SHARES in Royal Bank of Scotland (RBS) have fallen alongside the stocks of other major UK lenders after investors reacted coolly to the results of the latest European banking stress tests.

Capital levels at state-owned RBS would drop by 7.4 per cent in response to a severe financial shock, the latest stress tests by the European Banking Authority (EBA) have found.

The results signal that the Edinburgh-based institution would see the third biggest fall in capital of the 51 banks across the European Union assessed by the tests.

Shares in RBS narrowed by 1.72 per cent or 3.3p to 189.1p last night, well adrift of the 502p price at which the government would break even on its majority stake.

The price is also well down on the 246.6p at which shares in RBS closed at the night before the EU referendum on June 23.

The stress tests come shortly before RBS publishes its half-year results on Friday, when City watchers will be looking for signs of the bank’s response to the Brexit vote and further moves to cut costs.

Last week, Lloyds Banking Group, owner of Bank of Scotland, reacted to the Brexit vote, and the expectation of a cut in interest rates this week, by cutting 3,000 jobs and announcing the closure of 200 branches.

RBS, which has shed thousands of jobs and massively scaled back its operations since being bailed out by the UK Government’s bail out in 2008, put a positive gloss on the stress tests.

Despite being the third-biggest faller in the stress tests, a spokeswoman said the results showed that “strong progress” it has made in shoring up its capital position under chief executive Ross McEwan.

The spokeswoman highlighted that the RBS capital position takes account of a large, anticipated fine in the US over the mis-selling of mortgage-backed securities, adding that the tests also showed that it would end up with more capital in reserve than Barclays in the event of an economic shock as simulated by the EBA.

And she pointed to remarks made at the weekend by former Tory chancellor Lord Lamont, who said the RBS capital position was “nothing to worry about”.

Declaring that RBS is “one of the most strongly-capitalised banks in Europe”, the spokeswoman said: “The key cornerstone of our strategy was to become a much stronger bank – it’s been the number one thing we have done.

“We did fall further than anybody else [and] a large part of that is we still face, because of the past, namely a big fine from the US for mortgage-backed securities that everybody knows about.

“Nobody knows quite how much it will be but any analyst’s expectation tells you it will be a lot of money. That’s all taken into account. We have that aside so that’s kind of why artificially you so a bigger fall.”

RBS is not the only UK lender that would see its capital position worsen in the event of an economic shock.

According to the tests, which are used to assess banks’ resilience to extreme shocks to the financial system, Barclays’ capital would fall to 7.3 per cent from 11.4 per cent.

Lloyds’ common equity tier 1 ratio would fall to 10.1 per cent from 13 per cent, while HSBC would see its capital ratio drop to 8.8 per cent from 11.9 per cent, according to the tests.

Barclays’ shares closed 2.04 per cent to 151.4p, while the HSBC stock slid 1.22 per cent to 489.05p. Shares in Lloyds edged up 0.1p at 53.25p.

Despite bank share prices falling, Laith Khalaf, senior analyst at Hargreaves Lansdown, said the stress tests showed the banks, including RBS, were in much better shape compared with their position during the financial crash.

Noting that the tests are designed to show the impact on banks from “worst-case” scenarios, he said the action taken last week by Lloyds would give a stronger indication of “how things are on the ground” for the banks.

“I think investors are probably more attuned to what the likes of RBS and HSBC say this week, and indeed what Lloyds and Barclays last week,” he said.

“It probably gives the market a better indication of how things are on the ground, compared to the stress tests which are obviously useful from a regulatory point of view, but an entirely hypothetical situation which could come to pass, but probably afforded a small likelihood in most people’s books.”

Meanwhile, major British banks have called for more time to separate their retail operations from their riskier investment activities. Lenders have been given until 2019 to ring-fence their retail operations but say the Brexit interview will make the process more complicated and expensive, Reuters reported.