The US Federal Reserve released the results of its second stress test which looked at how the bank plans to build up capital in the event of a severe recession. A number of other prominent banks have fallen short.

Deutsche Bank’s US subsidiary failed the second part of the US Federal Reserve’s annual stress tests because of “widespread and critical deficiencies” in the bank’s capital planning controls. A number of other banks - Goldman Sachs and Morgan Stanley - also fell short on specific tests of how well they could withstand a shock such as a large fall in equity and bond markets.

Last week, Deutsche Bank cleared the Fed’s first hurdle that measures its capital levels against a severe recession, the strictest ever run by the Fed. Thursday’s second test focused on how the banks plan for that capital, such as dividend payouts and investments, to stand up against a severe recession.

The Fed also placed conditions on three banks that passed the test. Goldman Sachs Group and Morgan Stanley cannot increase their capital distributions and State Street must improve its counterparty risk management and analysis, the Fed said. Goldman Sachs’s and Morgan Stanley’s leverage ratios fell under the minimum 3 per cent level as required in the Fed’s stress tests. For other prominent US financial institutions, the ratios after capital return in the severely stressed scenario were: Wells Fargo (4.5 per cent); Bank of America (3.6 per cent); Citigroup (3.4 per cent); JP Morgan (3.2 per cent); Goldman Sachs (2.7 per cent), and Morgan Stanley (2.6 per cent).

“Concerns include material weaknesses in the firm’s data capabilities and controls supporting its capital planning process, as well as weaknesses in its approaches and assumptions used to forecast revenues and losses under stress,” the Fed said in a statement.

While failing the US stress test would not likely affect the bank’s ability to pay dividends to shareholders, it will require Deutsche Bank to invest in technology, operations, risk management and personnel, as well as changes to its governance.

It also means that the bank would not be able to make any distributions to its German parent without the Fed’s approval and could potentially result in the bank further stripping down its US operations, as this publication reported.

Deutsche Bank said it had made significant investments to improve its capital planning capabilities, as well as controls and infrastructure at its US subsidiary. It would work with regulators to “continue to build on these efforts".

This publication only recently reported that The New York State Department of Financial Services (DFS) had fined Deutsche Bank $205 million for unlawful, unsafe and unsound conduct in its foreign exchange trading business. Germany's largest bank has been through torrid times. As well as boardroom changes, the bank has moved to slash costs, trimming its equities business, while it stresses it sees wealth management as an important growth area.