Duncan’s Economic Blog

RBS may require £4.5bn of extra capital

Posted in Uncategorized by duncanseconomicblog on July 20, 2011

Yesterday was a news heavy day in a heavy news week. Whilst the political media is concentrating on the ongoing hacking fallout, the financial media is focussed on the Eurozone. All of this means some potentially significant UK politico-economic news risks being buried.

As both Bloomberg and Director of Finance magazine have reported, following the stress tests RBS may require additional capital:

Royal Bank of Scotland Group plc needs to find an extra £4.5bn in capital reserves say analysts at Morgan Stanley

The crucial factor, and what transforms a financial story into a potentially political one, is that I can’t envisage much private sector appetitive for providing this capital – especially given the coming ICB report (which is likely, even if weak, to reduce future profitability at UK banks).

So if RBS requires more capital it’ll probably have to come from the largest existing shareholder – i.e. the UK government.

Whilst this capital is required, and a failure of RBS would be catastrophic for the UK economy, I bet George Osborne isn’t relishing the headlines that advancing another £4.5 billion to the bank will generate at a time of public sector cuts.

2 Responses

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  1. Dave Holden said, on July 20, 2011 at 9:30 am

    I don’t see how these “stress” tests are that useful. It might give a hint – by whatever criteria they’re using at the moment – as to banks that are weak but does it give an indication of how weak the other banks are if one of the weak banks fail?

  2. gastro george said, on July 20, 2011 at 8:31 pm

    The stress tests are a disaster in PR terms. The fact that they exist gives rise to expectations, but they are damned if they are OK (“not stressful enough”) and damned if they are not (“look, look, collapsing banks”). The hawks are never satisfied , so why feed them?


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