also said that under the severely adverse scenario, Goldman Sachs, JPMorgan Chase and Morgan Stanley were projected to have at least one minimum post-stress capital ratio lower than regulatory minimum levels based on their original planned capital actions. The Goldman Sachs Group Inc., fell below the minimum required post-stress tier 1 risk-based and total risk-based capital ratios; JPMorgan Chase & Co. fell below the minimum required post-stress tier 1 leverage ratio; and Morgan Stanley fell below the minimum required post-stress tier 1 risk-based and total risk-based capital ratios.
Boston-based State Street Corp. would see its Tier 1 common ratio fall to 10.8 percent under the severely adverse scenario. The company yesterday announced that it would increase its quarterly common stock dividend from 30 cents to 34 cents per share beginning in the second quarter.
The Fed noted in its review that U.S. financial institutions had substantially increased their capital levels since the first round of stress tests in 2009. Since that time, the common equity capital ratio of those 31 bank holding companies has increased from 5.5 percent to 12.5 percent, representing an increase of more than $641 billion to $1.1 trillion.
The institutions evaluated during this round of stress testing represent more than 80 percent of domestic banking assets, or $14 trillion at the end of last year.