Banks Warned As RBS Struggles In Stress Test

Britain's largest banks were put on notice on Tuesday that they could be forced to find billions of pounds more capital as regulators signalled plans to make use of a powerful new tool designed to improve the resilience of the financial system.

Publishing the annual results of stress tests of the seven biggest lenders - which the state-backed Royal Bank of Scotland would have failed without moves to strengthen its balance sheet - the Bank of England (BoE) said bank profits had been projected to fall by nearly £100bn in 2015 and 2016.

Alongside the stress test results, the BoE's Financial Policy Committee (FPC) said it "intends to make active use of the time-varying countercyclical capital buffer".

That cushion, which applies to UK exposures is designed to build banks' exposure to losses in benign economic times, in order that it can be reduced during periods of turmoil.

Under one scenario, that additional figure could be as high as £10bn, although some of the affected banks already have sufficient reserves to set aside.

A decision is likely to be made about the level at which the buffer will be set next March.

Significantly, the BoE said that the UK banking system had now moved out of the "post-crisis repair phase" and that it was now resilient.

The BoE's Prudential Regulation Authority (PRA) said it would conduct a review of underwriting standards in relation to buy-to-let mortgage lending, but said there were no grounds at this stage to impose curbs on the sector.

The FPC said in its bi-annual Financial Stability Report that it remained "alert to financial stability risks arising from rapid growth in buy-to-let mortgage lending and notes the difference in underwriting standards in the owner-occupier and buy-to-let mortgage markets".

This year's stress tests - which the BoE insisted did not constitute a forecast - focused on a sharp slowdown in economies in China, parts of Europe and other emerging markets, coupled with a £40bn hit to banks' pre-tax profits from misconduct scandals over a five-year period.

They also included a 20% fall in UK house prices and a surge in unemployment to over 9%.

In total, industry-wide profits would slump by almost £100bn by the low-point of the stress period, at the end of 2016, compared to the projected levels in normal conditions.

Under those scenarios, RBS, which is 73%-owned by taxpayers, hit the minimum threshold for the highest quality capital of 4.5% but "did not meet its individual capital guidance after management actions".

"In light of the steps that [RBS] has already taken to strengthen its capital position, coupled with its plans for future additional Tier 1 [capital] issuance, the PRA board did not require [RBS] to submit a revised capital plan."

Standard Chartered, the London-headquartered emerging markets lender, was the other bank to fare poorly in the stress tests, which were based on data from the end of 2014.

Without a recently announced rights issue and moves to reduce riskier assets, Standard Chartered would not have met its Tier 1 minimum capital requirement of 6%.

Across the industry, core equity tier 1 capital fell to 7.6%, with Barclays, HSBC, Lloyds Banking Group, Nationwide and Santander UK all being judged to have adequate capital positions.

During the tests, banks' management teams were assumed to take additional action in order to improve their financial positions, including a £21.2bn reduction in dividends and a further £6bn in staff costs - much of which would be in the form of bonuses.

Banks were not permitted to tighten credit supply to the real economy during the fictitious stress period.