Royal Bank of Scotland overstated its ability to withstand another financial crisis: Share price drops after it is forced to lower stress test ratio

Catherine Neilan
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RBS: Bank is less able to withstand financial stress than originally thought (Source: Getty).
Royal Bank of Scotland's share price dropped sharply this aftenoon after it was forced to admit it is less able to withstand financial stress than originally stated, revising its figure down to just above the lowest cut off point.
The common equity tier one ratio is seen as a key marker of its resilience to possible market shocks, and the lowest level acceptable was 5.5 per cent.
Last month the bank revelled in the fact it was one of the more succesful financial institutions, coming out with a ratio of 6.7 per cent. It was higher than Lloyds, which came in at 6.2 per cent, though not as high as Barclays, which got 7.1 per cent.
Today RBS revealed its ratio was in fact 5.7 per cent.
The bank it had recalculated the figure after it “recognised an error” in its European Banking Authority test calculations, which led to its ratios being “overstated”.
It explained:
Within its EBA calculations RBS correctly recognised tax relief on the theoretical stress losses incurred during the 2014-16 period. However, RBS's modelled capital deduction for its Deferred Tax Asset ("DTA") did not adequately reflect these cumulative tax credits within the published Capital Template.
As a consequence, using the Prudential Regulation Authority "fully loaded" capital definitions and defined approach, RBS's full year 2016 CET1 under the modelled Adverse Scenario is 5.7% versus 6.7% previously reported.
The announcement, released this afternoon, said: “This error relates solely to the EBA stress test. RBS's reported CET1 regulatory capital ratio as at 30 September 2014 of 10.8 per cent is not affected.”
The bank insisted it was making “strong progress” in improving its equity ratio, adding that if the stress tests were to be carried out based on the third quarter financials “our result would at least reflect the 220 basis point reported increase in CET1 ratio”.
RBS' share price was down 1.39 per cent on yesterday's closing figure to 375p, though it had peaked at 384.3p earlier in the day.

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