The Metro Bank-ruptcy Case
The ‘challenger’ brand launched in 2010 aiming to found a new kind of high street bank. They wanted to provide more competition to existing high street banks with extended opening hours including weekends and a 24/7 telephone banking service.
They’ve grown to 67 branches employing 3,500 people all over the south of England from Bristol to Brighton to Peterborough.
In 2016 they floated on the UK stock market initially at £20 a share giving the company a valuation of £1.6 billion although shares currently trade at about a quarter of that today.
Things started to go wrong in January this year when they admitted that an accounting error in how they classified the risk of £900m worth of commercial loans. This mistake meant that they immediately had to allocate more capital to balance this risk causing the share value to fall by 40%. This mistake instigated investigations by the Financial Conduct Authority and the Prudential Regulation Authority.
If this wasn’t enough, last week a false rumour began and was amplified on WhatsApp and social media alleging that the bank was facing severe financial difficulties and could be on the brink of bankruptcy. The message urged customers with an account or a deposit box to empty it immediately or risk losing everything.
This caused some images of customers crowding into branches to withdraw money that looked eerily reminiscent of the queues forming at Northern Rock shortly before it was eventually nationalised.
This has naturally fueled increasingly negative sentiment amongst investors about the future prospects of profitability. The bank confirmed that it had experienced a “short period of deposit net outflows” which would be exactly how Robert Peston would have described activity at Northern Rock in 2007.
Metro Bank has moved to secure its position by raising £375m in fundraising in the past few days offering additional shares at £5 value. The bank said that the funding injection would help strengthen its capital position, allowing it to increase its loan book and invest in new branches and technology.
The images of customers queueing round the block in Newcastle and the fate of Lloyds, HBOS and the Royal Bank of Scotland has caused an indelible impression on a generation of customers.
Bank runs and failures can quickly become self-fulfilling prophecies especially if inaccurate information enters the ecosystem.
Fortunately, today’s customers have far more protection for their assets than they did a decade ago.
Customers of any bank entering insolvency have a degree of protection through the Financial Services Compensation Scheme (FSCS). They protect funds up to the value of £85,000 per person, per banking licence so if you have less than this in your account then you are fully protected and will be repaid. This applies to building societies and credit unions too.
If you have £100,000 in one account then the first £85,000 is guaranteed; similarly if you split that and have £50,000 in two accounts with two different banks and both fail then the full amount will be protected as they are both under the statutory coverage ceiling.
The banking licence part is also important – If you had accounts with HSBC and First Direct, then only one would qualify under the scheme as they are classed as one entity because both are owned by HSBC.
The Bank of England now has stricter oversight of the market and for instance enforces rules that require lenders to maintain more equity on their books to balance the risk of the loans they are making.
However, even they admit that another financial crisis will arise one day and it won’t look the same as the last one – hence the need to take what they see as reasonable precautions to ensure a functioning financial market in any event.