Royal Bank of Scotland fails UK’s toughest ever stress test

British banks in general capitalised for ‘severe stress scenario’, says Bank of England

 Royal Bank of Scotland in the City of London: The bank, which owns Ulster Bank in Ireland, said it plans     further cost cutting following after failing  a stress test. Photograph: Reuters

Royal Bank of Scotland in the City of London: The bank, which owns Ulster Bank in Ireland, said it plans further cost cutting following after failing a stress test. Photograph: Reuters


Royal Bank of Scotland bolstered its capital plan after failing multiple hurdles in the Bank of England’s toughest-ever stress test.

Some “capital inadequacies” were revealed at two other banks, Barclays and Standard Chartered, though neither was required to submit a revised capital plan, the UK central bank’s prudential regulation authority (PRA) said on Wednesday.

The test also covered HSBC Holdings, Lloyds Banking Group, Banco Santander’s British arm and Nationwide Building Society.

The stress test required all the banks to retain capital equivalent to 4.5 per cent of their assets weighted by risk, plus Pillar 2A – a requirement that varies depending on the specific risks for each bank.

“Based on RBS’s own assessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incorporate further capital strengthening actions and this revised plan has been accepted by the PRA board,” the authority said.

In a statement, RBS, which owns Ulster Bank in Ireland, said its plan includes further cost cutting, reduction in risk-weighted assets, and the sale of personal and commercial loan portfolios.

“We are committed to creating a stronger, simpler and safer bank for our customers and shareholders,” said RBS chief financial officer Ewen Stevenson.

“We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank’s stress resilience including resolving outstanding legacy issues.”

‘Real economy’

Overall, the Bank of England said the stress test showed that the UK banking system is “capitalised to support the real economy in a severe, broad and synchronised stress scenario”.

The central banks’s financial policy committee judged that no system-wide macro-prudential action on bank capital was needed in response to the findings.

The committee maintained the UK countercyclical capital buffer at 0 per cent and expects to keep it at that level until at least June 2017 “absent any material change in the outlook”.

Regulators began stress tests to restore confidence in the financial system after the bailouts that resulted from the crisis. Authorities impose a “severe but plausible” scenario to ensure banks can withstand strain and keep credit flowing.

This year’s test featured a sharp economic slide in Hong Kong and China, a 1.9 per cent contraction in the global economy, and exchange-rate volatility as emerging-market currencies depreciate against the US dollar.

It also assumed a 31 per cent crash in British house prices during the five-year period, and a 42 per cent drop in UK commercial real estate.

Leverage Test

RBS missed targets for common equity Tier 1 capital, a key measure of financial strength, and a leverage measure before the conversion of some debt to equity was factored in.

The Bank of England said it will monitor the Edinburgh-based lender’s progress in implementing the plan. The adverse scenario was drawn up in March and doesn’t model the impact of the Brexit negotiations or a withdrawal from the European Union.

RBS modelled its own performance based on the test and approached the central bank with a revised capital plan before it was asked to provide one.

The central bank test went beyond economic forecasts, asking lenders to provide stressed projections of their fines and settlements.

That caused trouble for RBS, because the 73 per cent taxpayer-owned lender hasn’t made much progress since it scraped through the central bank’s 2015 check-up: it has yet to settle US inquiries into the sale of mortgage-backed securities that could cost the bank billions, and is still trying to sell its Williams and Glyn unit.

– (Bloomberg)