RBS now strong enough to withstand economic shock, says Bank of England

Royal Bank of Scotland, which did not pass the Bank of England’s annual industry stress test last year, has done so this time around, a result that the Bank said shows the Edinburgh-based lender has improved its financial position over the last twelve months.

The test saw RBS joined by Lloyds, Barclays, HSBC, Santander, Nationwide and Standard Chartered in being tested against a hypothetical worst case scenario the in which the Bank imagined a 33 per cent fall in house prices, a rise in interest rates from 0.5 per cent to 4 per cent within two years, and the unemployment rate rising to 9.5 per cent from its current rate of 4.3 per cent.

Last year Barclays also failed the test along with RBS but this year proved to be resilient enough to come though this time, too.

Commenting on the results, RBS’s chief financial officer Ewen Stevenson, said: “We continue to make progress towards the stress resilient bank we aspire to be. 2017 represented another year of material improvement with our peak-to-trough stress resilience improving by 300bps from last year’s stress test. Until we have resolved our remaining major legacy conduct issues and non-core portfolio interests, we will continue to show stress test results weaker than our long term targets.”

It is the first time since the financial crisis that all of the UK’s biggest lenders have passed the Bank’s stress tests, and the Bank of England said the results show that the UK’s banks could survive a “disorderly Brexit” in 2019 and continue to lend money to support the UK economy.

Bank governor Mark Carney said they would be able to, even in “the unlikely event” of no deal when Brexit happens.

Mr Carney said that all parties were working to avoid the situation, but warned that if the UK did leave in a “sharp, disorderly” way there would be some economic “pain” for households and businesses.

Among the concerns for UK households would be the six million UK customers who buy insurance policies from EU companies which, after Brexit, would not have permission to collect premiums or pay claims.

The same issue is also relevant to financial insurance that banks buy and sell to each other, the notional value of which is £26 trillion.

While welcoming the increased robustness of UK banks, the Bank of England warned that without legislation from both the EU and the UK both personal and corporate contracts may be hard to enforce, a scenario that would create financial instability.

The Bank of England offered a checklist of items to mitigate the impact of Brexit which included: