Royal Bank of Scotland has admitted that it mis-calculated its financial strength under European tests of major banks' financial stability earlier this year.
The taxpayer-owned bank released a statement on Friday afternoonsaying that its Common Equity Tier 1 (CET1) ratio - the key measure of the bank's financial safety nets - was a whole percentage point lower than previously said.
Under an "adverse scenario" in which the financial system was subject to shocks such as a debt sell-off, falling property prices, and a new eurozone recession, RBS's CET1 ratio would have been just 5.7pc, compared to 6.7pc previously announced.
This is only just above the 5.5pc needed to pass the European Banking Authority's test. Shares in the bank fell more than 2pc on the news.
RBS said the error related to how it recognised tax credits under the adverse scenario, meaning its capital was overstated by £3.5bn.
The development does not affect RBS's current CET1 ratio, and since the bank still registers a pass in the test, it will not be forced to raise capital.
The tests related to capital positions at the end of last year, and RBS has improved its capital ratio since.
"RBS estimates that if the EBA stress-test were to be repeated based on the Q3 2014 financials, our result would at least reflect the 220 basis point reported increase in CET1 ratio," the bank said.
The readjustment means RBS performed the worst out of the four UK banks to be tested: RBS, Lloyds, HSBC and Barclays.
Lloyds passed with a CET1 ratio under an adverse scenario of 6pc, causing its shares to fall the day after.
The result may mean investors re-assessing the bank's prospects ahead of Bank of England stress tests to take place in December. However, the EBA stress tests are markedly different from the Bank's Prudential Regulation Authority ones, and are less backward-looking.
"Frankly, this does not look good at face value," said Joseph Dickerson, an analyst at Jefferies. "However in the case of RBS, the EBA stress tests are quite backward looking given that the reported CET1 ratio at [third-quarter results] was 10.8pc vs the FY 13 value of 8.6pc."
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