WASHINGTON--The capital plans of three U.S. subsidiaries of
foreign banks were rejected by the Federal Reserve Wednesday after
the regulator identified problems in their projections for how they
would withstand a severe economic slump.
Three out of the five banks that had their capital plans
rejected by the central bank on Wednesday were based overseas,
including the U.S. units of HSBC Plc., Banco Santander SA and Royal
Bank of Scotland Group Plc.
All three banks were rejected even though their projected
capital cushions in a time of severe economic stress were above
Fed-mandated levels. Instead, the rejection was based on what the
Fed called "qualitative concerns," including the types of capital
the banks have on their balance sheets.
All three banks had deficiencies in their capital planning
processes that "are sufficiently material to call into question the
overall reliability of their capital planning processes that the
Fed said "raise concerns that warrant an objection." They will be
required to resubmit their capital plans.
At RBS and HSBC, the Fed found deficiencies its practices for
estimating revenue and losses under a time of stress. And at
Santander, the Fed found "widespread and significant deficiencies
in several areas, including governance, internal controls,
risk-identification and risk management."
The Fed's annual "stress" tests are designed to ensure large
banks can handle a deep slump like the 2008 financial crisis and
continue lending without needing a government rescue.
A first round of tests last week showed that 29 of 30 banks had
adequate capital buffers to withstand a severe drop in housing
prices and surging unemployment.
As part of Wednesday's result, the Fed makes a decision on each
company's planned dividend and stock buyback plans over nine
quarters, and takes into account their capital buffer after a
severe economic shock.
More at The Wall Street Journal's MoneyBeat blog,
http://blogs.wsj.com/moneybeat
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