"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"
Royal Bank of Scotland has failed to meet two key requirements of the Bank of England's stress test, which also revealed capital inadequacies in Barclays and Standard Chartered.
RBS, which is still 73% owned by the government, did not meet its CET1 capital or Tier 1 leverage hurdle rates in the test, which conducts a hypothetical UK and global recession and an independent stress of misconduct costs.
As a result, RBS has already updated its capital plan which has been accepted by the PRA Board.
In a statement, the Bank says it intends to "execute an array of capital management actions" including further decreasing the cost base of the bank, reductions in RWAs across the bank, and sales of non-core loan portfolios in relation to its personal and commercial franchises.
Barclays and Standard Chartered have also announced plans to strengthen its capital position and will not need to submit a revised capital plan.
The test did not reveal capital inadequacies for the other four participating banks - HSBC, Lloyds Banking Group, Nationwide Building Society and Santander UK.
The Bank of England noted that the test, which is the first conducted under the Bank’s new approach to stress testing, examined the resilience of the system to a more severe stress than in 2014 and 2015. It also judged banks against the Bank’s new hurdle rate framework, which held systemic banks to a higher standard reflecting the phasing-in of capital buffers for global systemically important banks.
Despite the inadequacies found in three banks, the Financial Policy Committee believes that "the banking system is capitalised to support the real economy in a severe, broad and synchronised stress scenario".
Commenting on the results, Ewen Stevenson, 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.”
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."