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London / AFP
The Royal Bank of Scotland is the worst prepared among Britain’s lenders for another financial crisis, the Bank of England said on Wednesday, forcing the state-rescued lender to raise more cash.
The BoE, revealing its latest stress tests on Britain’s top seven banks, added that two — Barclays and Standard Chartered — also missed key hurdles but had taken steps to strengthen their capital positions.
The stress tests, designed to see if the sector can weather a global recession and crashing house prices, found that four out of the seven top banks did not have capital inadequacies based on their balance sheets at the end of 2015.
The four comprised HSBC, Lloyds Banking Group, Nationwide Building Society and Santander UK.
“The bank’s 2016 stress test comprised a severe, synchronised UK and global recession with associated shocks to financial market prices. It also incorporated a misconduct cost stress,” the BoE’s Financial Policy Committee said in a report. The FPC added that, in light of the tests and action agreed by RBS, “the UK banking system is in aggregate capitalised to support the real economy in this scenario”.
Royal Bank of Scotland is still 73-percent government owned after receiving an enormous bailout at the height of the global financial crisis.
“RBS has agreed a revised capital plan… to improve its stress resilience in light of the various challenges and uncertainties facing both the bank and the wider economy highlighted by the concurrent stress testing process,” the group said Wednesday.
The Edinburgh-based company added it would boost its balance sheet by taking actions including further asset sales and cost cutting, although it is not set to tap markets for extra finance. Wednesday’s news sent RBS shares sliding more then 2.5 percent in early morning deals on London’s rising stock market.
“No surprises as RBS came last in Bank of England stress tests,” noted ETX Capital analyst Neil Wilson.
“The upshot is RBS has to muster a fresh £2.0 billion in capital to bring its equity ratio up to scratch.
“That is going to prove very difficult for a bank that is yet to turn a profit some eight years after being bailed out.”
The latest round of tests were designed before Britain’s shock referendum decision on June 23 to exit the European Union. The BoE warned Wednesday that Brexit would continue to cast a shadow over the economy.
“The outlook for UK financial stability remains challenging,” it added.
“The UK economy has entered a period of adjustment following the EU referendum. The likelihood that some UK-specific risks to financial stability could materialise remains elevated.” The outlook for Britain’s financial stability was dependent on an orderly exit from the EU, the central bank cautioned.
“It will take time to clarify the United Kingdom’s new relationships with the European Union and the rest of the world as well as for the UK economy to adjust to these changes.
“The nature of, and path to, these new relationships will be the subject of forthcoming negotiations between the UK Government and the European Union.
“The orderliness of the adjustment will influence the risk to financial stability.”