It was last week where the results of the first round of the Federal Reserve’s annual «Stress Tests» were announced.
The «Stress Tests» evaluate whether U.S. banks have enough capital to withstand a financial crisis. They were created after the financial crisis as a means of evaluating whether banks have enough of a financial cushion to absorb losses if a crisis was to occur. The aim is to prevent bank failures in the future. In the first round the results were positive. All 33 U.S. banks passed the “warm up” stress tests, signaling that they could, hypothetically, withstand an estimated 385 billion dollars in losses.
The second round of results, which were released just after markets closed, were much less promising. Watched closely by banks and investors, since passing or failing dictates whether a particular bank is allowed to increase the amount of money it returns to shareholders in the form of dividends or share buybacks. This year, the tests failed two banks, the Deutsche Bank Trust Corporation and Santander Holdings USA. Both are subsidiaries of European banks and both failed last year as well. After Wednesday’s results, Deutsche Bank said that it will strengthen its capital planning process, though the German bank has two years until their newly consolidated U.S. outpost—which is quite a bit larger than the portion of the company that was recently subjected to a stress test. As for Santander, this is the latest in a series of setbacks for the bank’s U.S. operations. Failing the test means that neither banks will be able to increase dividends or buybacks for their shareholders.