The central bank's comprehensive capital analysis and review programme, which measures how well lenders would perform in a range of different scenarios, found the banks lacked necessary internal controls and were worried about their risk management processes.
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They were the only two of the 33 banks studied by the Fed to fail the test, although Morgan Stanley was asked to present a new business plan by the end of the year or risk falling short in the next round of analysis.
Santander has now failed the test for three consecutive years - the first bank to do so. Earlier this week, shares in Credit Suisse and Deutsche Bank reached their lowest ever level.
Deutsche Bank has been a pin-up for the global financial sector's woes over the last year. Its share price is down 60 per cent over the last year as it struggles to deal with the pressure of negative interest rates in the Eurozone and weak global growth.
Earlier this year the International Monetary Fund (IMF) found one third of European banks would struggle to make a profit if they do not radically change their business model. Deutsche Bank was one of the most at risk, alongside a number of Italian lenders.
The Fed objected to both Deutsche Bank and Santander on "qualitative" not "quantitative" grounds, meaning the banks' capital levels are acceptable, but their internal processes, governance structures and risk management controls raise concerns.
"In particular, the Fed identified deficiencies in the risk management and control infrastructure at Deutsche Bank, including risk measurement processes, stress testing process, and data infrastructure," the US central bank said in a statement issued overnight.
On Santander, the Fed said: "The firm continues to have material unresolved supervisory issues that critically undermine its capital planning process."