Prior to Friday, financial shares were laggards when it came to the market’s performance, with S&P 500 financial stocks down 3.5% in aggregate. Year-to-date, they were down almost 5%. These losses could trim, with the shares of major banks moving higher on Friday. Ticker Security Last Change Change % JPM JPMORGAN CHASE & CO. 163.69 +1.73 +1.07% WFC WELLS FARGO & CO. 46.76 +0.34 +0.73% GS THE GOLDMAN SACHS GROUP, INC. 371.38 +3.71 +1.01% MS MORGAN STANLEY 90.15 +0.74 +0.83% The movement was in reaction to the majority of banks passing the Federal Reserve’s stress tests on Thursday. “Although financials rallied after this report, it should be noted that they were weak leading in and many investors thought the sector was broadly oversold,” according to Shawn Cruz, manager, Trader Strategy, TD Ameritrade. He noted that S&P 500 financials fell for 13 straight days leading up to the tests as they remained under pressure from the flattening yield curve, mixed results from Part 1 of stress tests and global trade issues. More from FOX Business Tax reform savings: Where companies are investing The U.S. arm of Deutsche Bank failed for the third time in four years. While overall it passed the test, Goldman Sachs and Morgan Stanley will have to keep their shareholder payouts at current levels. The investment banks experienced a one-time drop in capital ratios, due to the recent passing of tax reform, according to the Federal Reserve. The point of the stress tests are to determine if banks are properly capitalized to withstand a financial crisis. They were implemented following the Great Recession. According to the Fed, the 35 banks that it stress tested have built up an extra $800 billion in capital since the start of 2009.<doc-sep>Bloomberg (Bloomberg) -- Credit Suisse Group AG executives ignored warnings from colleagues about troubled steel tycoon Sanjeev Gupta as they channeled $1.2 billion of client funds to his businesses, according to people familiar with the matter.Bankers in Credit Suisse’s commodity trade-finance unit blacklisted Gupta’s Liberty Commodities Ltd. in 2016 because they suspected some of its deals weren’t legitimate, the people said. When they learned about two years later that the bank was lending to his companies through a suite of investment funds, which eventually grew to $10 billion, they flagged their worries to leaders in compliance and the division that housed the loans, one of the people said.The disclosure that Credit Suisse may have put clients at risk despite internal concerns over Gupta’s businesses adds a new twist to the debacle stemming from the March implosion of Greensill Capital, the finance firm at the center of the three-way relationship.Investigations, LawsuitsThe U.K. Serious Fraud Office is now investigating Gupta’s group of companies for suspected fraud, including in its financing deals with Greensill, according to a May 14 statement. Credit Suisse has sued to force Gupta’s Liberty Commodities into insolvency and has since shut the funds that made the loans and launched an internal investigation. Investors are staring at losses as the bank confronts embarrassing lawsuits.“We are currently focusing our efforts on recovering our investors’ money,” Will Bowen, a spokesman for Credit Suisse in London, said in an emailed statement, adding that the bank’s internal probe will focus on “all of the issues” linked to the funds. “We are committed to learning the lessons and will share the relevant lessons learnt at the appropriate time.”Andrew Mitchell, a spokesman for the Gupta Family Group Alliance, or GFG Alliance, a collective of businesses linked to Gupta including Liberty Commodities, denied any wrongdoing.The Greensill saga represents just one of the two disasters that rocked Credit Suisse in the first half of 2021. Since Greensill began unraveling, the bank has announced a $5.5 billion hit from the blowup at Archegos Capital Management.ApologiesFormer Chairman Urs Rohner apologized to shareholders and his successor, Antonio Horta-Osorio, who arrived at the end of April, has promised a sweeping strategy review.Chief Executive Officer Thomas Gottstein, who was head of the division that oversaw trade finance, wasn’t aware of the internal concerns about Gupta that had prompted the bank to cut him off, according to a person familiar with the matter.Employees at the trade-finance unit, which lends money for the buying and selling of commodities, cut ties with Gupta in 2016 after becoming skeptical toward his Liberty Commodities, the people said. They distrusted the documents the company provided, triggering doubts about its transactions, they said. In one example reported by Bloomberg, the company had presented another bank with what seemed to be duplicate shipping receipts. A spokesman for Gupta has denied any wrongdoing.Banking TiesLiberty Commodities pledged assets to Credit Suisse as security for borrowings in 2013 but by early 2016, all such