RBS and Standard Chartered show capital inadequacies in BoE stress tests

However all seven banks passed the Bank's testing after the PRA board decided that continuing improvements to resilience meant that RBS and Standard Chartered were not required to submit a revised capital plan.

The stress test revealed no capital inadequacies for Barclays, HSBC, Lloyds Banking Group, Nationwide, and Santander UK.

The stress test assesses banks' ability to withstand a number of factors, annual growth in China slowing to a low point of 1.7%, oil prices falling to a low of $38 per barrel, and weaker domestic demand, world trade and commodity prices leading to further disinflationary pressures and deflation which persists for more than three years.

RBS's potential downside risks related to the Group’s corporate lending book, including stressed projections of misconduct costs and the sale of Citizens Financial Group and Williams & Glyn business.

The Bank of England passed Standard Chartered due to its Board undertaking a number of capital strengthening actions as well as a strategic review. The Standard Chartered Board concluded that its balance sheet needed to be strengthened and announced a plan that included a rights issue and a reduction in risk-weighted assets.

Overall, the FPC judged that banks would remain adequately capitalised under the stress to continue providing financial services to the real economy.

The FPC also announced that it will be introducing a new capital buffer for banks which will be 'flexed up and down as risks wax and wane' in order to ensure the banking system can withstand stress without restricting the supply of credit to the real economy.

Mark Carney said that the countercyclical buffer would currently remain at zero, but could rise to 1%, equivalent to around £10 billion in total.

Carney announced that individual firms’ requirements will be reviewed in the first quarter of next year, before deciding the appropriate setting of the buffer rate in March.

Discussing the stress test results, Carney said:

"UK banks are now significantly more resilient than before the global financial crisis. Capital requirements for the largest banks have risen ten-fold. Their holdings of liquid assets have increased four-fold. Their trading assets are down by a third, and inter-bank exposures have shrunk by two-thirds.

"The results of the Bank of England’s 2015 stress test underscore these improvements. This year’s test complements last year’s effort. It is focused on an emerging market stress that prompts reassessments of global prospects and asset prices; considers the implications of deflation not inflation; and places greater emphasis on exposures to corporates rather than households. It also includes an unrelated but important stress of costs for known misconduct risks.

"The stress test results, taken together with banks’ capital plans, indicate that the UK banking system would have the capacity to continue to lend to the real economy even under such a severe scenario. They testify to the value of the reforms that have rebuilt capital and confidence in the UK banking system."