BRITAIN's main listed banks have passed stress tests set by European regulators to model an economic downturn with Royal Bank of Scotland coming out with the lowest capital cushion of the four.

The European Banking Authority found that eight out of 91 European banks, fewer than many had expected, could see their core tier one capital fall below its minimum standard of 5% in a crisis.

This amounts to a €2.5 billion (£2.2bn) shortfall.

Some 16 only narrowly passed the test with capital ratios of 5% to 6%.

The EBA modelled the impact over two years of lower than expected economic growth combined with a house price crash, sovereign debt problems and rising funding costs.

RBS would see its tier one capital cushion fall 35% to 6.3% from 9.7% currently, the EBA concluded, although the Edinburgh-based bank criticised the way the test was run.

Lloyds Banking Group, 41% owned by the taxpayer, would see its capital ratio drop to 7.7% from 10.2%.

Barclays’ capital would decline to 7.3%. HSBC would retain a 8.5% cushion.

RBS, which is 83% owned by the taxpayer, said it “remains well capitalised with a core tire one capital ratio passing both the baseline and adverse scenarios”.

It added: “RBS continues to make good progress implementing its restructuring plans, including the de-risking of its balance sheet.”

The bank criticised the test’s assumption of a stable balance sheet when it is running down its toxic assets.

It also disagreed with the EBA’s use of profit data from the last five years, which included RBS’s massive £24.1bn loss three years ago.

In a crisis, the EBA’s model suggests RBS could rack up impairments and trading losses of £26.5bn, including £496 million from sovereign debt defaults. This would lead to an annual operating loss as great as £10.3bn.

One Austrian bank, two from Greece, and five Spanish banks failed the test. A German bank withheld its results.

Greece’s ATEbank came out worst with a capital ratio of -0.8%, well below the 5% standard. But it said it didn’t need to up its capital raising.

The tests showed that British banks hold just 2% of debt issued by Greece, the most vulnerable European state.

Two-thirds is in the hands of domestic institutions.