commitments had been extinguished, indicating that the financing relationship had ceased, U.K. Companies House filings show. And while Gupta’s company listed the Swiss bank as one of its lenders in its 2014 annual report, it didn’t in the following year’s report, which is dated May 2016, according to the filings.Their counterparts at other banks, including Macquarie Group Ltd. and Sberbank PJSC, halted trading with Liberty Commodities around the same time because of similar concerns; Goldman Sachs Group Inc. also stopped in 2016, Bloomberg has reported.Nevertheless, executives at Credit Suisse’s asset-management division -- which creates investment products for clients and charges a fee for overseeing them -- began arranging a suite of funds focused on supply-chain finance in 2017. The entities bought securitized loans packaged by Greensill, a firm created by Australian businessman Lex Greensill. Much of the debts were linked to Gupta’s businesses.WarningsOfficials at the commodity trade-finance unit were concerned when they found out about the funds’ links to Gupta and took their fears to Thomas Grotzer, general counsel for the bank’s Swiss division. They also warned Luc Mathys and Lukas Haas, the bankers who helped oversee the trades at the asset-management unit.Grotzer was promoted last month to interim global head of compliance at Credit Suisse. He didn’t respond to requests for comment. Mathys, head of fixed-income at the asset-management division, and Haas, a portfolio manager, were put on temporary leave in March. Neither responded to requests for comment.The bank pushed ahead with the funds and marketed them to investors as being made up of short-term debt secured on invoices, assets considered so safe that Credit Suisse gave the largest vehicle its lowest rating for risk. Yet part of the loans were linked to mere possible future revenues.Other parts of the bank continued working with Gupta as well. Credit Suisse’s investment bankers were due to lead an initial public offering for Liberty’s U.S. steel arm, which was ultimately pulled, according to a statement from the company. Gupta also announced that the Swiss bank would finance his planned acquisition of Thyssenkrupp AG’s steel unit, which fell apart earlier this year.Credit Suisse has so far recouped about $5.9 billion of the $10 billion in these supply-chain funds, but it remains unclear how much will be returned ultimately to investors. Loans to Gupta’s businesses are among a batch of debts that are the “principal sources of valuation uncertainty,” the bank said earlier this month.Liberty Commodities’s external legal advisors investigated “alleged rumors concerning the paperwork” it used in 2019, according to Mitchell, the spokesman for GFG Alliance. They found no evidence to substantiate the rumors, nor was the company “ever subject to further complaints or proceedings,” he said.“LCL has ongoing banking relationships with separate financial institutions,” Mitchell said, referring to Liberty Commodities. “The trade-finance market has been hugely challenging for all but the very largest commodities traders in recent years. Nevertheless, no financial institution has been left out of pocket as a result of lending money to LCL. On the contrary, they have received substantial commercial returns.”More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.<doc-sep>Deutsche Bank AG's U.S. subsidiary failed on Thursday the second part of the U.S. Federal Reserve's annual stress tests due to "widespread and critical deficiencies" in the bank's capital planning controls. The Fed board's unanimous objection to Deutsche Bank's U.S. capital plan marks another blow for the German lender, sending its shares down 1 percent after hours. Its financial health globally has been under intense scrutiny after S&P cut its rating and questioned its plan to return to profitability. 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 Corp must improve its counterparty risk management and analysis, the Fed said. Deutsche Bank last week easily cleared the Fed's easier first hurdle that measures its capital levels against a severe recession, the strictest ever run by the Fed. Thursday's second test focuses on how the bank's plan for that capital, such as dividend payouts and investments, stands up against the harsh scenarios. "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 U.S. stress test would not likely affect the bank's ability to pay dividends to shareholders, it will require Deutsche Bank to make substantial investment in technology, operations, risk management and personnel, as well as changes to its governance. It also means 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 paring back some of its U.S. operations. In a statement on Thursday, Deutsche Bank said it had made significant investments to improve its capital planning capabilities as well as controls and infrastructure at its U.S. subsidiary and would work with regulators to "continue to build on these efforts." The newly created U.S. subsidiaries of six foreign lenders, Deutsche Bank, Credit Suisse Group AG, UBS Group AG, BNP Paribas SA, Barclays Plc and Royal Bank of Canada, went through the test for the second time this year had their results publicly released for the first time. Deutsche Bank's results cover DB USA Corp, a holding company with $133 billion in assets, according to Deutsche Bank's March filings. This includes all of Deutsche Bank's non-branch U.S. assets, including its mortgage lending and debt financing subsidiary, and its sizable Wall Street broker-dealer trading business.<doc-sep>
