By Ryan Tracy, Eyk Henning and Emily Glazer 

Two large European banks, Deutsche Bank AG and Banco Santander SA, are expected to fail the Federal Reserve's stress test over shortcomings in how they measure and predict potential losses and risks, according to people familiar with the matter.

A rebuke would mark the second year large foreign banks, which were drawn into the Fed's stress tests in 2014, failed to meet the U.S. regulator's expectations for risk management. As banks have bulked up capital cushions to ensure they can withstand losses in periods of turmoil, the Fed has focused on more qualitative issues, including whether banks accurately measure potential losses in credit portfolios and correctly collect risk-exposure data. The Fed also seeks to determine whether they have strong internal controls.

Failing the stress tests would likely subject the U.S. units of Deutsche Bank and Banco Santander to restrictions on paying dividends to their European parent companies or other shareholders. Santander, the largest eurozone bank by market capitalization, is already under such a restriction after failing its first stress test last year. Deutsche Bank, the biggest German bank by assets, is undergoing the U.S. stress-test process for the first time this year.

Both Deutsche Bank and Santander passed European Central Bank stress tests in October. Those tests focused on whether the banks had enough capital to withstand a two-year recession but didn't assess such things as governance, risk management and other more subjective factors like the Fed's test.

The expected Fed action comes amid a tussle between the U.S. regulator and foreign banks over what the Fed views as potential vulnerabilities at overseas firms with large U.S. operations. The Fed wants European banks to adhere to stricter rules and fix flaws that could potentially destabilize a firm to the point it needs support from the U.S. central bank, as happened during the 2008 financial crisis.

The Fed's board of governors will disclose partial results of the test on March 5 and full results on March 11, including any capital restrictions.

Last year, the board met just ahead of releasing the results to vote on whether banks should fail the tests for qualitative reasons. It ultimately rejected Citigroup Inc. as well as U.S. units of Santander, HSBC Holdings PLC and Royal Bank of Scotland Group PLC on such grounds. At the time, it cited the foreign banks for "significant deficiencies" in their capital-planning process.

The Fed on Friday declined to comment on specific banks.

Deutsche's U.S. unit, Deutsche Bank Trust Corp., is expected to be found adequately capitalized by the Fed but will likely receive a warning on qualitative shortcomings, according to people familiar with the matter. A bank spokeswoman said Deutsche Bank Trust represents less than 5% of the parent's total assets.

Deutsche Bank is in the process of fixing flaws the Fed has identified in areas ranging from its regulatory reporting, risk control, monitoring and compliance systems, these people said. The bank has also been reprimanded by the Fed for flaws in its regulatory reporting, The Wall Street Journal reported last year.

In a letter to Deutsche Bank executives in December reviewed by the Journal, a senior official with the Federal Reserve Bank of New York said reports produced by some of the bank's U.S. arms "are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm's entire U.S. regulatory reporting structure requires wide-ranging remedial action."

At the time of the report, a Deutsche Bank spokesman said the German bank had "been working diligently to further strengthen our systems and controls and are committed to being best in class" and said the bank was spending EUR1 billion ($1.14 billion) globally and appointing about 500 compliance, risk and technology employees in the U.S.

A rejection by the Fed could put additional pressure on the company's top executives, who are under scrutiny for other problems, including regulatory reporting woes and a U.S. probe into manipulation of the foreign-exchange market that has ensnared the bank and many others.

A New York state regulator is installing a monitor at Deutsche Bank in connection with that probe, the Journal has reported. A Deutsche Bank spokesman has said in the past that it is cooperating with investigators.

A person familiar with the matter said Santander is also likely to fail for qualitative reasons. A Santander spokesman declined to comment on Friday.

Santander has been working to fix the issues cited last year, but suffered a setback in September when the Fed said the bank had paid an unauthorized dividend, violating restrictions placed on the firm after its failure on the 2014 stress test.

The Fed forced Santander's parent company to reimburse the U.S. unit for the dividend, barred it from additional payouts and required it to beef up internal controls. At the time, Santander declined to comment. Ana Patricia Botín, the Spanish firm's new executive chairman, has vowed to improve the bank's regulatory compliance.

Quantifying the impact of a restriction on dividend payments can be difficult, because banks don't always disclose the amount they ask the Fed for permission to pay. In a note to clients Wednesday, analysts at RBC Capital Markets estimated 24 banks taking the test would be able to pay an average of 74% of their earnings, with a range of between 17% and 100%. The analysis didn't make estimates for Deutsche Bank and Santander.

Santander's U.S. holding company reported net income of $2.3 billion in 2014, while Deutsche Bank's reported $338 million, according to regulatory filings.

Last year, the Fed adopted a rule forcing Deutsche Bank, Santander and other foreign banks operating in the U.S. to form U.S.-based holding companies that adhere to strict risk-management standards and add potentially billions of dollars more in capital to meet minimum requirements at the U.S. units.

For banks, managing the stress-test process is costly. A person at one bank subject to the test said the firm has invested upward of $50 million on personnel and systems in the past year alone in an effort to improve the quality of its data gathering and computer models, among other related expenses.

"You don't fundamentally understand the level of effort required until you are in the program," this person said.

Write to Ryan Tracy at ryan.tracy@wsj.com, Eyk Henning at eyk.henning@wsj.com and Emily Glazer at emily.glazer@wsj.com

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