Wall Street behemoth Credit Suisse’s US operations had flaws in its risk management system, according to Federal Reserve statement on Thursday. The finance giant now has time until October to correct these issues.
Federal Reserve stress test confirms limited issues
This year, the Federal Reserve performed its stress test on 18 major US banks and did not raise any objection on capital plans of any of the entities. It suggested that the US financial system is overall sufficiently resilient. Fed chair for banking supervision Randal Quarles said that the stress tests have confirmed that the largest American banks follow strong practices for capital planning and are equally well capitalized.
The results now ensure that banks are able to make billions of dollars in shareholder payments. However, as Credit Suisse had limited issues, it will not be able to make payments until the Fed’s objections are cleared. The Fed statement said that the bank needs to address “limited weaknesses in its capital planning process.”
Deutsche Bank officials relieved
The stress test has also helped Deutsche Bank officials because the bank failed the stress test last year. The Fed said last year that there were widespread and critical deficiencies in the bank’s operations. This year, the Feds said that the bank had made progress, but it still needs to improve. Note that Deutsche Bank’s operations in the US and beyond are currently mired in controversy, creating issues for the German lender.
The results announced today continue from the Feds’ findings last week which indicated that the US banks were sufficiently capitalized to continue lending and paying dividends to their shareholders even if the US economy experiences an 8% shrink. The capitalization will be unaffected even if the Wall Street falls flat on its face and unemployment rates rise to 10%.
The second round of stress tests examined how these banks will work if such a scenario is experienced and how they forecast their needs in such testing times. Note that the 18 banks represent 70% of the told assets held by financial firms in the US. The Feds have indicated that they did not stress test the parent companies of either of the banks and focused only on their US-based operations.
Credit Suisse, which received a “conditional non-objection” will have to make changes to the way it forecasts trading losses in times of economic stress. The bank said that is was committed to oversight, acknowledged the concerns, and ensured that they will remedy the concerns raised by the Feds by October.