WASHINGTON (Reuters) - This year’s Federal Reserve stress test results suggested a more flexible approach, a further sign the regulator’s new leadership is responding positively to a Wall Street push for pragmatic bank supervision, analysts and lawyers said. FILE PHOTO: The Federal Reserve headquarters in Washington, U.S., September 16, 2015. REUTERS/Kevin Lamarque/File Photo Banks that took a one-off capital hit due to the 2017 U.S. tax overhaul got a conditional pass, a departure from the Fed’s traditional strict pass-fail approach to quantitative capital issues, while scandal-plagued Wells Fargo & Co was able to double share buyback plans. Goldman Sachs and Morgan Stanley were dinged since their capital fell below the Fed’s minimum, but the regulator’s response this year sounded a more industry-friendly tone under Chairman Jerome Powell and Vice Chairman Randal Quarles, President Donald Trump appointees, analysts and lawyers said. “They have allowed firms to pass on the basis there were special circumstances and applied a level of pragmatism in the way they haven’t in the past. This is the new Fed and it signals to me an early retirement of this super-strict quantitative test,” said Mike Alix, financial services risk leader at PwC. The Fed on Thursday approved the capital plans of 34 lenders following the second leg of its annual tests, a process introduced after the 2007-2009 financial crisis to assess banks’ capacity to withstand a severe recession. The U.S. central bank has ramped up its worst-case scenarios each year. The U.S. tax code rewrite signed into law in December meant Goldman and Morgan Stanley’s Thursday results were weighed, in part, by changes to the treatment of past losses on hypothetical tax bills under the Fed’s scenarios. But since the tax issue was a one-off and capital levels in the system are high, the Fed felt it was unnecessary to fail the two banks, senior Fed officials said. Under the conditional approvals for their capital plans, the two banks can pay out capital distributions but must keep them in line with previous years. Some analysts pointed to the Fed’s conditional approval of State Street Corp’s higher dividend even though its counterparty exposures showed high losses under the scenarios. “This reinforces how the Federal Reserve was less draconian in how it reacted to the results,” said Cowen Washington Research Group’s Jaret Seiberg in a note. Wells Fargo won approval for the highest payout ratio of the major U.S. banks, quashing investor concerns it would fail the part of the test measuring operational controls. A passing grade could signal clearer skies ahead for Wells Fargo and better relations with regulators, according to analysts at Evercore Group LLC. Democratic U.S. Senator Sherrod Brown on Thursday criticized bank payouts to “wealthy shareholders” and warned the Fed against easing up on how it approaches the tests. STRESS BUFFER Lenders have long complained the stress-test process is too opaque and that the Fed has been too harsh on firms whose results fall short of models the Fed keeps secret. Despite noting the Fed’s pragmatic stance on Goldman Sachs and Morgan Stanley, industry insiders still questioned whether the regulator should have proceeded with the tough scenarios this year given the short-term adverse tax changes, and said they want further changes to make the process more transparent. Powell and Quarles have said they believe stress-testing can be more transparent and less discretionary, but banks continue to worry that Fed rule-easing may not go far enough or could inadvertently make life tougher if changes are not finely tuned. They point, for example, to the Fed’s April proposal to introduce a “stress capital buffer” that would work in tandem with the stress tests to move the system away from a strict annual quantitative pass-fail. In a blog post published on Friday, bank trade group The Clearing House warned the proposal as written could actually exacerbate their capital planning challenges by requiring banks to capitalize themselves against stress losses year-round. “This year’s results illustrate that capital requirements in the United States are highly volatile from year to year and that the volatility will be magnified by ... the stress buffer,” they added.