Standard Chartered, RBS avoid need for more capital in BOE tests

[LONDON] Standard Chartered Plc and Royal Bank of Scotland Group Plc escaped having to raise additional capital in the Bank of England's latest stress test, even though they fell short in some parts of the assessment.

RBS failed to meet its individual-capital guidance in the examination, based on end-2014 data, the BOE's Prudential Regulation Authority said in a statement on Tuesday. Standard Chartered did not meet its Tier 1 minimum capital ratio, a measure of financial strength.

The BOE said Standard Chartered's "recent strategy review and the associated steps taken to strengthen its capital position" meant it didn't need to submit a new capital plan. RBS was also let off based on previous capital raising and debt issuance plans.

This was the BOE's second public stress test, as it seeks to reinforce investor confidence in financial firms seven years after the global banking crisis. Britain's largest banks were probed on their resilience to shocks including a sharp slowdown in the Chinese economy, negative euro-area growth and plunging commodity prices. The seven lenders would have seen profits fall by around 100 billion pounds (S$213 billion), more than during the financial crisis.

Under the stress scenario, Standard Chartered's ratio of common equity Tier 1 capital to risk-weighted assets, a measure of financial strength, fell to as low as 5.1 per cent, above the 4.5 per cent pass mark, while RBS dipped to 5.9 per cent.

Leverage Ratio The banks also had to maintain a 3 per cent leverage ratio to pass the test. They were allowed to include management actions such as asset disposals or cost cuts they would take under stressed conditions in order to pass.

RBS and Standard Chartered would have failed on this measure if they hadn't been allowed to take management actions or if bonds hadn't converted to equity.

The BOE published the results alongside its latest Financial Stability Report in which it outlined its thinking on capital regulation. It signaled it will gradually increase the countercyclical-capital buffer to 1 per cent as the UK economy recovers from the crisis and risks to stability re-emerge. The buffer forces banks to set aside capital to support lending in a downturn and is currently at zero per cent.

Banks were able to improve their capital positions in anticipation of the stress tests, which began earlier this year.

Global Slowdown In November, Standard Chartered Chief Executive Officer Bill Winters unveiled plans for a rights issue to boost the lender's common equity Tier 1 ratio to 13.1 per cent from 11.5 per cent. The shares are on sale through Dec. 10.

RBS, led by CEO Ross McEwan, has sold the lender's Citizens Financial Group Inc. US consumer bank and disposed of assets housed within its bad bank to bolster capital levels.

The stressed scenario included a global slowdown, with shrinking economies in the euro area and the UK, near stagnation in the US and slump in emerging markets, sparking a drop in oil prices to US$38 a barrel. In China, the model simulated a drop in property prices and the economy cooling to 1.7 per cent, with Hong Kong "particularly impacted by the downturn." The model also took into account currency fluctuations, including a 25 per cent plunge in the euro against the dollar and a 15 per cent drop versus the pound.

This year's test covered Standard Chartered, HSBC Holdings Plc, Barclays, Lloyds Banking Group Plc, Nationwide Building Society, RBS and Santander UK Plc.

BLOOMBERG