In the latest Bank of England stress tests for the UK banking sector, Royal Bank of Scotland failed the test with failure to meet Tier 1 capital target under adverse conditions and will need to raise fresh capital.
There were also shortcomings in Barclays and Standard Chartered, although the banks have already taken action and they did not fail the tests.
In the latest financial stability report, accompanying the stress tests, the Bank of England stated that financial stability had been maintained through a challenging period of uncertainty surrounding the domestic and global economic outlook. The overall vulnerabilities have increased since the July report, primarily due to the EU referendum outcome.
The bank, however, also commented that substantial moves in market prices had not been amplified by the UK financial system.
According to the bank, the overall outlook for financial stability remains challenging. The economy has entered a period of adjustment and the likelihood that some UK-specific risks to financial stability could materialise remains elevated.
There had been a further slowing of activity in the commercial real-estate market with a 2.6% decline in the third quarter and there is the risk of a further adjustment.
The UK current account is vulnerable to any decline in investor appetite for UK assets and a sharp adjustment could pose risks to the financial sector.
The level of UK indebtedness remains high and the ability of some households to service their debts could be challenged by a period of high unemployment.
The bank also commented that the US election has reinforced existing vulnerabilities, primarily due to sharp upward pressure on global yields. The bank was also concerned over the banks’ exposure to China and Hong Kong with emerging markets finding it more difficult to service debts in the new environment.
Sterling edged lower after the stress tests, but quickly regained ground with gilts slightly lower on the day and little change in the FTSE index.