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Deutsche Bank fails stress test

March 12, 2015

The US Federal Reserve has slammed the breaks on the German bank's plans to raise dividends and buy back shares. The central bank says its US operations are too weak to survive another major economic crisis.

Deutsche Bank's US headquarters in New York
Image: Getty Images

The US divisions of Germany's biggest bank failed a crucial stress test on Wednesday after the Federal Reserve in Washington deemed its financial foundation too weak to withstand a crisis like the one that threatened to crash the global economy in 2008.

The Fed faulted the capital plans of some 12 to 14 percent of Deutsche Bank's US operations, saying they showed "numerous and significant deficiencies."

For the second year in a row, the central bank also vetoed the US plans of Spain's largest bank, Santander, pointing to "widespread and critical deficiencies" with regard to governance, planning for risks and other areas.

Santander and Deutsche Bank have $118 billion (111.1 billion euros) and $55 billion in assets in the US respectively.

Deutsche Bank offensive

For Deutsche Bank, it was the first US stress test since the Fed launched its review in 2009.

Reacting to the Fed's objections, a Deutsche Bank spokeswoman in New York said the company had already recruited 500 employees and launched an investment offensive to the tune of 1 billion euros ($1.06 billion) meant to improve the shortcomings.

Shareholders rejoice

The Fed's annual check-up assesses the financial health of the biggest banks operating in the country, based on their "ability to lend to households and businesses even in times of stress."

Of the 31 lenders tested this year, 28 were given the green light to raise dividends and buy back shares, which would make the banks more attractive to investors, drive up share prices and allow them to reward shareholders.

The news prompted several banks, including JPMorgan Chase and Wells Fargo, to announce that they were raising their dividends. The US' second-largest bank, Bank of America, said it intended to buy back $4 billion in stock. However, the bank was only given conditional approval due to certain weaknesses in the way it deals with risks and potential losses. It now has until the end of September to resubmit its capital plan.

pad/uhe (AP, dpa, Reuters)