Fed Tells Santander's U.S. Unit To Shape Up

By Ryan Tracy And Jeannette Neumann 

        The Federal Reserve issued a stinging lecture to Spanish bank Banco Santander SA, faulting the lender's U.S. unit for failing to meet regulators' standards on a range of basic business operations.
        Santander had previously told investors that the Fed was preparing an enforcement action. The one that arrived Tuesday, however, was unusually broad in scope for a bank of Santander's size. It represents the latest crackdown by U.S. regulators, who have been pressing the largest U.S. banks to improve their risk management.
        The Fed's recent actions against other banks have typically targeted discrete problems, such as anti-money-laundering controls or mortgage underwriting, rather than reaching across an organization, such as in Santander's case.
        Regulators said they found deficiencies, including in how the holding company manages its capital, its daily funding needs and corporate governance. It also faulted risk management at a consumer-lending subsidiary, Santander Consumer USA, Inc.
        The chief executive of Santander Consumer abruptly stepped down last week.
        The Fed said it identified the issues in its "most recent inspection" of Santander's U.S. holding company.
        The regulator doesn't typically pursue public enforcement actions unless a bank repeatedly fails to fix issues the regulator identifies. Separately, Santander Consumer has faced multiple federal inquiries into its auto-lending practices.
        The Fed didn't fine the bank but reserved the right to do so later and required the bank to write a series of remedial plans.
        "This written agreement underlines how much work we have to do to meet our standards of excellence and our regulators' expectations," a Santander spokesman said in a written statement.
        The U.S. holding company has begun "a comprehensive, multiyear transformation project within our organization," the spokesman added, and the company is "confident this project will address the concerns the Federal Reserve has cited."
        Santander is the eurozone's largest bank by market value and its U.S. unit has about $123 billion in assets.
        Santander's U.S. holding company, which accounted for 14% of the bank's total net profit in the first quarter, has been an outsize regulatory headache for new Executive Chairman Ana Botin. Since she took the helm of the bank last September, she has appointed at the holding company a new chairman, chief executive and board members.
        "I cannot fix the U.S. without the right team," Ms. Botin told The Wall Street Journal in early June.
        Ms. Botin met three times with Fed governor Daniel Tarullo between October and December 2014, according to a copy of Mr. Tarullo's schedule obtained through a Freedom of Information request.
        That was more than any foreign-owned bank executive during the period from May to December of 2014.
        The problems revealed Tuesday are similar to those identified in Fed stress tests in both 2014 and 2015. Santander's holding company failed the Fed's annual exams both years because of what the regulator said were "widespread and critical deficiencies" in governance and its inability to identify and plan for potential risks. Santander executives think the U.S. holding company will likely fail the 2016 tests, too, the Journal reported in June.
        Tuesday's agreement starts with the basics, requiring Santander's U.S. holding company to describe "the duties and responsibilities" of its top officers and "actions that the board of directors will take to maintain effective control over, and supervision of, the consolidated organization's risk management."
        Karen Shaw Petrou, managing partner at policy analysis firm Federal Financial Analytics Inc., said the move is consistent with regulators' focus on corporate governance.
        She said, however, the broad action is "unusual at a time in which the regulators are focused typically on individual lines of business at individual institutions."
        The Fed on Tuesday also faulted Santander for failures in "liquidity risk management," indicating the bank may not have satisfactory programs for projecting future cash flows. The regulator suggested Santander isn't complying with the Fed's risk-management guidelines, including those for internal audit programs and computerized risk models.
        Another part of the action stated that the bank must comply with federal rules governing executive severance packages and requirements to notify regulators about changes in bank leadership.
        Ms. Botin inherited the problems at the U.S. unit from the previous chairman, her father, Emilio Botin, who died in September after nearly three decades at the helm, and has been heavily involved in trying to fix its problems.
        On Oct. 9, less than one month after she was named Santander executive chairman, she and then-Chief Executive Javier Marin met for an hour with Mr. Tarullo, the U.S. central bank's regulatory point man, inside the Fed's Washington headquarters, according to Mr. Tarullo's schedule.
        During Ms. Botin's brief tenure leading up to that meeting, the Fed had already scolded Santander for paying an unauthorized dividend earlier in 2014 without the Fed's required permission.
        Ms. Botin spoke for 15 minutes by phone with Mr. Tarullo on Nov. 10.
        She met with him again in Washington on Dec. 10, when they talked privately for an hour, the schedule indicates.
        Write to Ryan Tracy at ryan.tracy@wsj.com and Jeannette Neumann at jeannette.neumann@wsj.com
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        (END) Dow Jones Newswires

        July 07, 2015 18:31 ET (22:31 GMT)

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