Bell & Co urges caution for RBS and Barclays customers after banks were recently exposed by stress tests

It’s fair to say that England’s banks are robust and it’s likely that they are already well prepared for anything that they might face as a result of Brexit or other economic upheavals. However, while this is true for the majority of banks, it seems that two of the biggest names on the high street might not quite live up to expectations.

Recent stress tests carried out by Regulators of Threadneedle Street have revealed that both RBS and Barclays fell short of the standards expected and may not survive in detrimental situations.

So, what do these stress tests entail and what does it mean for these two major banks?

The stress tests

Stress tests are designed to model sharp economic downturn and see how banks would behave and perform when confronted with this reality. Introduced during the financial crisis, today’s stress tests are in place to probe whether any given bank’s balance sheets would be able to cope with a ‘doomsday’ scenario without crumbling.

Some of the hypothetical conditions implemented during the most recent stress tests included a surge in defaults by UK consumers and a sharp rise in interest rates.

How Barclays and RBS did in the tests

Unfortunately for these two major UK banks, both fell below their minimum capital levels in the stressed scenarios, meaning that it’s likely that they would not be able to perform effectively if a new financial crisis were to take place. RBS was hoping to restore its dividend payments and return to profitability by next year, so the results of the stress tests are likely to be a major sting to them and those that bank with them.

RBS’s capital also fell to a low point of 7%, somewhat below its 7.4% minimum ‘systemic reference point’. Similarly, Barclay’s capital ratio fell from a 7.9% minimum requirement to 7.4%. The five other banks that were involved in the testing – HSBC, Standard Chartered, Lloyds Banking Group, Nationwide and Santander UK – were all able to maintain their minimum capital levels throughout the course of the exercises.

What could be next

While these tests demonstrate some of the problems that Barclays and RBS may encounter during a financial crisis, they do not account for the biggest risk that all banks are likely to face in the not too distant future;  Brexit.

Furthermore, since the start of the year, RBS has managed to bolster its balance sheets by shedding assets and Barclays has raised capital by selling a large portion of its African operation, so who can really say what’s in store? Only time will tell.

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