Royal Bank of Scotland (RBS) emerged as one of the biggest losers in a stress test carried out by the London-based European Banking Authority (EBA). The EU regulatory agency conducts these tests to increase transparency in the European banks, identify weaknesses in their capital structures and also assess their capacity to withstand another financial crisis.
The 2016 stress test results showed that under adverse conditions, among the 51 banks tested, RBS, had the third biggest fall in common equity tier one (CET1), a ratio which acts as a measure of a bank's financial strength. It is calculated by comparing a bank's core equity capital with its total risk-weighted assets.
For RBS, this ratio came in at 8.08%, which was far below the 9.2% average across the sector. RBS, however, fared better than Italy's Monte dei Paschi and Ireland's Allied Irish Banks, which had the first and second biggest decline respectively in their CET1 ratios. While Italy's embattled bank showed a 14.51% decline in capital levels in the test, the Irish bank was forecast to lose 8.8% of its capital under adverse test conditions.
RBS, which was bailed out by the UK government in 2008, said that these results showed its "continued progress" in improving its balance sheet. "The EBA stress test results demonstrate our continued progress towards transforming the balance sheet to being safe and sustainable... We are confident that in delivering our strategy, we will transform RBS into a low risk, resilient bank," Ewen Stevenson, chief financial officer at RBS, was quoted as saying by the BBC.
While the European regulators gave a clean chit of health to most other banks that underwent the test, a few others that performed poorly include Italy's UniCredit, the UK's Barclays and Germany's Deutsche Bank. For Barclays, it was found that under adverse scenarios, its CET1 ratio would decline from 11.4% to 7.3%.
Unlike in the past, the EBA this time did not judge if the banks had passed or failed its latest tests. However, as per its 2014 benchmark, where a bank was required to have a capital buffer of 5.5% after the test to be considered healthy, both RBS and Barclays can be considered to have passed the test.
With regards to these results, the Bank of England said that it was consistent with those of its own stress tests conducted previously. "They provide evidence that major UK banks have the resilience necessary to maintain lending to the real economy, even in a macroeconomic stress scenario," it added.