The Royal Bank of Scotland (RBS) announced a revised capital plan on Wednesday as the results of the Bank of England's (BOE) latest round of stress tests on the U.K. banking system revealed it as the poorest performer of the seven lending institutions examined.
RBS' updated plan was approved by the Bank of England's Prudential Regulation Authority (PRA) on Tuesday evening ahead of Wednesday's announcement that the bank had failed to meet two of its key measures of financial strength.
These metrics are known as its common equity Tier 1 (CET1) capital rate and its Tier 1 leverage hurdle rate which calculate the buffers that banks keep for times of financial stress. Under the stress scenario these are tested before the conversion of AT1 debt. The latter is an instrument - hybrid bonds that combines debt and equity elements - which automatically converts to equity once the bank's buffer ratio falls below 7 percent.
Once the AT1 debt was converted under the stressed scenario, RBS did surpass the CET1 hurdle but still fell short of both the leverage hurdle and a third test - the newly introduced systemic reference point - which holds banks deemed to be systemically important from a global perspective to a higher standard.
RBS' relative weakness was largely due to its sensitivity to ongoing conduct fines, impairments and regulatory changes to risk-weighted asset requirements. The risk profile of its book – more weighted towards the worse performing unsecured, corporate and globally exposed loans than the better-performing domestically focused secured loans – also affected its stress test performance.
Commenting on the results, Ewen Stevenson, the chief financial officer at RBS, said the bank was committed to creating a stronger, simpler and safer bank for customers and shareholders.
"We have taken further important steps in 2016 to enhance our capital strength, but we recognize that we have more to do to restore the bank's stress resilience including resolving outstanding legacy issues," he said in a statement.