RBS shares hit as stress test failed eight years on from bailout

The results of the tests, which applied a hypothetical adverse scenario to the group’s balance sheet as at 31 December 2015, forced Edinburgh-based RBS to devise plans to bolster its balance sheet by £2 billion through cost cuts and shedding assets.

RBS became one of the biggest fallers on the FTSE 100 this morning on the news, with shares opening 2.3 per cent lower at 192.5p,

The results of the BoE’s stress test showed that RBS’ key capital ratio, the so-called fully loaded common equity tier one (CET1) ratio, fell to just 5.9 per cent, significantly below the BoE’s 7.3 per cent “systemic reference point” as well as its 6.6 per cent “hurdle rate.”

Under the “very severe” tests, banks had to be able to handle a house price crash in the UK and a global recession.

All seven of the UK’s major banks were subjected to the test with the BoE finding that Barclays and Standard Chartered also missed key hurdles but had already taken steps to cope.

RBS was the only bank to fail the test.

The lender, which was bailed out by the UK government during the 2008 financial crisis at a cost of £45 billion to the public purse, said it had “agreed a revised capital plan… to improve its stress resilience”.

It said the change came “in light of the various challenges and uncertainties facing both the bank and the wider economy highlighted by the concurrent stress testing process” and its has taken a number of actions since 31 December 2015 which was the date which acted as the reference point for the BoE’s modelling.

RBS said it had submitted the new plan to the Bank after running its own internal tests and finding its balance sheet would fall short.

Measures taken include the ongoing run down of “risk-weighted assets” and the continued reduction in its “higher-risk credit portfolios”.

The last year has also seen RBS reach settlements with regard to various litigation cases and regulatory investigations.

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”.

On RBS, Sam Woods, deputy governor of the Bank of England, said: “It’s taking a long time to move this bank forward.”

Ewen Stevenson, RBS’s 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.”