30th Nov 2016 09:07
LONDON (Alliance News) - Royal Bank of Scotland Group PLC came out worst in the results of the Bank of England's latest round of stress tests, released on Wednesday, joined by Barclays PLC and Standard Chartered PLC in showing capital inadequacies in the scenario of a global economic downturn.
Top UK banks were subjected to a test which simulated a 1.9% contraction in the global economy, including a sharp decline in Hong Kong and China. Domestically, the scenario modelled a 31% crash in UK house prices over a five-year period with commercial real estate plunging by 42%. The test also required lenders to provide stressed projections of misconduct settlements and regulatory fines.
Banks were set individual Common Equity Tier 1 ratios and Tier 1 leverage ratio hurdles, measures of their financial resilience. For the first time, banks were also set a systemic reference point, an additional threshold which takes into account the potential global consequences of a lender's collapse.
Under the stressed scenario, RBS's CET1 low point fell below its individual CET1 ratio and Tier 1 leverage ratio hurdles, as well as its systemic reference point. RBS noted that after the application of management actions and the conversion of Additional Tier 1 securities to capital, it reached its CET1 ratio hurdle, but remained below its systemic reference point and Tier 1 leverage ratio hurdle.
RBS has therefore agreed a revised capital plan with the Bank of England, including more cost-cutting, a reduction in its risk-weighted assets and a further run-down and sale of non-core loan portfolios in its personal and commercial franchises.
"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," said Ewen Stevenson, RBS chief financial officer.
Shares in Royal Bank of Scotland were down 2.7% at 191.70 pence Wednesday, one of the worst performers in the FTSE 100 index.
Barclays and Standard Chartered also showed weaknesses in the test. Barclays' Common Equity Tier 1 ratio fell below its systemic reference point, although after the conversion of additional securities to capital it then exceeded the target. Standard Chartered meanwhile was under its Tier 1 risk-weighted capital requirement when the additional regulatory capital targets were imposed.
However, neither Barclays nor Standard Chartered was required to submit a revised capital plan by the central bank, in light of ongoing capital strengthening plans at both banks. Barclays is planning the sale of its African operation and other parts of its business, while Standard Chartered has also been reducing its liquidation portfolio and in August issued USD2.0 billion in additional Tier 1 capital.
Shares in Barclays were up 0.4% at 215.10p Wednesday, while shares in Standard Chartered were flat at 631.10p.
HSBC Holdings PLC, Lloyds Banking Group PLC, Nationwide Building Society and Santander UK did not reveal any capital inadequacies in the test.
HSBC noted that it was particularly adversely affected by the modelled scenario, which included a synchronised global downturn in Hong Kong, China and other emerging markets in which it operates, and said the results showed its capital strength.
Shares in HSBC were up 0.5% Wednesday morning, while shares in Lloyds were up 0.9%.
Despite the inadequacies shown at three banks, the Bank of England said that given the results it has decided that no "system-wide macroprudential" actions on bank capital were required in response to the stress test. The stress test is designed to test if the UK banks will be able to continue lending even in the case of a severe downturn, and the Bank of England said the results confirmed British banks could continue to support the real economy in such a scenario.
In the Bank of England's biannual Financial Stability Report, also published on Wednesday, the central bank said that the UK financial system has been able to "accommodate", rather than amplify volatility in financial markets.
However, it warned that the outlook for UK financial stability following the vote to leave the European Union remains challenging.
"The nature of, and path to, these new relationships will be the subject of a forthcoming negotiations between the UK Government and the European Union. The orderliness of the adjustment will influence the risk to financial stability," said the report.
By Adam Clark; [email protected]
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