RBS fails Bank of England stress test

These were the most severe stress tests carried out since the 2008 crash

UK State-backed lender Royal Bank of Scotland must bolster its balance sheet after failing a Bank of England stress test on how it would cope with another financial crisis.

Two other lenders - Barclays and Standard Chartered - also fell short on some measures but will not have to submit revised capital raising plans.

Stress tests on major lenders were put in place by the Bank of England after British taxpayers were forced to bail out banks such as RBS in the financial crisis. It 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%.

It was 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 did not reveal any shortcomings in the stress test, the Bank of England said.

Bank of England governor Mark 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 company owns Ulster Bank in Ireland.