Banks struggle as BoE warns on 'elevated' risk to financial system

Three of Britain's biggest lenders have struggled in a key test of how they would cope in a future financial crisis, as the Bank of England warned of "elevated" risks after the Brexit vote.

State-backed Royal Bank of Scotland (LSE: RBS.L - news) must bolster its balance sheet by £2bn after failing the test.

Two other lenders - Barclays (LSE: BARC.L - news) and Standard Chartered (HKSE: 2888.HK - news) - also fell short on some measures but will not have to submit revised capital raising plans.

Regular stress tests were put in place by the Bank of England after taxpayers were forced to bail out banks such as RBS in the financial crisis. RBS remains 73% owned by taxpayers.

The latest test - the third since the crisis - was the most severe yet, combining shocks to the global and domestic economies in a five-year doomsday scenario worse than that seen in 2008.

It modelled how the banking system would cope in a situation in which UK GDP shrinks by 4.3% amid a worldwide recession, unemployment adds 4.5 percentage points, and house prices plunge by 31%.

Bank of England Governor Mark Carney said the test had reinforced the resilience of the UK financial system which "may prove valuable given the elevated likelihood that some UK-specific risks to financial stability could materialise".

He added: "It will take time to clarify the UK's new relationships with the EU and the rest of the world.

"And the orderliness of the UK economy's adjustment to these changes will influence the risks to financial stability."

Results of the stress test were published alongside the Bank's latest Financial Stability Report, which said Britain's financial system faced a "challenging" outlook due to risks posed by leaving the European Union and the recent US election.

HSBC, Lloyds Banking Group, Nationwide and Santander UK (LSE: 44RS.L - news) did not reveal any shortcomings in the stress test.

Mr Carney said actions by banks to build up the capital they hold since the financial crisis had bolstered the resilience of the banking system.

He said it was now "well-placed to provide credit to households and businesses during periods of severe stress".

But the Bank found that RBS "remains susceptible to financial and economic stress" when taking into account misconduct costs it still faces following its behaviour during the financial crisis.

RBS finance director Ewen Stevenson said: "We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank's stress resilience, including resolving outstanding legacy issues."

The bank plans to boost its balance sheet by taking actions including further asset sales and cost-cutting, but it is not tapping markets for extra finance. Shares (Berlin: DI6.BE - news) fell 2%.

It comes weeks after the body that manages the Government's stakes in bailed-out banks disclosed the potential impact of US fines estimated at up to $12bn (£10bn) over RBS's role in the sale of mortgage-backed financial products in the run-up to the 2008 crisis.

Laith Khalaf, senior analyst at Hargreaves Lansdown (LSE: HL.L - news) stockbrokers, said: "RBS is still the weak link in the UK banking chain, almost a decade after the financial crisis came close to wiping the bank out.

"However RBS is in no immediate danger, barring a repeat of something akin to the financial crisis.

"The good news from the stress test is the regulator believes that as a whole the UK banking system is in a good position to weather a particularly nasty economic storm."