RBS to change capital plans after failing Bank of England stress test

Market - Himanshu Gill - Nov 30,2016

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rbs to change capital plans after failing bank of england stress test

Royal Bank of Scotland (RBS) has emerged as the biggest failure in the Bank of England’s annual health check of the UK banking system, known as stress test.

RBS will now cut costs and sell its assets to boost capital as its shares went down by 2.3% at 192 pence after the test results. The state-backed bank gave a statement straightway after the results, saying that it would take a range of actions to make up for the capital shortfall measured at around 2 billion pounds ($2.5 billion).

On the recommendations of the Financial Policy Committee (FPC), the Bank of England regularly conducts stress tests of the UK banking system in order to assess the system's capital adequacy. The first stress test results were published in December 2014.

This year’s stress test was considered to be the toughest for the country, majorly because of the financial uncertainty caused due to Brexit. RBS performed the worst in this test and was forced to draw up a new capital plan, which it has accepted. Other domestic factors like, high level of debts in UK households and the potential vulnerability of the economy to a reduction in foreign investors buying UK debt, also contributed in this downfall.

RBS, which is still 73% owned by the government after its bailout in 2008, submitted the new plan to the Bank of England after conducting its own internal tests and finding its balance sheet would fall short. The bank also said that, it is reducing the higher risk credit portfolios and has settled various litigations and regulatory investigations against it.

Barclays Bank was also asked to take action as it fell short in some aspects, but the BoE said its existing capital plan was enough. Standard Chartered also struggled to pass the test, but it hasn’t been asked to take any action.