• By
  • Alan Zibel

WASHINGTON–The capital plans of three U.S. subsidiaries of foreign banks were rejected by the Federal Reserve Wednesday after the regulator identified problems in their projections for how they would withstand a severe economic slump.

Three out of the five banks that had their capital plans rejected by the central bank on Wednesday were based overseas, including the U.S. units of HSBC Plc., Banco Santander SA and Royal Bank of Scotland Group Plc.

All three banks were rejected even though their projected capital cushions in a time of severe economic stress were above Fed-mandated levels. Instead, the rejection was based on what the Fed called “qualitative concerns,” including the types of capital the banks have on their balance sheets.

All three banks had deficiencies in their capital planning processes that “are sufficiently material to call into question the overall reliability of their capital planning processes that the Fed said “raise concerns that warrant an objection.” They will be required to resubmit their capital plans.

At RBS and HSBC, the Fed found deficiencies its practices for estimating revenue and losses under a time of stress. And at Santander, the Fed found “widespread and significant deficiencies in several areas, including governance, internal controls, risk-identification and risk management.”

The Fed’s annual “stress” tests are designed to ensure large banks can handle a deep slump like the 2008 financial crisis and continue lending without needing a government rescue.

A first round of tests last week showed that 29 of 30 banks had adequate capital buffers to withstand a severe drop in housing prices and surging unemployment.

As part of Wednesday’s result, the Fed makes a decision on each company’s planned dividend and stock buyback plans over nine quarters, and takes into account their capital buffer after a severe economic shock.