Britain's banks pass Europe's stress tests

Britain's banks passed long-awaited European Union stress tests yesterday, but Royal Bank of Scotland appeared to come close to being placed on a danger list for those that scraped through.

RBS was the weakest British bank under the distressed scenarios, while the strongest was HSBC.

Banks had to show that in an economic meltdown their core capital buffer to guard against losses would be at least 5 per cent of their risk-weighted assets.

RBS's core tier one capital ratio under the European Banking Authority's scenarios was predicted at 6.3 per cent and HSBC's was 8.5 per cent. Barclays was forecast to have a figure of 7.3 per cent with Lloyds Banking Group coming in at 7.7 per cent. Under the adverse scenario, RBS would post a net loss of £9.02bn this year and HSBC's forecast profit would be cut to $2.96bn from $11.93bn. Barclays' profit would be cut to £1.2bn from a projected £4.27bn and Lloyds' would post an £8.1bn loss.

Though the pass mark was 5 per cent, banks with less than 6 per cent were put on a watch list – a fate RBS escaped by 0.4 of a percentage point. Another condition for being placed on the watch list was large exposures to debts of countries under stress. It was not clear whether that standard applied to RBS.

RBS said the tests could help to restore confidence in the European banking sector, but it criticised the EBA's models.

"The prescriptive methodology of EBA stress testing delivers outcomes that are not fully consistent with internal results and may not reflect business changes for groups in transition such as RBS," a spokesman said.

Flaws include assuming average profits from trading activities in the last five years which racked up big losses but have now been pared back, the bank said.

The tests assumed a 0.5 per cent economic contraction in the eurozone this year, a 15 per cent drop in the Continent's equity markets and trading losses on sovereign debt not held in the long-term "banking book".

Despite passing the EBA's stress tests, Britain's banks took one of the biggest hits to current capital levels under the stress tests with a 25 per cent reduction in ratios. Only Greece, with a 40 per cent fall, was worse affected under the scenarios.

The Financial Services Authority said: "The results support our own stress tests and we are pleased that the major UK banks have capital above the minimum required in the test, reflecting the work we and the banks have undertaken to improve resilience since the crisis."

Britain was the first country to insist that its banks raise new capital in 2008. The Government injected tens of billions of new capital into Lloyds, HBOS (which is now part of Lloyds) and RBS. Barclays and HSBC went it alone by raising funds from the Middle East and shareholders respectively.

In total, eight European banks out of 90 failed the tests, and they were judged to need an extra €2.5bn of shareholder capital. Those that passed but came in with ratios below 6 per cent numbered 16.