June 1, 2018 / 4:38 PM / 21 days ago

REFILE-Deutsche Bank faces another challenge with Fed stress test

(Refiling to fix date in dateline to June 1 instead of May 31)

By Michelle Price and Pete Schroeder

WASHINGTON, June 1 (Reuters) - Deutsche Bank AG < DBKGn.DE> will face another challenge this month when the Federal Reserve publishes for the first time the results of a “stress test” on its U.S. operations.

Germany’s largest lender is already facing challenges with U.S. bank regulators and in financial markets, with its stock price falling to historic lows on Thursday. Standard & Poor’s downgraded its credit rating to BBB+ from A- on Friday.

The downgrade came after reports earlier in the week that the Fed last year designated one of Deutsche Bank’s U.S. businesses as “troubled,” something a person with knowledge of the matter confirmed to Reuters on Friday.

The Fed’s stress test results, expected to be released sometime this month, will be the next big public barometer of Deutsche Bank’s financial strength.

The regulator has been examining how the biggest U.S. banks would handle a range of adverse economic and market scenarios since 2009, requiring many to shore up their capital buffers and risk management controls.

But this is the first year the Fed will publicly release results of six foreign lenders, including Deutsche Bank, after requiring them to create consolidated U.S. holding companies with ring-fenced capital. The Fed tested those new entities last year in a trial run, the results of which are confidential.

It could be difficult for a bank which has a business on the “troubled” list to pass the scenarios, said a person familiar with the tests who was not authorized to speak publicly. That is because the capital, liquidity and risk management failures that would land a bank on the list are similar to those that lead banks to flunk the stress test, the person said.

Additionally, many of the foreign holding companies are relatively new and have had little time to get the systems and processes in place to handle the tests, the person added.

On Friday, Deutsche Bank Chief Executive Officer Christian Sewing said the bank had been working to “strengthen our internal control environment and infrastructure and to address concerns that have been identified both internally and by our regulators.”

This year’s scenarios are also the toughest to date because the Fed raises the bar when the broader economic environment improves, with more extreme assumptions around unemployment rates this year. Reuters reported in April that the new tax code could also exacerbate the capital hit in the tests.

In previous years, the Fed has publicly stress-tested Deutsche Bank Trust Corp, a subsidiary that includes its U.S. transaction bank and wealth management business.

That unit passed last year but failed in 2016 due to "material unresolved supervisory issues that critically undermine its capital planning process," the Fed said. (reut.rs/296L4yH)

This year’s results will include all of Deutsche Bank’s non-branch U.S. assets, including its sizable Wall Street broker-dealer trading business.

That business is due to shrink as the bank slashes 7,000 jobs from its global workforce, particularly in trading, which has been a drag on its profits in recent years. (Reporting by Michelle Price; editing by Lauren Tara LaCapra and Jonathan Oatis)

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