The toughest stress test yet measured the UK’s seven biggest lenders against a global economic crash.
RBS performed the worst and was forced to draw up a new capital plan, which has been accepted, reports the BBC.
The bank said it had “agreed a revised capital plan… to improve its stress resilience”.
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”.
‘Action taken’
RBS, which is still 73 per cent owned by the government after its bailout in 2008, submitted the new plan to the Bank of England (BoE) after running its own internal tests and finding 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 had taken a number of actions since then, including the ongoing run down of “risk-weighted assets”.
And it said it had continued its reduction in “higher-risk credit portfolios”, and reached settlements with regard to various litigation cases and regulatory investigations.
Eight years on from the financial crisis and taxpayer-owned RBS is still short of the money it needs to survive another one. It came bottom of the class in the Bank of England’s tests of financial strength and has been forced to beef up its finances.
Barclays also scored poorly but the proceeds of the sale of its Africa business saw it squeak through. These were the two weakest links in a system that overall has strengthened. And just as well. The Bank’s Financial Stability Report has plenty of reasons for concern.
The UK’s reliance on foreign money to finance its trade deficit – the so-called “kindness of strangers” – is highlighted, along with the vulnerability of the UK’s role in providing financial services to the European Union.
Add to that the rapid increase in debt in China and the world looks like a dangerous place – not for the first time. RBS has been found vulnerable.
Barclays was also asked to take action when it fell short of one hurdle, but the BoE deemed its existing capital plan was enough.
Standard Chartered missed a key metric as well, although it was not asked to take any action.
The Bank’s Financial Policy Committee said in light of the findings and action taken by RBS, “the banking system is in aggregate capitalised to support the real economy in a severe, broad and synchronised stress scenario”.
And Bank of England governor Mark Carney, referring to the above trio of banks, said: “There were three of the institutions who could see the direction of travel and took actions of their own accord.
“In our opinion, they’d still be in a position to lend to the economy (even after this shock).”
Risk factors
The annual stress test gauges the financial strength and resilience of the UK’s seven major lenders – Lloyds Banking Group, HSBC, Barclays, Royal Bank of Scotland (RBS), Santander, Standard Chartered and Nationwide Building Society.
They were tested against a doomsday scenario which would see economic growth plunge to levels seen during the financial crisis of 2008.
Stress test scenario
UK house prices fall by 31 per cent
UK GDP falls by 4.3 p er cent
UK unemployment rises to 9.5 per cent
Global GDP falls nearly 2 per cent
China enters recession with -0.5 per cent growth
US and eurozone GDP fall by 3 per cent
Oil drops to $20 a barrel
Under the five-year scenario, UK house prices would dive 31% and unemployment rise to 9.5 per cent, while China would suffer a recession and oil prices plunge to $20 a barrel.
This is the third year of stress tests for UK banks.
The 2014 stress test focused on risks to the UK household sector, while the 2015 ones focused more on global risks, particularly with a sharp contraction in growth in China.
This year’s tests incorporate a more severe global stress than either 2014 or 2015, and a domestic stress which is broadly as severe as the 2014 exercise.
The Bank says it “reflects the desire of policymakers to use the stress-test framework to help set capital requirements and buffers for all stress-test participants each year”.
