UK bank fails China-linked stress test
Britain's third-largest bank, Royal Bank of Scotland, has failed a stress test that included an assessment of its ability to cope with the impact of a fictional recession in the Chinese mainland and a collapse in the Hong Kong property market.
RBS, which has been 73 percent state-owned since the government propped it up during the 2008 financial crisis, was among seven banks that underwent the Bank of England's annual health check.
In results published on Wednesday, the central bank said two other institutions－Barclays and Standard Chartered, which analysts say has significant exposure to Chinese credit－also struggled to meet the requirements of its toughest test yet.
The test highlighted the sensitivity of Western economies to potential developments in China.
As part of the "hypothetical adverse scenario" devised by the central bank, the test imagines China's growth collapsing to -0.5 percent by the end of 2016, while home values in the Chinese mainland plummet by 35 percent. In Hong Kong, the theoretical residential price fall was 50 percent.
In what amounted to a financial version of a military "war game", the imagined Chinese downturn was perceived as part of a global drop in growth to -1.9 percent, as it was during the 2008 crisis.
It was the second year in a row the Bank of England had tested the UK's top banks against hypothetical scenarios in which a sharp contraction in Chinese growth figured.
China's Finance Ministry this month adopted an emergency plan to cope with concerns over the rising debt levels of local authorities in the country.
The Bank of England governor identified slowing growth in China as a key challenge to UK financial stability, alongside its own burgeoning household debt and Britain's departure from the European Union.
In response to the stress test results, RBS, which failed to meet two of its key measures of financial strength, announced a plan to cut costs and sell assets in order to boost its capital by about 2 billion pounds ($2.5 billion).
