BARC Barclays Plc

By Margot Patrick and Max Colchester 

LONDON-- Royal Bank of Scotland Group PLC must add around GBP2 billion ($2.5 billion) in capital after failing a Bank of England stress test Wednesday, sending its shares down 4%.

The annual health checks also exposed weaknesses at two other banks, Barclays PLC and Standard Chartered PLC, but neither bank needs to change its capital plans.

The central bank said overall the U.K.'s banking system is in strong shape and could still keep lending to businesses and households even under a five-year scenario of economic turmoil roughly akin to the financial crisis. The hypothetical scenario for the test, issued last March, didn't cover the impact of Britain leaving the European Union, but the results gave a snapshot of how the country's banks would fare in a severe U.K. recession.

The annual tests measure the health of seven lenders--RBS, Barclays, Standard Chartered, HSBC Holdings PLC, Lloyds Banking Group PLC, Santander U.K. and Nationwide Building Society. The scenarios change each year and provide a road map for British banks' capital plans, including their ability to pay dividends. They are watched by analysts and investors, but so far haven't taken on the significance of similar annual tests of big banks by the Federal Reserve.

RBS, still 73%-government owned since bailouts in 2008 and 2009, will outline a new strategic plan early next year as it continues to face headwinds from low interest rates and potentially vast fines from U.S. authorities over the sale of toxic mortgage-backed securities. The plan should raise more than the GBP2 billion capital shortfall identified by the Bank of England.

On Wednesday, RBS said that it would further cut costs and assets to meet regulatory requirements. However, the bank warned that "additional management actions may be required until RBS's balance sheet is sufficiently resilient to stressed scenarios."

The results are another blow to RBS, which is already wading through a vast restructuring program. Dividends haven't been paid out since the government bailout and still look someway over the horizon. RBS is also contending with a host of regulatory issues, including having to spinoff part of its branch network to meet European state-aid rules after the taxpayer rescue.

Even before the results of the stress test, the bank's management had warned that it wouldn't hit medium-term earnings targets and would need to revise plans in the wake of the June Brexit vote. During a recent earnings call RBS Chief Executive Ross McEwan said that his team would present a new plan alongside full-year results in February.

Barclays and Standard Chartered also stumbled in parts of the test, but won't have to take any new steps. Barclays has already announced plans to thicken its capital cushion, including by reducing its stake in its Africa unit, while Standard Chartered has bolstered its capital since the end of 2015.

Write to Margot Patrick at margot.patrick@wsj.com and Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

November 30, 2016 04:58 ET (09:58 GMT)

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