The toughest stress test yet assessed how the UK’s seven biggest lenders would cope with hypothetical scenarios including a recession, a housing crash and a halving of the oil price.
RBS, which is still 73 per cent owned by the government after its bailout in 2008, has emerged as the worst hit in the annual health check of the banking system. This means the lender must take action to protect itself against a sharp slump in the economy.
RBS has issued a plan intended to bolster its financial strength by an estimated £2bn, which has been accepted by the BoE.
The bank has also reduced its "risky" assets by £10.4bn or 21 per cent to £38.6bn.
Ewen Stevenson, RBS chief financial officer, said the bank is committed to creating a “stronger, simpler and safer” bank for their customers and their shareholders.
He 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."
Barclays and Standard Chartered also struggled under the test, however neither was required to submit a revised capital plan.
Shares in Royal Bank of Scotland fell more than 4 per cent before paring the losses. Barclays and Standard Chartered shares also saw modest falls.
The test also covered HSBC, Lloyds Banking Group, Santander and Nationwide.They did not reveal any capital inadequacies in the test, the BoE said.
The Bank's Financial Policy Committee said in light of the findings and action taken by RBS, “the banking system is in aggregate capitalised to support the real economy in a severe, broad and synchronised stress scenario”.
Last year, Standard Chartered and RBS had the weakest positions.
As the BoE announced the results of its third annual stress test, it warned of a "challenging period of uncertainty around the domestic and global economic outlook."
Britain's banking system underwent a severe real-life test in June when markets and sterling plummeted in response to Britain's vote to leave the European Union.
Next year, the BoE will introduce a second stress test to run alongside its now annual check.
Banks could be required to change their business models to make them more sustainable as they face a prolonged period of low interest rates and uncertainty over Britain's future relations with the EU after it leaves the bloc.
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