WASHINGTON, March 11 (UPI) -- One of the largest companies in the world nearly failed a financial stress test administered by the U.S. Federal Reserve Wednesday -- a checkup implemented after the mortgage market-led meltdown in 2008 that is designed to determine if banks are capable of handling similar economic disasters in the future.
The Fed this week administered the final stage of the annual test to 31 of the nation's largest banks. Although Bank of America's capital plan was not approved, the firm was given an opportunity to restructure and resubmit it in September. Two others, however -- U.S. divisions of Deutsche Bank and Santander Holdings -- failed the tests outright.
Bank of America, the second-largest U.S. bank by assets, demonstrated "deficiencies" in its ability to predict how it would perform in an economic downturn, the Federal Reserve said, as well as "weaknesses" in its internal control structure, Fortune reported.
By gaining conditional approval from the Fed, Bank of America avoided the pitfalls of failing, which can heavily influence a bank's profitability and shareholder optimism. The U.S. arms of Deutsche Bank and Santander were not as fortunate.
During the tests, Deutsche Bank Trust Corp. was asked by the Federal Reserve to resubmit its capital plan -- and advised it would fail if it didn't -- but the German-based bank refused to do so. The Fed noted numerous significant problems with the firm's capital plan, including difficulty identifying risk and projecting losses. This is the first year Deutsche Bank Trust Corp. took the Fed stress tests, the Wall Street Journal reported.
Spain-based Santander Holdings' U.S. division was advised of the same thing, resubmitted its fiscal intentions and failed again. The Federal Reserve released its 142-page stress test report Wednesday.
Failing the Federal Reserve's stress test means banks, by law, are not allowed to increase dividends or share repurchases for the next year -- something shareholders eagerly anticipate every year. However, because Deutsche and Santander are both foreign banks, it remains unclear whether the Fed wields sufficient authority to enforce their restrictions.
Banks typically submit capital plans that increase dividends or facilitate the buying back of shares because that increases share prices and generates optimism among investors. Before the financial crisis began, banks were able to do this without much regulatory oversight. But starting in 2009, following the economic disaster that killed longtime investment banks Lehman Brothers and Bear Stearns, such re-calibration now requires the Fed's approval.
"The Federal Reserve may object to a capital plan based on quantitative or qualitative concerns. After the Federal Reserve objects to a capital plan, the institution may not make any capital distribution unless expressly permitted by the Federal Reserve," the federal oversight agency said.
JPMorgan Chase, Morgan Stanley and Goldman Sachs were each forced to resubmit their plans -- either lowering dividends or reducing the amount of money earmarked to repurchase shares -- otherwise they, too, would have failed.
The tests indicated that U.S. banks are presently in far better shape than they were at the start of the crisis, and some institutions showed they are much better off than they were just 12 months ago.
"U.S. firms have substantially increased their capital since the first round of stress tests led by the Federal Reserve in 2009," the Fed noted.
Bank of America's struggles passing the test came largely as a surprise to analysts, as the firm appeared to perform splendidly during the first battery of tests last week. Last year, BoA was also asked to resubmit its plan and later had to submit it yet again when the North Carolina-based bank identified $4 billion in losses that were overlooked in its previous submissions.
The Fortune report said BoA's missteps last year might be part of what the Fed was referring to this time around when it identified "weaknesses" in the firm's internal control.
After receiving conditional approval, Bank of America announced a plan to buy back $4 billion worth of stock.
"We believe that this year's planned repurchase program is the best way to continue to drive value for our shareholders," Bank of America CEO Brian T. Moynihan said.
Citigroup, which flunked the tests last year due to what the Fed called a deficient disaster plan, soothed some executive and investor concern by achieving a pass this year. Like BoA, Citigroup also announced plans to repurchase as much as $7.8 billion of its stock. JPMorgan and Morgan Stanley similarly announced stock buybacks of $6.4 million and $3.1 million, respectively.