By Douwe Miedema
WASHINGTON, Sept 18 (Reuters) - The Federal Reserve on Thursday disciplined Spain’s Santander over paying out a dividend without approval, as it tightens control of how foreign banks manage risk in the United States.
In a written agreement with the Boston Fed, Santander Holdings USA, Inc. said it would tighten management standards to make sure it did not pay out any dividends without the prior written approval of the Fed.
“Santander Consumer declared a cash dividend on its common stock payable in the second quarter of 2014, which was not specifically authorized in advance by the Federal Reserve,” the Fed said in the document.
It was the Fed’s first enforcement action related to its annual checks of how healthy banks are, known as stress tests, in which it subjects their capital buffers to a simulation of being hit by a major financial crisis.
Santander was one of three foreign banks whose plans for higher dividends or share buybacks the Fed blocked in the stress tests earlier this year, due to weaknesses in their capital planning processes.
Santander declined to comment. Its shares were largely unchanged in pre-close trading on the Madrid bourse.
The Spanish bank had agreed to contribute $21 million to the U.S. unit to mitigate the violation, the document said. That transfer had been announced in May, in a regulatory filing with the Securities and Exchange Commission.
Santander now has 30 days to submit a plan to outline how it will make sure there won’t be a repeat of any unauthorized shareholder payouts, which for instance includes keeping minutes of all board meetings on dividends.
The stress tests increasingly are a cornerstone for the Fed to supervise the banks on its watch after the 2007-09 financial crisis, and the Fed is giving banks less leeway to use internal models to measure risks.
This year, Citigroup flunked the tests for the second time in three years when the Fed rejected its plans to buy back $6.4 billion in shares and boost dividends, a blow to chief Executive Michael Corbat.
But much of the Fed’s efforts are directed at foreign banks, to address concerns that U.S. taxpayers will need to foot the bill should foreign regulators treat U.S. subsidiaries with low priority if they need to rescue one of their banks.
Foreign banks with sizeable operations on Wall Street are now given far less flexibility to shift around capital across the world, and the Fed forces their U.S. units to have the same safety buffers as comparable U.S. banks. (Reporting by Douwe Miedema, additional reporting by Sarah White in Madrid; Editing by Bill Trott and Meredith Mazzilli)