Royal Bank of Scotland Group PLC (RBS) bolstered its capital plan after failing multiple hurdles in the Bank of England’s (BOE) toughest-ever stress test.
Some “capital inadequacies” were revealed at two other banks, Barclays PLC and Standard Chartered PlC, though neither was required to submit a revised capital plan, the BOE’s Prudential Regulation Authority (PRA) said yesterday.
The test also covered HSBC Holdings PLC, Lloyds Banking Group PLC, Banco Santander SA’s British arm and Nationwide Building Society. The hurdle rate required all the banks to retain capital equivalent to 4.5 percent of their assets weighted by risk, plus Pillar 2A — a requirement that varies depending on the specific risks for each bank — in the stressed scenario.
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“Based on RBS’ own assessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incorporate further capital strengthening actions and this revised plan has been accepted by the PRA board,” the Prudential Regulation Authority said.
In a statement, RBS said its plan includes further cutting costs, reduction in risk-weighted assets, and the sale of personal and commercial loan portfolios.
“We are committed to creating a stronger, simpler and safer bank for our customers and shareholders,” RBS chief financial officer Ewen Stevenson said. “We have taken further important steps in 2016 to enhance our capital strength, but we recognize that we have more to do to restore the bank’s stress resilience, including resolving outstanding legacy issues.”
Overall, the BOE said the stress test showed that the UK banking system is “capitalized to support the real economy in a severe, broad and synchronized stress scenario.”
The BOE’s Financial Policy Committee judged that no systemwide macroprudential action on bank capital was needed in response to the test. It maintained the UK countercyclical capital buffer at zero percent and expects to keep it at that level until at least June next year “absent any material change in the outlook.”
Regulators began stress tests to restore confidence in the financial system after the bailouts that resulted from the crisis. Authorities impose a “severe, but plausible” scenario to ensure banks can withstand strain and keep credit flowing.
This year’s test featured a sharp economic slide in Hong Kong and China, a 1.9 percent contraction in the global economy and exchange-rate volatility as emerging-market currencies depreciate against the US dollar. It also assumed a 31 percent crash in British house prices during the five-year period, while UK commercial real estate sank 42 percent.
RBS missed targets for common equity Tier 1 capital, a key measure of financial strength, and a leverage measure before the conversion of some debt to equity was factored in. The PRA said it would monitor the Edinburgh-based lender’s progress in implementing the plan.
The adverse scenario was drawn up in March and does not model the impact of the Brexit negotiations or a withdrawal from the EU. RBS modeled its own performance based on the test and approached the BOE with a revised capital plan before it was asked to provide one by the central bank.
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