We (The U.S.) Are The Champions (Of The U.S. Stress Tests)

US units of foreign banks, less so.

Author:: Jon Shazar
Updated:: Jan 14, 2019
Original:: Mar 12, 2015

Playing favorites?

The folks over at MoneyBeat have noticed that only two banks failed the Fed’s stress tests this week, and they have a few ideas why. Maybe it’s because Deutsche Bank and Banco Santander have appointed pretty low-rent boards to their U.S. subsidiaries. Maybe it’s because they’re not taking the test seriously enough. Maybe it’s because they’ve pulled a few too many numbers out of their asses. Maybe it’s because they’re not showing the improvement teacher expects of all of her students. Or, you know, maybe it’s because “Deutsche” means “German” and Santander is a city in Spain.

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.

Why Did U.S. Units of Deutsche Bank, Banco Santander Fail the Stress Test? [WSJ MoneyBeat blog]
Earlier: U.S. Maybe Kinda Taking It Out A Little Hard On Foreigners

Compared to the U.S.-based units of Deutsche Bank and Banco Santander expected to receive F's on their stress tests.

By David Sifry (DSCN0991.JPG) [CC BY 2.0], via Wikimedia Commons

Or "How Banks Learned To Stop Stressing And Sue The Fed."

More stress tests, bleargh. I guess the news is that Citi "failed", though I can't get all that excited by that because it didn't exactly "fail" in the sense of now it's being forced to raise capital / broken up / burned to the ground. Instead it failed assuming it follows the capital plan it submitted to the Fed, which is clearly a capital-lowering rather than capital-raising plan. I ballpark it at $10bn of share repurchases and dividends,* which is ... well, it's pretty big for Citi. So they can just not do that then. Or not do quite as much of that, which seems to be their plan: In light of the Federal Reserve’s actions, Citi will submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations. The Federal Reserve advised Citi that it has no objection to our continuing the existing dividend levels on our preferred stock and our common stock, and we plan to do so, subject to approval by the Board of Directors each quarter. The Federal Reserve also advised that it has no objection to Citi redeeming certain series of outstanding trust preferred securities, as Citi proposed in its Capital Plan. We plan to engage further with the Federal Reserve to understand their new stress loss models. We strongly encourage the public release of these models and the associated benchmarks and assumptions. We believe greater transparency in this process will best serve all banking institutions and their shareholders as well as the international regulatory community and market participants, and will encourage a level playing field globally. There are at least two ha! moments in that snotty last paragraph. First there's the fact that the Fed had planned to release the stress test results on Thursday and got gun-jumped by Jamie Dimon. So much for Fed transparency. But also, specifically, as people are all running around suing each other about the Fed maybe kind of encouraging bank CEOs to hide material information from investors, it is odd that the Fed would have the stress test results and sit on them for two days. Imagine the scenario where Jamie Dimon, Vikram Pandit, and the Fed all know that JPM passed and was going to do a largeish buyback, while Citi failed and was going to do a ... I guess somewhat smaller buyback - and they didn't tell anyone from today until Thursday. If you sold JPM to buy C today, wouldn't you be kind of annoyed?**

By Ryan McGilchrist [CC BY-SA 2.0 ], via Wikimedia Commons

Even Deutsche Bank won’t have to cram for this one.

This one's gonna be a hoot.

House of Iniquity and Ineptitude. By Dan SmithRdsmith4 (Own workOwn work) [CC BY-SA 2.5], via Wikimedia Commons

Apparently said tests are illegal, according to a group whose members "include senior executives at big banks J.P. Morgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., and State Street Corp."

deutschebank3

And the second quarter definitely did not kill it!