By Thomas Atkins
FRANKFURT, March 6 (Reuters) - Deutsche Bank AG has passed the first "stress test" set by U.S. regulators but is unlikely to clear the next hurdle as the German bank struggles to tighten compliance fast enough to appease controllers at the Federal Reserve.
Deutsche eased through the capital test of the two-part exam on Thursday, showing its U.S. operations had an ample cash cushion to survive even a severe market downturn.
It even came out as the most robust of all the 31 banks to take the test, due to the fact that the unit tested represented only a small, low-risk part of its sprawling U.S. operations.
But the Fed is widely expected to fail Deutsche Bank in a test of processes and controls on March 11, underscoring how much work lies ahead for Deutsche to expand successfully in the world's largest market, analysts say.
"It's almost inevitable that you won't pass with flying colors, whatever you do," said Bridget Gandy, managing director at Fitch Ratings. Many first-time test takers, in fact, fail, she said.
"It won't be because of lack of capital or managing their operations that they fail, but that they haven't managed their operations in such a way as to tick each box to come through the test well," she said.
Deutsche said Thursday's results demonstrated the robustness the unit that was tested, which represents less than 5 percent of its total assets, but declined to comment on the outcome expected 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 time round. Banco Santander, Europe's biggest bank, failed last year, as have HSBC and Royal Bank of Scotland .
Deutsche has avoided primary supervision by the Fed up to now by structuring its operations so they came largely under the purview of the Securities and Exchange Commission. Legal changes in 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 as well-run as domestic ones, and that the U.S. government is not left on the hook for problems created by overseas-based lenders.
While no punitive actions are expected, a failure would give Deutsche a black eye just as it races to bolster internal reporting and controls. The bank is half way through a four-year plan to invest some 1 billion euros ($1.1 billion) in beefing up compliance.
The bank has hired some 500 staff to address weaknesses in U.S. financial reporting and hired Elizabeth Ford from Goldman Sachs as head of compliance in the Americas. Deutsche will also bring on board Steven Reich, a U.S. defense lawyer with experience in the White House.