By Ryan Tracy And Jeannette Neumann
The Federal Reserve issued a stinging lecture to Spanish bank
Banco Santander SA, faulting the lender's U.S. unit for failing to
meet regulators' standards on a range of basic business
operations.
Santander had previously told investors that the Fed was
preparing an enforcement action. The one that arrived Tuesday,
however, was unusually broad in scope for a bank of Santander's
size. It represents the latest crackdown by U.S. regulators, who
have been pressing the largest U.S. banks to improve their risk
management.
The Fed's recent actions against other banks have typically
targeted discrete problems, such as anti-money-laundering controls
or mortgage underwriting, rather than reaching across an
organization, such as in Santander's case.
Regulators said they found deficiencies, including in how the
holding company manages its capital, its daily funding needs and
corporate governance. It also faulted risk management at a
consumer-lending subsidiary, Santander Consumer USA, Inc.
The chief executive of Santander Consumer abruptly stepped down
last week.
The Fed said it identified the issues in its "most recent
inspection" of Santander's U.S. holding company.
The regulator doesn't typically pursue public enforcement
actions unless a bank repeatedly fails to fix issues the regulator
identifies. Separately, Santander Consumer has faced multiple
federal inquiries into its auto-lending practices.
The Fed didn't fine the bank but reserved the right to do so
later and required the bank to write a series of remedial
plans.
"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 is the eurozone's largest bank by market value and its
U.S. unit has about $123 billion in assets.
Santander's U.S. holding company, which accounted for 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 appointed at the
holding company a new chairman, chief executive and board
members.
"I cannot fix the U.S. without the right team," Ms. Botín told
The Wall Street Journal in early June.
Ms. Botín met 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 than any foreign-owned bank executive during the
period from May to December of 2014.
The problems revealed Tuesday are similar to those identified in
Fed stress tests in both 2014 and 2015. Santander's holding company
failed the Fed's annual 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. Santander executives think the U.S. holding company will
likely fail the 2016 tests, too, the Journal reported in June.
Tuesday's agreement starts with 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 policy analysis firm
Federal Financial Analytics Inc., said the move is consistent with
regulators' focus on corporate governance.
She said, however, the broad action is "unusual at a time in
which the regulators are focused typically on individual lines of
business at individual institutions."
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.
Another part of the action stated that the bank must comply with
federal rules governing executive severance packages and
requirements to notify regulators about changes in bank
leadership.
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, and has been heavily
involved in trying to fix its problems.
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.
She met with him again in Washington on Dec. 10, when they
talked privately for an hour, the schedule indicates.
Write to Ryan Tracy at ryan.tracy@wsj.com and Jeannette Neumann
at jeannette.neumann@wsj.com
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