European Banks, Santander and Deutsche guaranteed better capital planning, controls and reporting upon knowing that the two big European lenders fall short in the US stress tests by the Federal Reserve.
Analysts said the results were another indication of how the duo have had tense relationships with US regulators in recent years.
Failing the test prevents the US entities of the foreign banks from distributing capital to their parent companies — but the results were expected and shares in both lenders were flat on Thursday.
Santander is the only foreign bank to fail the test twice in a row, while Deutsche’s debut failure comes only weeks before the lender announces a strategic overhaul.
Next year the US stress tests will be expanded to include BancWest, the US operation of France’s BNP Paribas, and TD Bank of Canada, the Fed said.
All foreign banks with large US operations are being forced to set up US bank holding companies by next year to comply with tough local capital, leverage and governance requirements. Others in this category, such as Barclays, will join the US stress tests in 2018.
A senior Fed official said Santander and Deutsche were found to have serious deficiencies in capital planning and risk management.
The biggest banks in Spain and Germany respectively were found to have enough capital to remain above the minimum needed under stressed conditions, but they failed the “qualitative” part of the test.
Ana Botin has identified Santander’s US operations as a priority since taking over as executive chairman from her late father in September. Last week, the Madrid-based lender appointed a new chief executive of its US bank holding company.
Francisco Riquel, an analyst at N+1, a Madrid-based investment bank, said the failure was a costly distraction for Santander in the US. “I don’t think they can afford to fail this test for a third consecutive year,” he added. “If that happens, they may be forced to exit.”
Last year, the Fed said Santander’s consumer lending unit had paid an unauthorised $52 million dividend to its shareholders, including its US bank holding company. It had been barred from making any capital distributions except dividend payments on certain preferred stock instruments after failing last year’s stress test.