Fed Forces Santander to Revamp Capital, Risk Controls

WASHINGTON — The Federal Reserve Bank of Boston reached a broad agreement with the U.S. affiliate of Spanish powerhouse Banco Santander calling for improvements in internal risk management, liquidity and capital adequacy controls.

The agreement — released by the central bank Tuesday and dated July 2 — only adds to the Spanish bank's U.S. regulatory troubles following poor marks in the Federal Reserve Board's most recent Comprehensive Capital Analysis and Review, consumer protection concerns at its Dallas-based auto lender and other issues.

Under the pact, Santander Holdings USA — a registered bank holding company — has 60 days to develop and submit plans for enhancing board oversight of "management and operations of the consolidated organization" with particular enhancement of risk management and capital planning. Those plans must describe actions the board will take to establish and maintain control and oversight over the bank's operations, as well as who is responsible for carrying out those actions.

Santander must also implement an "effective capital planning and stress testing process that is well documented and objectively evaluated by the board of directors and senior management," the agreement says, and that process must take into account "the organization's risk position across all exposures."

The agreement follows a string of bad regulatory news for the Spanish bank. Santander was one of only two banks to fail the qualitative portion of the Fed's stress test known as CCAR in March, after it had also failed in 2014. In the 2015 stress test result, the Fed said the bank had failed because of concerns over "governance, internal controls, risk identification and risk management, management information systems, and assumptions and analysis that support the [bank holding company's] capital planning processes."

Meanwhile, Santander has faced further scrutiny from the Fed for paying dividends without central bank approval and the lending practices of Santander Consumer USA — the company's Dallas-based subprime auto lender — have been questioned. The company announced earlier this month that Thomas Dundon was resigning as chief executive of Santander Consumer to "pursue new opportunities."

The written agreement with the Fed "underlines how much work we have to do to meet our standards of excellence and our regulators' expectations," said a spokeswoman for Santander in an emailed statement. "We have begun a comprehensive, multi-year transformation project within our organization. We are confident this project will address the concerns the Federal Reserve has cited and position Santander for long-term success."

The agreement further requires Santander to assess its current firm-wide risk management program. The company must develop "enhanced written policies, procedures, and risk management standards" as well as set "risk tolerance guideline limits" while ensuring adherence to those limits.

The company must also improve its liquidity risk management practices by establishing a consolidated liquidity stress testing framework and liquidity buffer metrics, as well as contingency plans in case liquidity reserves do not perform as expected.