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By Thomas Atkins
FRANKFURT, March 6 (Reuters) - Deutsche Bank AGhas passed the first "stress test" set by U.S. regulators but isunlikely to clear the next hurdle as the German bank strugglesto tighten compliance fast enough to appease controllers at theFederal Reserve.
Deutsche eased through the capital test of the two-part examon Thursday, showing its U.S. operations had an ample cashcushion to survive even a severe market downturn.
It even came out as the most robust of all the 31 banks totake the test, due to the fact that the unit tested representedonly a small, low-risk part of its sprawling U.S. operations.
But the Fed is widely expected to fail Deutsche Bank in atest of processes and controls on March 11, underscoring howmuch work lies ahead for Deutsche to expand successfully in theworld's largest market, analysts say.
"It's almost inevitable that you won't pass with flyingcolors, whatever you do," said Bridget Gandy, managing directorat Fitch Ratings. Many first-time test takers, in fact, fail,she said.
"It won't be because of lack of capital or managing theiroperations that they fail, but that they haven't managed theiroperations in such a way as to tick each box to come through thetest well," she said.
Deutsche said Thursday's results demonstrated the robustnessthe unit that was tested, which represents less than 5 percentof its total assets, but declined to comment on the outcomeexpected next week.
"Like the other banks, we'll know the results on March 11," a spokesman said.
PRIMARY SUPERVISION
Other foreign banks have failed the U.S. test the first timeround. Banco Santander, Europe's biggest bank, failedlast year, as have HSBC and Royal Bank of Scotland.
Deutsche has avoided primary supervision by the Fed up tonow by structuring its operations so they came largely under thepurview of the Securities and Exchange Commission. Legal changesin 2013 forced the bank under the Fed's oversight.
By running its Comprehensive Capital Analysis and Review(CCAR) tests, the Fed aims to ensure foreign banks are aswell-run as domestic ones, and that the U.S. government is notleft on the hook for problems created by overseas-based lenders.
While no punitive actions are expected, a failure would giveDeutsche a black eye just as it races to bolster internalreporting and controls. The bank is half way through a four-yearplan to invest some 1 billion euros ($1.1 billion) in beefing upcompliance.
The bank has hired some 500 staff to address weaknesses inU.S. financial reporting and hired Elizabeth Ford from GoldmanSachs as head of compliance in the Americas. Deutschewill also bring on board Steven Reich, a U.S. defense lawyerwith experience in the White House.
In doing so, Deutsche is playing catch-up with those bankswho have already taken the Fed tests for the past four years.
Deutsche aims to fortify its position as a global securitieshouse and is the only global bank with such a strategy thatdoesn't have its headquarters on Wall Street.
A failure would highlight an even bigger challenge ahead:Deutsche's entire U.S. operation is set to be tested in 2018.
The unit examined this time, Deutsche Bank Trust Corp, orDBTC, has a balance sheet worth about $62 billion, making it thesmallest part of the bank's U.S. empire. It houses primarilywealth management and transaction operations.
The rest, most housed in its Deutsche Bank Securities Inc(DBSI) unit, contains the important broker-dealer operations,the core of its investment bank and the heart of its U.S. push.
Deutsche was the target in 2014 of punishing criticisms fromU.S. regulators for "low quality, inaccurate and unreliable"financial reports at some of its U.S. divisions, showing thescope of the task ahead to bring those operations up to snuff. ($1 = 0.9114 euros) (Editing by David Holmes)
