The Bank of England’s (BoE) third annual stress test assessing the UK’s seven biggest lenders has found that Royal Bank of Scotland (RBS) is the least resilient.
The assessment of the strength of the UK banks in the event of a further global financial crisis on the scale of 2008 found that Barclays and Standard Chartered also missed key hurdles, but had already taken steps to bolster their capital position.
Lloyds Banking Group, HSBC, Santander and Nationwide Building Society passed the “very severe” tests, under which banks had to demonstrate the ability to withstand a property market price crash in the UK and a global recession.
RBS, which is still 73% owned by the UK government after its bailout in 2008 financial crisis, said it had “agreed a revised capital plan… to improve its stress resilience”, which included bolstering its balance sheet by £2bn (US$2.5bn) through cost cuts and asset disposals.
It said the change came “in light of the various challenges and uncertainties facing both the bank and the wider economy highlighted by the concurrent stress testing process”.
RBS submitted the new plan to the BoE after its own internal tests indicated that its balance sheet would fall short. The bank said the test applied a hypothetical adverse scenario to the group’s balance sheet as at 31 December 2015, and that it subsequently took various actions, including the ongoing run down of “risk-weighted assets”.
In addition, it had continued its reduction in “higher-risk credit portfolios”, and reached settlements with regard to various litigation cases and regulatory investigations.
BoE’s financial policy committee (FPC) said that following the actions taken by RBS, “the banking system is in aggregate capitalised to support the real economy in a severe, broad and synchronised stress scenario”.
RBS’s chief financial officer (CFO), Ewen Stevenson, confirmed that the bank is committed to creating a “stronger, simpler and safer” bank for their customers and their shareholders. “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,” he added.
“The Bank of England’s stress test results demonstrate the challenging environment for UK banks, which will constrain their ability to serve their clients,” commented Abhai Rajguru, co-founder and director of lending platform Nava Finance.
“The tougher regulatory regime, requiring high levels of capital and liquidity, with the additional challenge of political and economic uncertainty is likely to limit their capacity to lend. The growing alternative lending sector can play an active role in filling the funding gap, while also providing good value loans to consumer and business borrowers abandoned by high street banks.”
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