The assessment of how European banks might perform in adverse conditions found RBS’s capital levels down 7.5 per cent, making it the third biggest faller of 51 lenders tested. Under the conditions, it was left with a capital buffer of 8.1 per cent.
The tests are based on financial figures for the 2015 year end and the scenarios are then applied through to the end of 2018.
Ultimately, what the tests are trying to show is whether the banks in question are financially healthy enough to stay up and running should the foreseeable worst-case scenario happen.
RBS, which in 2008 was bailed out by the government and is 73 per cent owned by the taxpayer, said the results showed “our continued progress towards transforming the balance sheet to being safe and sustainable”.
Chief financial officer Ewen Stevenson said: “Over recent years we have materially strengthened our CET1 ratio [Common Equity Tier 1, or capital ratio], substantially reduced our balance sheet and leverage, and continued to de-risk our asset exposures.
“We are confident that in delivering our strategy, we will transform RBS into a low risk, resilient bank.”
The EBA found that, under the conditions, Barclays’ capital ratio would fall from 11.4 per cent to 7.3 per cent, HSBC’s from 11.9 per cent to 8.8 per cent and Lloyds from 13 per cent to 10.1 per cent.
Italian bank Monte dei Paschi di Siena was the worst performer. The test found a fall from 12.9 per cent to -1.6 per cent.
Marcus Evans, a partner in KPMG’s ECB office:
Banks have broadly passed the EBA test, but will they pass the market’s test? The 2016 Stress Test confirms stronger capitalisation across the sector, yet Price-to-Book ratios are at almost unprecedented lows. There is a tension between the Stress Test results and the market’s view of sector strength, which has yet to be resolved.
David Strachan, partner and head of Deloitte’s EMEA Centre for Regulatory Strategy:
Analysts are likely to pore over the results for some time. Differences in capital positions between two banks could be superficial; what matters more is to understand the full regulatory capital requirement for each bank, and its capacity and flexibility to take actions to respond to the shock. This complexity may add difficultly in initially understanding the results.
As resilience of banks has improved, challenges around qualitative aspects of the exercise – such as data quality and governance – have come to the fore on the ground with banks. The EBA has refrained from challenging banks publicly on those factors, but further scrutiny should be expected in future.