Scotland's two major banks given a clean bill of health in 'stress test'

SCOTLAND'S two major banks have both passed crucial European "stress tests" of their balance sheets.

Royal Bank of Scotland and the Lloyds Group, which owns Bank of Scotland, say it shows they have "robust" cash reserves. Both were bailed out during the financial crisis.

The tests of 90 banks in the EU are designed to act as a financial healthcheck to ensure they have sufficient capital to deal with any future economic crash.

The banks were required to maintain a financial pad of at least five per cent of their loans, investments and other assets.

This financial pad - dubbed Core Tier 1 capital - stands ready to absorb unexpected losses and is therefore a key measure of a bank's stability.

Eight banks failed to make this 5 per cent threshold. The combined shortfall of the failing banks was about 2.2 billion, it emerged yesterday.

The European Banking Authority (EBA), which carried out the tests, found that Lloyds Banking Group held 7.7 per cent and Royal Bank of Scotland held 6.3 per cent. Barclays held 7.3 per cent tier one capital, while HSBC held 8.5 per cent.

The results were welcomed by Royal bank of Scotland in a statement last night. "RBS continues to make good progress implementing its restructuring plans, including the de-risking of its balance sheet," it stated.

"Stress testing is a regular feature of the group's own risk management approach and regulatory framework.

"RBS supports the need for banks to maintain strong capital ratios and believes that stress tests like these, whilst theoretical, can help restore confidence in the resilience of the European banking sector."

The taxpayer still owns 83 per cent of RBS and 41 per cent of Lloyds after both were bailed out at the height of the banking crisis three years ago.

A statement issued by Lloyds added that the Group met the "capital benchmark" set out for the purpose of the stress test.

"The Group will continue to ensure that appropriate capital is maintained," it added. "Lloyds Banking Group has a robust capital position."

Oesterreichische Volksbanken, in Austria, failed, while EFG Eurobank and ATE bank in Greece did not pass. In Spain, Catalunya Caixa, Pastor, Unnim, Caja3 and CAM all failed.

The EBA has issued its first formal recommendation that individual authorities should require that these banks act promptly to fix this shortfall.

The tests conducted last year by the EBA's predecessor, the Committee of European Banking Supervisors, were criticised for not being strict enough.

Both Irish banks tested in 2010, Bank of Ireland and Allied Irish Bank (AIB), passed. But just months later, AIB needed a government bail-out.

A spokesman for the British Bankers' Association said: "The UK's banks took early action to rebuild their capital base following the global financial crisis, and are recognised by international authorities for their work to strengthen their capital positions.

"Today's report provides further information on strengths and weaknesses in the European banking system. This is a significant piece of work, which should now be subjected to careful and considered analysis."

The EBA added that another 16 banks only just passed the tests.

The Financial Services Authority (FSA), the UK city regulator, 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."

Jason Karaian, economist with The Economist Intelligence Unit, said the result of the tests was "underwhelming".