RBS fails stress test

Royal Bank of Scotland has failed the 2016 Bank of England banking stress test.

However the regulator said it has approved remedial action that RBS is already taking to improve its resilience to financial shocks.

In aggregate the Bank of England said the UK banking system is currently capitalised to support the UK in a severe economic scenario.

The 2016 test was the most severe test applied to banks yet. In many ways the scenarios tested are worse than conditions during the financial crisis; in particular the stress tests project UK house prices falling 31%.

The stress test is a worst case scenario, and the Bank of England’s main baseline projection is in fact for the capital positions of UK banks to improve in aggregate in 2017.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown commented:

‘RBS is still the weak link in the UK banking chain, almost a decade after the financial crisis came close to wiping the bank out.

On the face of it the bank currently has a high capital buffer, but the 2016 stress test reveals than under extremely severe economic conditions, that would quickly be eroded.

Unlike most of its peers, RBS doesn’t have the luxury of a dividend which it can cut to support its capital position. The bank is still in the process of restructuring its business, not to mention spinning off Williams & Glyn, as well as facing potentially hefty misconduct costs in the US, all of which serve to weaken its hand.

However RBS is in no immediate danger, barring a repeat of something akin to the financial crisis, and it’s important to bear in mind that the 2016 stress test uses an extremely severe economic scenario to challenge the resilience of the UK banks to financial shocks.

Indeed the point of these tests is to identify inadequacies which require remedial action, and to that end RBS has submitted a revised capital plan which has been accepted by the regulator.

The good news from the stress test is the regulator believes that as a whole the UK banking system is in a good position to weather a particularly nasty economic storm.’

(Source: Hargreaves Lansdown)