The Fed’s statement on Santander appears particularly scathing:
“The Board of Governors objected to Santander’s CCAR 2015 capital plan on qualitative grounds because of widespread and critical deficiencies across the BHC’s capital planning processes. Specific deficiencies were identified in a number of key areas, including governance, internal controls, risk identification and risk management, management information systems (MIS), and assumptions and analysis that support the BHC’s capital planning processes.”
This conclusion might seem disproportionately stern. Yet, officials in the Bank of Spain have long expressed their deep concern about Santander’s risk management. Internal modelling shows a rather skewed penchant for underestimating potential losses, thus depriving the nominal capital ratios of wholly sensible meaning. Such errors undoubtedly undermine the bank’s key solvency stance.
The ECB should take due note of the Fed’s statement. Ignoring the outcome, while at the same time trying to enforce its brand-new supervisory powers would cripple its credibility. It should cast a thorough review on Santander’s risk management to assuage current concerns. The bank’s widely perceived soundness requires firm reassurance from the ECB. Otherwise, investors might challenge its outstanding reputational standing.
The recent capital increase underlined the need to bolster its capital adequacy ratio, bringing it in line with other main banking concerns in Europe. Now, a thorough review of its risk-weighted assets is also welcome. The objections put forward by the Fed depict widespread mismanagement that should induce swift action. Making sure failures only hit the US subsidiary will be essential for dispelling outstanding doubts.
*Check the US Federal Reserve’s complete CCAR 2015 here (.pdf).