The Bank of England has announced the results of our 2016 stress test of the UK banking system. The 2016 stress test incorporated a synchronised UK and global recession with associated shocks to financial market prices, and an independent stress of misconduct costs.
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.
While the Prudential Regulation Authority (PRA) Board judged that some capital inadequacies were revealed for three banks (The Royal Bank of Scotland Group, Barclays and Standard Chartered), these banks now have plans in place to build further resilience. The Financial Policy Committee (FPC) judged that, as a consequence of the stress test, the banking system is in aggregate capitalised to support the real economy in a severe, broad and synchronised stress scenario.

It was found that RBS did not meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion in the scenario, and after AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate. The bank has since agreed a revised capital plan with the PRA.

Ewen Stevenson, chief financial officer at RBS, 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.”

Barclays failed to meet its CET1 systematic reference point prior to additional Tier 1 conversion. Meanwhile, Standard Chartered, which did meet all of its hurdle rates and systematic reference points, was found not to have met its Tier 1 minimum capital requirement.

However, the PRA did not require either Barclays or Standard Chartered to submit a revised capital plan in light of steps that they had already taken to strengthen their position. HSBC, Lloyds Banking Group, Santander UK and Nationwide Building Society were also included in the test.