By Chad Bray
The Royal Bank of Scotland said recently that it would further bolster its capital position after failing regulatory stress tests that measure the ability of large banks to weather a financial crisis.
The annual stress test, by the Bank of England, also identified capital inadequacies at Barclays and Standard Chartered. But the central bank did not require them to issue revised capital plans, given a ctions they had already taken to strengthen their balance sheets.
The weaknesses point to the continuing troubles for Britain’s banking industry, which has struggled to get back on its feet since the global financial crisis that came to a head in 2008. Along with the general economic malaise, the industry has faced a string of scandals.
The Bank of England, in a separate assessment about the financial system’s stability, pointed to the potential issues for banks after Britain’s vote in June to leave the European Union, as well as the United States election in November, which has prompted a sharp move in global asset prices. Both political developments could create economic ripples.
The banking industry’s profitability has been hurt, particularly in Europe, by low interest rates, which are expected to remain so in Britain and on the Continent for the foreseeable future. The industry, and R.B.S. in particular, also continues to face an overhang of potential fines and litigation costs from past misconduct.
The stress test modeled the potential impact of a severe recession globally and in Britain, with associated shocks to financial market prices.
“Today’s stress tests are the next stage of our efforts to maintain the resilience of our financial system as the UK economy adjusts to the UK’s new relationship with the EU in an environment of elevated global and domestic risks,” Mark Carney, the Bank of England’s governor, said at a news conference in London.
The test covered seven of Britain’s largest lenders based on their balance sheets at the end of 2015. Those banks account for about 80 percent of lending in the country.
HSBC, Lloyds Banking Group, Nationwide Building Society and Banco Santander’s British business were deemed to have adequate capital under the stress test conditions, the Bank of England said.
RBS faces the most acute issues.
The lender, which is 73% owned by the British government since a bailout during the financial crisis, announced plans last year to dismantle its global investment bank and to focus on retail and corporate banking in Britain and Ireland. The bank has struggled to return to profitability as it faces ballooning litigation costs from past misconduct—including potential fines by the United States authorities related to its sale of mortgage-backed securities— and a difficult business environment.
“The stress test demonstrates that RBS remains susceptible to financial and economic stress,” the Bank of England said in its report. “This assessment includes stressed projections of misconduct costs. R.B.S. faces a range of costs and risks over the projected period, as it continues to execute its strategy to reshape its balance sheet.”
RBS also has faced difficulties as it tries to unload Williams & Glyn, a branch network that it must divest by the end of 2017 as a condition of its bailout. The bank abandoned plans to spin off the business in August and is instead focusing on a possible sale of Williams & Glyn.
Jason Napier, a UBS analyst, said that RBS’s revised capital plan was likely to be a “formal inclusion of measures planned and known by the market,” and he expects further cost cuts and restructuring measures to be announced by the bank next year.
“We think RBS remains under pressure to deliver on core profits, principally by achieving further significant cost cuts,” Mr. Napier said in a research note.
© 2016 The New York Times
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