Treasury officials will be hoping for a clean bill of health from Bank of England (BoE) stress tests on Royal Bank of Scotland (RBS) this week as the government eyes a sale of its majority stake in the lender.
The BoE will unveil its latest assessment of the ability of the UK’s banks to withstand a major economic shock on Tuesday.
John Cronin, financials analyst at Goodbody Stockbrokers, said he believes Asia-focused lender Standard Chartered could struggle with harsher stress conditions around its Chinese operations, making it the most likely to fail the test and calling into question its ability to to return capital to shareholders in the next year.
Meanwhile, Barclays and Lloyds could see increased requirements in the bank-specific Prudential Regulation Authority (PRA) buffer because of their consumer credit books. HSBC, Spanish-headquartered bank Santander and building society Nationwide will also be subject to the full tests.
This year the BoE has tested how banks would perform in a crisis situation: a deep recession, house prices crashing by a third and, in a change from last year, interest rates soaring to above four per cent.
For the first time the BoE will also test a second, exploratory scenario: persistently low growth, low interest rates, and stagnant world trading conditions.
Banks which fail the tests or certain elements could face higher capital requirements to enable them to withstand a crash without needing government interventions.
RBS was the only one of seven major banks to fail the test last year, with the BoE ordering it to find an extra £2bn of capital to make sure it can withstand another financial crisis. Barclays and Standard Chartered both failed to meet some of the technical standards required by the BoE, but were judged to have strong enough capital-raising plans in place.
In its Budget last week the government included a signal it will start to sell its 72 per cent stake in the bank, a legacy from the massive bailout almost a decade ago during the financial crisis.
Cronin expects the government to move to sell the bank in the spring, once RBS settles a fine, expected to reach billions of dollars, with the US Department of Justice over misselling mortgage-backed securities.
Investors have given the improved fortunes of RBS their seal of approval since the last stress test: shares had risen in value by almost 40 per cent since the 2016 assessment at the close of trading last week.
Of the major UK-listed banks only shares in Barclays have declined in value over the last year, reflecting worries around the bank’s strategy and multiple ongoing regulatory actions.