ALEX BRUMER: Metro is testing the Bank of England
The biggest risk of bank failure is contagion. That is why it is extremely important to find an early solution for Metro Bank.
Short sellers, destroying the value of the stocks and bonds held in the bank, have determined its fate, regardless of the stability of the enterprise.
Metro Bank’s superior levels of customer service have proved hugely popular at a time when the larger High Street banks are engaged in a concerted campaign to force customers online.
Writing on the wall: Finding an early solution for Metro Bank is critical
It’s easy to make fun of Metro’s dog-loving founder Vernon Hill, who was ousted after accounting irregularities in 2019.
In his quest to bring zip back to branches and high streets, he left behind a valuable, if volatile, legacy.
The previously known problems at Metro as it sought to raise new shares and capital do not appear to have sparked a Northern Rock-style run in the summer of 2007.
A lot has changed since then, not least the jump in deposit insurance up to £85,000. Why queue to get your money when you know it’s safe?
What is evident from all banking crises is that the “silent run” is so destructive.
The crisis at Silicon Valley Bank (SVB) in March this year was triggered by social media posts that led to a tsunami of online withdrawals. A parallel process takes place in money markets, where banks lend to each other.
SVB’s run caused parallel difficulties at First Republic and some regional banks. It took back-up funding from the US Treasury and an industry bailout led by Jamie Dimon of JP Morgan Chase for First Republic to stop the rot.
On this side of the Atlantic, the contagion was the final nail in Credit Suisse’s coffin.
Problems: The Old Lady’s burdensome and protective capital rules have become part of the problem, says Alex Brummer
What is clear from these experiences is that the amount of time regulators have spent establishing a regime where no bank is “too big to fail” and creating living wills – so banks can pass through bankruptcy over the weekend and come out intact on Monday morning – turns out to be a waste of time. All it has done is enrich professional advisors.
Under the strict leadership of Governor Andrew Bailey and Prudential Regulator Sam Woods, the Bank of England has made bank safety a priority.
The irony is that the biggest security problem the bank has faced since the onset of the UK pension fund crisis is due to its use of derivatives, liability-driven investments (LDIs) in the bond markets.
The bank intervened with a temporary rescue. This was not simply a case of saving our pensions, but without intervention the failure of LDI could have triggered a cascade of bankruptcies and large losses for creditors.
Having earmarked HSBC as the savior for SVB’s UK operations, it is not surprising that the bank is looking for a private sector savior for Metro.
Some bailouts in the past, such as Virgin Money’s takeover of Northern Rock and HSBC’s recent deal for SVB, have created value for new owners.
The difficulty with Metro is that so many UK lenders have decided that, despite the inconvenience to the elderly, small businesses and ordinary customers, ordinary branch services are considered an unnecessary overhead.
Metro’s model of weekend service and instant card replacement at its 76 branches may not be a good fit, even though it has 2.7 million customers to round up.
Challenger banks like Atom have made a virtue of their cheaper and faster digital models. That doesn’t rule out an intervention from, say, Chase – part of JP Morgan – which is engaged in an aggressive digital push for retail customers in the UK and across Europe.
The bigger question facing the Bank of England is whether it has become so overcautious, requiring banks and lenders to hold huge amounts of capital, that it holds back output.
It has covered capital requirements to such an extent that its new “competition” mandate is meaningless.
Americans have long understood that tier two and tier three bank failures are a fact of life.
American banking has recovered more quickly and is more enterprising than British banking precisely because it is not burdened by onerous regulations.
We may have no choice but to plan a Metro bailout.
However, the Old Lady’s heavy and defensive capital rules became part of the problem.