The Fed executives at Deutsche Bank are pleased that the Fed test passed is “an important step forward” – especially because an impeccable assessment was not always the rule in the past. But the money house cannot lean back. The Fed imposes all sorts of rules because of the corona crisis.
For the second year in a row, Deutsche Bank got through the stress test by the US Federal Reserve without problems. However, in view of the Corona crisis, the financial regulators imposed strict requirements to protect capital resources in the country’s largest financial institutions. Profit distributions from share buybacks and dividend increases are therefore taboo at least until the end of September, as the Fed announced.
At Deutsche Bank the relief prevailed, however, that the supervisors gave them an impeccable rating. Germany’s largest money house had failed the Fed’s audits several times in the past few years, so the US boss Christiana Riley and CEO Christian Sewing were all the more pleased that everything worked out as it did in 2019. The stress test result was “an important step forward,” Riley and Sewing wrote to the employees in a memo. The change takes time, but Deutsche Bank is making noticeable progress and is on the right track, the letter said. Investors, customers and also the supervisors would recognize the positive development of the company.
Although the Fed gave all 33 banks tested a good rating, the stress test was ultimately a bitter pill for the industry. An analysis of the possible burdens caused by the corona pandemic has revealed risks, the central bank said. The Fed would therefore take further measures to examine the resilience more closely. Because of the uncertainty, the banks will have to hold their money together for the next few months. The news was not well received by investors, and bank shares initially reacted with price losses after the exchange.
Fed Vice Randal Quarles praised the money houses: “The banking system has been a source of strength in this crisis”. Nevertheless, the Fed wants to keep a close eye on the big banks first. Because of the risk of enormous loan defaults, she wants to be on the safe side. As a result, banks will have to resubmit their capital plans – which also include dividends and share buybacks – later this year. The central bank’s strict requirements for the financial sector show how seriously the Fed continues to take the risks of the pandemic.
Distribution of profits to parent company is doubtful
The corona crisis had temporarily paralyzed the US economy and caused unemployment to rise rapidly. The pandemic is not yet over, although the lockdown measures have been eased in many places. On the contrary: Recently, the number of cases rose again in many states.
The Fed’s regulations could also have indirect consequences for Deutsche Bank. Unlike the rivals in the US, the dividends and share buybacks for the subsidiaries of foreign financial institutions do not depend on the approval of the Fed, but the profit distributions to their corporate mothers do. The Federal Reserve’s stress tests are a consequence of the major financial crisis of 2008. They are designed to ensure that banks do not have to be rescued with tax money in the event of a financial market collapse.
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