Regulators are circling Metro Bank following an accounting blunder over misclassified assets that caused shares to hit record lows.
The challenger bank said on Tuesday it is facing a rare twin investigation from both the Bank of England (BoE) and the Financial Conduct Authority (FCA), and it would have to raise another £350m from investors and £500m from the debt markets to address its capital shortfall.
In January, it emerged hundreds of millions of pounds of commercial property loans and loans to commercial buy-to-let operators from the lender had been incorrectly classified in risk terms, and should have been among its “risk-weighted assets” (RWAs).
Although the bank initially suggested that it had discovered the issue, it later emerged that the error was uncovered by the Prudential Regulation Authority (PRA), the central bank’s regulatory arm.
The Institute of Chartered Accountants in England and Wales called for independent scrutiny of banks’ capital ratios and risk-weighted assets. In a 2016 report by the institute's Financial Services Faculty, it said that regulatory capital ratios are key measures of the strength and resilience of banks for regulators, investors, creditors and other stakeholders.
“Capital ratios and the risk-weighted assets that underpin them are among the most important balance sheet measures that banks produce and since the financial crisis, there has been much more interest in that information,” ICAEW said in a statement.
The regulators will also review whether the bank’s mistake created a false market in its shares, incorrectly presenting it was on a more secure financial footing than it actually was.
The bank declined to give details of the inspections to AccountingWEB beyond confirmation of the twin regulatory probe, however it is understood the PRA is concerned with the bank’s accounting error and how it miscalculated its risk-weighted assets while using what is meant to be a simple standardised model.
The bank said previously it wanted to move to a new more tailored model that would slash its capital requirements in 2019, but it is unlikely to get approval before the end of 2020.
It is also unlikely to escape sanction for appearing to suggest it had found the problem itself, rather than following a PRA review.
The FCA will review the bank’s duties as a listed company to put out accurate statements. Under the new Senior Managers and Certification Regime, introduced to improve individual accountability in financial services, executives could be fined or banned from the industry if the regulator finds misconduct occurred on their watch.
Supervisors at the PRA can also increase the bank’s bespoke capital levels under so-called Pillar 2 requirements if it believes the lender was careless in risk-taking.
On a conference call, the bank’s chief executive officer Craig Donaldson said he offered to resign, but the board backed him to continue. Donaldson will not receive a bonus for 2018, rumoured to be around £800,000, and senior management will be reshuffled as part of a plan to help turn the company around.
Non-executive director Sir Michael Snyder, who has led the top 20 accountancy firm Kingston Smith for the past 36 years, will replace Ben Gunn as senior independent director and become chair of its audit committee. The bank is also searching for another independent non-executive director.
Metro’s market capitalisation has dropped to just over £1bn from a high of £3.5bn last March, and the initial announcement of the accounting error triggered the worst one-day drop in a British bank stock since the financial crisis, which accelerated once it became clear the PRA had ordered the review.
The slump proved that, as in many accounting misses, management information was not up to scratch, said Simon Bittlestone, CEO of financial analytics firm Metapraxis. “To avoid making the same mistakes, companies need to promote a greater collaboration between financial and management accounting,” he said. “If these two parts of the organisation learn to work together and complement one another, the board will have a heightened understanding of the entire business and will know when something’s not quite adding up.”
Founded by US entrepreneur Vernon Hill in 2009, Metro Bank was the UK’s first high street bank for more than 100 years, expanding aggressively with a focus on customer service.
Its rapid growth has been matched by a rapid fall from grace as doubts emerge over its corporate governance and long-term viability.
A £120m grant awarded to Metro last week, the largest prize in an EU-mandated scheme to improve competition in the business banking sector, is now at risk because of the debacle.