Could UK’s Metro Bank Be This Year’s Next Major Banking Fail?

Metro Bank (MTRO.L)has had a challenging week. Reports that the UK-based challenger bank had been planning to raise as much as £600 million from investors led to financial regulators asking the bank’s management to have a sit-down meeting.

Although shares in the banking institution fell nearly 30% on Thursday (and trading briefly paused twice), troubles at the bank actually began during mid-September 2023 when the Bank of England said it would not be offering fund relief for mortgage lending until next year at the earliest. Reports from today that the bank may sell some assets to shore up its balance sheet have helped shares to recover some of the decline but concerns remain.

Metro says it has spent several years attempting to obtain approval from the Prudential Regulatory Authority (PRA) to utilize internal models for its residential mortgage unit, instead of the more standardized models. This could enable Metro Bank (other challenger banks have also looked into this kind of application with the PRA) to use its own history to determine loan risk – a move away from standard capital rules. In simple terms, if loans are assessed as being less risky, then banks have to maintain less capital under Basel III and incoming Basel IV.

Metro is said to have met with competitors such as HSBC, NatWest, and Lloyds this past Thursday in order to discuss acquiring a third of its mortgage book in order to strengthen its balance sheet.

The bank stated that it has asked Morgan Stanley to advise on the issue and potential capital raise, possibly leveraging the expertise of Guillaume Gabaix – an experienced banker who served a key role advising UBS on the acquisition of Credit Suisse.

It’s worth noting that Metro Bank’s struggles are not the first of their kind this year, as global issues and fast-rising interest rates caused multiple banks to be saved by authorities. Other banks such as Credit Suisse, Silicon Valley Bank, Signature Bank, and First Republic have collapsed in the past year, joining a roster of institutions that were unable to manage the choppy economic environment.

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