07 12 2015

Bank stress test: RBS and Standard Chartered shamed by BoE as weakest UK finance institutions

The Royal Bank of Scotland (RBS) and Standard Chartered have been named by the Bank of England (BoE) as the weaker banks in the UK. In good news for the financial services sector, all banks passed the BoE's stress test, but the organisation did single out some banks, saying work needs to be done.

HSBC, Barclays, Lloyds, Nationwide and Santander easily cleared the test, with the BoE signalling there were no capital inadequacies. However, the BoE said that RBS did did not meet its individual capital guidance. Standard Chartered missed its minimum Tier 1 capital requirement of 6%.

However, both banks have organised management meetings on the issues, and they have set out plans to deal with the problems. This saved them from being ordered to implement a new capital savings plan by the BoE.

Despite the relatively positive results, the BoE has warned the financial institutions it is possible they will have to gather a total of £10bn (€14.3bn, $15.1bn) to secure capital. Global economic concerns have probably contributed to the organisation being more wary of the possibility of another crash.

This is the second stress test executed by the BoE's Prudential Regulation Authority and the Financial Policy Committee. It tests the bank's ability to survive a financial crash. Last year, the Co-operative Bank was given a warning but its management was on top of the BoE's concerns, so it was ruled there was no need for a new savings plan.

"We are pleased with the progress we have made relative to the 2014 stress test, but recognise we still have much to do to restore RBS to be a strong and resilient bank for our customers," the bank's chief financial officer Ewen Stevenson said in a statement to shareholders.

"During 2015 we have continued to strengthen our core capital ratio and improve our leverage position. Following the divestment of Citizens in October 2015, our pro-forma CET1 ratio at 30 September 2015 would have been 16.2% and our leverage ratio 5.6%."

The BoE also said that some £40bn is likely needed to be put aside to deal with the costs of potential misconduct over the coming years. Recent research by EY (formerly Ernst and Young) showed that the total amount paid as fines for financial misconduct has been quadrupled in the last year.

"Overall, this reads more positively that we expected," David Lock, research analyst at Deutsche Bank commented. "The FPC is being explicit in saying that for the sector overall it is not increasing capital requirements further ... and is seeking to minimise the motivation to hold additional voluntary buffers due to regulatory uncertainty.

"This is a positive, particularly for Lloyds where distributions are particularly geared to capital requirements."