Government backed lender Royal Bank of Scotland has failed the Bank of England’s key stress test whilst Barclays and Standard Chartered just scraped through.
The Bank’s toughest stress test yet measured the UK’s seven biggest lenders against a global economic crash including HSBC, Lloyds Banking Group, Nationwide Building Society and Santander as well as RBS and Barclays and Standard chartered.
All were tested against a scenario which would see economic growth plunge to levels seen during the financial crisis of 2008 with UK house prices falling by 31%; UK GDP falling by 4.3%; UK unemployment rising to 9.5%; global GDP falling nearly 2%; China entering recession with -0.5% growth; US and eurozone GDP falling by 3% and oil dropping to $20 a barrel.
RBS, still 73% owned by the taxpayer, said it had “agreed a revised capital plan… to improve its stress resilience”.
The test, which is the first conducted under the Bank’s new approach to stress testing, examined the resilience of the system to a more severe stress than in 2014 and 2015. It also judged banks against the Bank’s new hurdle rate framework, which held systemic banks to a higher standard reflecting the phasing-in of capital buffers for global systemically important banks.
While the Prudential Regulation Authority Board judged that some capital inadequacies were revealed for three banks (The Royal Bank of Scotland Group, Barclays and Standard Chartered), these banks now have plans in place to build further resilience.
The Financial Policy Committee judged that, as a consequence of the stress test, the banking system is in aggregate capitalised to support the real economy in a severe, broad and synchronised stress scenario.
RBS failed to meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion in this scenario. After AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate. 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 PRA will continue to monitor RBS’s progress against its revised capital plan.
Barclays did not meet its CET1 systemic reference point before AT1 conversion in this scenario. In light of the steps that Barclays had already announced to strengthen its capital position, the PRA Board did not require Barclays to submit a revised capital plan. While these steps are being executed, its AT1 capital provides some additional resilience to very severe shocks.
Meanwhile Standard Chartered met all of its hurdle rates and systemic reference points in this scenario. However, it did not meet its Tier 1 minimum capital requirement (including Pillar 2A). In light of the steps that Standard Chartered is already taking to strengthen its capital position, including the AT1 it has issued during 2016, the PRA Board did not require Standard Chartered to submit a revised capital plan.