Taxpayer-backed bank unveils plan to bolster its capital by £2bn after faltering in annual health check of UK banking system
Barclays and Standard Chartered also struggled to pass the Bank of England’s annual stress tests. Photograph: Anthony Devlin/PA
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oyal Bank of Scotland has emerged as the biggest failure in the Bank of England’s annual health check of the UK banking system.
The bank, which is 73% owned by taxpayers, issued a plan on Wednesday to Threadneedle Street intended to bolster its financial strength by an estimated £2bn.
Two other banks, Barclays and Standard Chartered, also struggled in the so-called stress tests, the toughest yet, which are based on hypothetical scenarios including house prices falling and the global economy contracting by 1.9%. Barclays already has a plan in place to bolster its financial position, while Standard Chartered said it has not needed to take any action.
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As the Bank announced the results of its third annual stress tests, it warned of a “challenging period of uncertainty around the domestic and global economic outlook”.
Domestic risks include the uncertainty created by the Brexit vote, the commercial property sector, high level of debts in UK households and the potential vulnerability of the economy to a reduction in foreign investors buying UK debt.
Mark Carney, the Bank governor, said Threadneedle Street was keeping an eye on household debt. Households are “drawing down their savings for the first time since the crisis”, he said. Lending to households increased by 4.1% in the year to September, close to the fastest rate since the 2008 crisis, the Bank said.
Global risks are described as “elevated”, with the Bank also warning that there could be an impact on global trade from Donald Trump’s election as US president. Chinese debt is high and the Bank also highlighted risks in some countries using the euro, including those caused by a referendum in Italy on Sunday.
The Bank also provided its promised update to the health of the residential mortgage market and is keeping in place measures announced in 2014 to restrict lenders’ ability to help customers needing to borrow four and half times their income.
Three other banks, Lloyds Banking Group, HSBC and the UK arm of Santander, as well as Nationwide, were subjected to the test. The Bank said its stress tests were made up of “a very severe, synchronised UK and global economic recession, a congruent financial market shock and separate misconduct cost stress”.
Standard Chartered and RBS had the weakest financial positions in stress tests held last year.
On RBS, the deputy Bank governor, Sam Woods, said: “It’s taking a long time to move this bank forward.”
The Bank found that in aggregate, the entire banking system was strong enough to withstand the test, which is based on a five-year scenario in which £44bn of capital is wiped out in the first two years – five times the losses incurred during the depths of the financial crisis.
Under this scenario, another £48bn of costs are incurred to pay fines and legal costs – more than the £40bn hit the banks took between 2011 and 2015.
The health checks have been in place since the 2008 banking crisis, which led to the taxpayer bailouts of RBS and Lloyds. In the first set of tests, run in 2014, the Bank focused on risk to UK households. In 2015, it concentrated on global risks, such as a contraction in China and parts of the eurozone. Another test will be run in 2017.
The results of the stress tests were published alongside the Bank of England’s financial stability report, a half-yearly update on risks to the financial system.
The report, the first since the election of Trump, said: “Following the US election, increases in advanced economy sovereign bond yields, coupled with risks of reduced global trade, have reinforced vulnerabilities associated with those emerging market economies with high levels of debt.”
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It highlighted the risks associated with the Italian referendum. Euro-area economies were still vulnerable to a rise in the cost of government borrowing, the report said. “Uncertainty is further heightened over the coming months by the forthcoming Italian referendum and a number of elections in the euro area.”
There has been a 2.6% fall in commercial property prices in the UK since the EU referendum on 23 June and the Bank of England said it was alert to further risks.
RBS said it had agreed a revised capital plan with the Bank’s Prudential Regulation Authority 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”.
Ewen Stevenson, the RBS chief financial officer, said: “We are committed to creating a stronger, simpler and safer bank for our customers and shareholders.
“We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank’s stress resilience, including resolving outstanding legacy issues.”
Barclays said it had passed the Bank’s test and “we have not been asked to submit a revised capital plan”.
Standard Chartered said it “has a strong and liquid balance sheet and the results of the stress test demonstrate its resilience to a severe global stress scenario”.