By Ryan Tracy And Jeannette Neumann
The Federal Reserve is requiring Banco Santander SA to make
sweeping risk management improvements at its U.S. subsidiaries,
highlighting the bank's repeated failure to address the regulator's
concerns about its U.S. operations.
The Fed, in an enforcement action issued Tuesday, faulted the
Spanish-owned bank's U.S. holding company for deficiencies across a
swath of its organization, including how the holding company
manages its capital, daily funding needs, internal audit programs
and risk management at its consumer-lending subsidiary, Santander
Consumer USA, Inc.
The action was unusually broad in scope. Though regulators have
stepped up their oversight of large banks in recent years,
enforcement agreements have typically targeted discrete problems,
such as anti-money-laundering controls or mortgage underwriting,
rather than reaching across an organization.
The Fed said it identified the issues in its "most recent
inspection" of Santander bank. The regulator typically doesn't
pursue a public enforcement action unless a bank repeatedly fails
to fix issues that the regulator identifies.
The regulator isn't fining the bank. But it reserved the right
to do so later and required the bank to write a series of remedial
plans to fix the problems.
"This written agreement underlines how much work we have to do
to meet our standards of excellence and our regulators'
expectations," a Santander spokesman said in a written statement.
The U.S. holding company has begun "a comprehensive, multiyear
transformation project within our organization," the spokesman
added, and the company is "confident this project will address the
concerns the Federal Reserve has cited."
Santander, the eurozone's largest bank by market value,
previously disclosed the Fed was preparing action against it. The
bank announced last week that Santander Consumer's chief executive,
Thomas Dundon, was stepping down.
Santander's U.S. holding company, which represented 14% of the
bank's total net profit in the first quarter, has been an outsize
regulatory headache for new Executive Chairman Ana Botín. Since she
took the helm of the bank last September, she has prioritized a
U.S. cleanup, appointing a new chairman, chief executive and board
members to the holding company.
"I cannot fix the U.S. without the right team," Ms. Botín told
The Wall Street Journal in early June.
Ms. Botín has sought face time with U.S. regulators, meeting and
speaking three times with Fed governor Daniel Tarullo between
October and December 2014, according to a copy of Mr. Tarullo's
schedule obtained through a freedom of information request. That
was more meetings with Mr. Tarullo than any foreign-owned bank
executive during the period from May to December of 2014.
The problems are similar to those identified in Fed stress tests
earlier this year and last year. Santander's holding company failed
the Fed's annual balance sheet exams both years because of what the
regulator said were "widespread and critical deficiencies" in
governance and its inability to identify and plan for potential
risks.
Tuesday's agreement outlines issues Santander promises to fix.
It starts at the basics, requiring Santander's U.S. holding company
to describe "the duties and responsibilities" of its top officers
and "actions that the board of directors will take to maintain
effective control over, and supervision of, the consolidated
organization's risk management."
Karen Shaw Petrou, managing partner at Federal Financial
Analytics Inc. said the move is consistent with regulators' "focus
on corporate governance and not letting the board or senior
management off the hook." She added, however, the Santander action
is "unusual at a time in which the regulators are focused typically
on individual lines of business at individual institutions."
Santander also promised to improve its stress-testing program.
Among other things, the tests evaluate a bank's ability to identify
emerging risks and track exposure to them.
While Santander executives are working to resolve the Fed's
concerns, they think the holding company will likely fail the 2016
balance-sheet exam, people familiar with the company have said.
The Fed on Tuesday also faulted Santander for failures in
"liquidity risk management," indicating the bank may not have
satisfactory programs for projecting future cash flows. The
regulator suggested Santander isn't complying with the Fed's risk
management guidelines, including those for internal audit programs
and computerized risk models.
Ms. Botín inherited the problems at the U.S. unit from the
previous chairman, her father Emilio Botín, who died in September
after nearly three decades at the helm of the bank. Analysts and
investors are watching closely to see if she successfully addresses
regulatory concerns, or struggles to turn operations around.
On Oct. 9, less than one month after she was named Santander
executive chairman, she and then-Chief Executive Javier Marín met
for an hour with Mr. Tarullo, the U.S. central bank's regulatory
point man, inside the Fed's Washington headquarters, according to
Mr. Tarullo's schedule.
During Ms. Botín's brief tenure leading up to that meeting, the
Fed had already scolded Santander for paying an unauthorized
dividend earlier in 2014 without the Fed's required permission.
Ms. Botín spoke for 15 minutes by phone with Mr. Tarullo on Nov.
10 and then met with him again in Washington on Dec. 10. The two
talked privately for an hour at the third meeting, the schedule
indicates.
Write to Ryan Tracy at ryan.tracy@wsj.com and Jeannette Neumann
at jeannette.neumann@wsj.com
Access Investor Kit for Banco Santander SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=ES0113900J37
Access Investor Kit for Banco Santander SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US05964H1059