Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn.
Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever modelled by the Bank of England, but they were judged to have sufficient capital-raising plans already in place.
The outright failure of RBS – partly caused by heavy litigation costs still hanging over the bank – underlines how it is still struggling to regain a stable footing eight years after being bailed out by the taxpayer in the financial crisis.
RBS presented its revised capital plan to the BoE overnight after the bank, which is 73 per cent owned by the state, suffered the second-highest ever percentage fall in capital under the stressed scenario after the Co-operative Bank in 2014.
Overall, the BoE said the results showed the banking system had continued to increase its overall levels of capital and came out of the stressed scenario with stronger balance sheets than in previous years.
RBS, however, was the only bank to fall below the minimum hurdle rate even after “assumed management actions” but before the presumed benefit of converting its loss-absorbing hybrid debt know as alternative tier one (AT1) securities.
In the stressed scenario, RBS’s common equity tier one ratio – a measure of capital to risk-weighted assets that is the main benchmark of banking strength – fell from 15.5 per cent to 5.9 per cent after management actions but before AT1 conversion. That is below its 6.6 per cent hurdle rate and its 7.3 per cent “systemic reference point” – a second, more stretching target set for systemically important banks.
“The stress test demonstrates that RBS remains susceptible to financial and economic stress,” the BoE said. “Based on RBS’s own asssessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incoroporate further capital strengthening actions and this revised plan has been accepted by the PRA board.”
The BoE said Barclays and StanChart also fell below their hurdle rates before management actions and conversion of AT1 securities. But in Barclays case the regulator was confident that its capital plan – including selling much of its African subsidiary – would be enough to fix its shortfall. In StanChart’s case, it said the bank had recently issued AT1 securities that would resolve its shortfall.
Lloyds Banking Group, HSBC, Nationwide and Santander UK all passed the stress test, which the BoE said hit riskier corporate loans harder than residential mortgage books.
The BoE toughened the tests from the previous two years and introduced higher individual targets for each bank – including an extra hurdle rate for the most systemically important lenders – instead of a standard hurdle rate.
This year the test modelled the impact of a sharp contraction in Chinese and Hong Kong growth, with an overall 1.9 per cent contraction of the global economy, combined with the knock-on effect of emerging market currencies depreciating against the US dollar. It also examined the consequences of a 31 per cent in UK house prices over a five-year timeframe.
In a statement following the stress tests, StanChart said it had a “strong and liquid balance sheet”, with the overall results demonstrating the lender’s “resilience to a severe global stress scenario”.