By Huw Jones
LONDON (Reuters) - The Bank of England will publish stress test results for seven of Britain's major banks on Tuesday, which will put the spotlight on Royal Bank of Scotland (L:RBS) now the government has revived plans to sell its majority stake.
RBS failed the stress test a year ago and had to cut costs and sell assets worth 2 billion pounds to plug a capital shortfall.
"As in prior years, RBS will be on the watch list," said Rob Smith, a partner at consultants KPMG.
"Whilst we think they will fare better than in the 2016 exercise, it is likely to be a close call. However, it should be noted the positive effect of the improved capital position over 2017 is not reflected in the results," Smith said.
The Bank has said it will consider any steps banks have taken to strengthen their capital positions since the end of 2016 before deciding on any actions they must take.
The tests aim to show if banks have strong enough balance sheets to withstand an economic crisis.
RBS, along with Barclays (L:BARC), HSBC (L:HSBA), Lloyds (L:LLOY), Santander UK (MC:SAN), Standard Chartered (L:STAN) and the Nationwide building society must show they would still hold enough capital to avoid a bailout after undergoing theoretical market shocks spanning five years.
The shocks include a big drop in the pound and growth, and sharp rises in unemployment and loan defaults.
All have a bespoke basic hurdle to pass, but RBS, Barclays, HSBC and Standard Chartered must also leap a higher "systemic" hurdle because they are bigger banks.
The banks hold a lot more capital than they did before the financial crisis, but analysts said the test results could still affect their ability to pay dividends given the uncertainties banks face, not least Britain leaving the European Union in 2019.
RBS was rescued in the financial crisis with a 45.5 billion pound taxpayer bailout, leaving the government with stake of around 71 percent.
Chancellor Philip Hammond said on Wednesday the government would reprivatise RBS by selling 15 billion pounds of shares before the end of the 2018-19 fiscal year.
Last year's Brexit vote forced the government to shelve original plans for a sale.
RBC Capital Markets analysts said they did not expect RBS to fail. "We do not expect RBS to fail again this year given the progress on clean up at the bank."
They said Barclays might face a bumpy ride in the tests due to higher hurdle rates and higher assumed consumer finance losses.
Markets will also be looking at how much detail the Bank releases from its first, parallel "exploratory scenario" test that spans seven years.
This assesses how the banks' business models would cope with a prolonged downturn. There is no pass or fail, but it will help the BoE check whether profits are "sustainable".
KPMG's Smith said markets also want to know if next year's test will include the potential for a hard Brexit, or Britain crashing out of the European Union in 2019 without trading arrangements with the bloc.
The test results will be published at 0700 GMT on Tuesday, followed by a press conference with BoE Governor Mark Carney.