Metro Bank barely survives problems of its own making

It has been a dramatic few days for all sorts of reasons. On another weekend there is a good chance the business press would have been transfixed by the Metro Bank saga, as the so-called challenger bank in the UK battled to find a buyer after a collapse in its share price and bonds last week left it struggling to survive.

The lender is one of several banks to emerge out of the wreckage of the 2008 crash to challenge the established big players in consumer banking. Much like in Ireland, the big banks in the UK were weighed down with bad loans and high costs after the crash leaving them wary of new customers. That created a gap in the market for new entrants who did not have to deal with the so-called legacy issues of the past.

Metro Bank was different from its peers in that it actively sought out a high-street presence, investing heavily in a branch network with some in high profile, high-cost locations in central London. That was a tactic its rivals deliberately avoided as a needless expense in a digital age.

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Metro’s valuation soared as high as £3.5 billion in 2018 and added more than two million customers quickly. Key to the bank’s valuation was its attempt to be allowed use its own internal models to calculate how much assets it would have to set aside to cover potential losses. If the UK regulator allowed Metro to use its own method, that would free up a huge amount of capital that could be returned to shareholders.

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The idea always seemed optimistic at best, and it wasn’t helped when in 2019 it emerged the bank had miscalculated how much capital to retain against some mortgages. When the lender said last month it would not be allowed to use its own models before 2024, investors quickly fled. The bank has now raised new capital that removes any immediate peril but there is no question it is hugely damaged, with a market cap now of about £85 million.

Some good news though: this appears to be a very specific issue with one bank. Unlike other bank failures of yore, there is no indication of any wider crisis. At least for now.