Deutsche Bank's US unit fails Fed stress tests due to 'material weaknesses'

This means the bank would not be able to make any distributions to its German parent without the Fed's approval

Deutsche Bank AG's US subsidiary failed on Thursday the second part of the US Federal Reserve's annual stress tests due to "material weaknesses" in its data capabilities and capital planning controls.

The Fed board's unanimous objection to Deutsche Bank's US capital plan marks another blow for the German lender, whose financial health globally has been under intense scrutiny in recent months.

Deutsche Bank last week cleared the Fed's easier first hurdle that measures its capital levels against a severe recession scenario.

The Fed's second test focuses on the bank's capital plan.

"Concerns include material weaknesses in the firm's data capabilities and controls supporting its capital planning process, as well as weaknesses in its approaches and assumptions used to forecast revenues and losses under stress," the Fed said in a statement.

While failing the US stress test would not likely affect the banks' ability to pay dividends to shareholders, which are typically paid out at the group level, it will require Deutsche Bank to make changes to its US operations.

It also means the bank would not be able to make any distributions to its German parent without the Fed's approval.

The newly created US subsidiaries of six foreign lenders, Deutsche Bank, Credit Suisse Group AG, UBS Group AG, BNP Paribas SA, Barclays Plc and Royal Bank of Canada, went through the test for the second time this year had their results publicly released for the first time.

Deutsche Bank's results cover DB USA Corp, a holding company with $133 billion (£101.8 billion) in assets, according to Deutsche Bank's March filings. This includes all of Deutsche Bank's non-branch US assets, including its mortgage lending and debt financing subsidiary, and its sizable Wall Street broker-dealer trading business.

CONDITIONAL APPROVALS

The Fed otherwise approved the capital plans for 34 lenders, allowing them to use the extra capital for stock buybacks, dividends and other purposes.

These include household names like JPMorgan Chase & Co, Citigroup Inc, Bank of America Corp and Wells Fargo & Co, as well as major regional lenders like Capital One Financial Corp, PNC Financial Services Group Inc and US Bancorp.

The country's top regulator said it conditionally approved the capital plans for Goldman Sachs Group Inc, Morgan Stanley whose capital levels had been adversely affected during the test by last year's changes to the US tax code.

Those banks will maintain their capital distribution levels in line with those paid in recent years to bolster their capital cushion, the Fed said.

The Fed also said it had conditionally approved the capital plan for State Street Corp, but that the bank needed to shore up its counterparty risk management and analysis.