ALEX BRUMMER: Metro tests the Bank of England

The biggest risk of any bank failure is contagion. That is why it is critical that an early solution is found for Metro Bank.

Short-sellers, by destroying the value of equity and bonds held in the bank, have determined its fate irrespective of the soundness of the enterprise.

Metro Bank’s superior customer service levels have proved enormously popular at a time when the bigger High Street banks are engaged in a concerted campaign to force clients online.

It is easy to mock Metro’s dog-loving founder Vernon Hill, who was ousted after accounting irregularities in 2019.

In seeking to put the zip back into branches and high streets, he left behind a worthwhile if shaky legacy.

Writing on the wall: It is critical that an early solution is found for Metro Bank

So far, known problems at Metro, as it seeks to raise new shares and capital, do not appear to have sparked a summer of 2007 Northern Rock-style run.

Much has changed since then, not least the jump in deposit insurance to £85,000. Why stand in line to get your money if you know it is safe?

What is evident from all banking crises is that it is the ‘silent run’ which is so destructive. The crisis at Silicon Valley Bank (SVB) in March of this year was triggered by social media posts which led to a tsunami of online withdrawals. A parallel process took place in money markets where banks lend to each other.

The run on SVB triggered parallel difficulties at First Republic and some regional banks. To halt the rot, it required back-up finance from the US Treasury and an industry rescue led by Jamie Dimon of JP Morgan Chase for First Republic. On this side of the Atlantic, the contagion was the last nail in the coffin of Credit Suisse.

What is clear from these experiences is that the amount of time spent by regulators in setting up a regime where no bank is ‘too big to fail’ and creating living wills – so banks can go through bankruptcy over a weekend and emerge intact on a Monday morning – is proving a waste of time. All it has done is enrich professional advisers.

Under the stern stewardship of governor Andrew Bailey and prudential regulator Sam Woods, the Bank of England has made banking safety a priority.

It is an irony that the biggest safety problem faced by the Bank since the crisis occurred in UK pensions funds was because of the use of derivatives, liability driven investments (LDIs) in the bond markets.

The Bank stepped in with a temporary bail-out. It wasn’t just a case of saving our pensions, but without intervention the LDI debacle could have triggered a cascade of failures and big losses for lenders.

Having identified HSBC as a rescuer for SVB’s British operations, it is not surprising that the Bank is scouting around for a private sector saviour for Metro.

Some rescues in the past, such as Virgin Money’s absorption of Northern Rock and the recent HSBC deal for SVB, created value for new owners.

The difficulty with Metro is that so many UK lenders have decided that despite inconvenience to the elderly, small businesses and ordinary customers, simple branch services are regarded as 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 there are 2.7m customers to be scooped up.

Challenger banks such as Atom have made a virtue of their lower cost, speedier digital models. That is not to rule out an intervention from, say, Chase – part of JP Morgan – which is engaged in an aggressive digital drive for retail customers in the UK and across Europe.

The bigger question facing the Bank of England is whether it has become so super-cautious, requiring banks and lenders to hold vast quantities of capital, that it is holding back output.

It has gold plated the capital requirements to the point that its new ‘competition’ mandate is pointless.

Americans recognised a long time ago that failures among second and third tier banks are a fact of life.

US banking recovered more speedily and is more entrepreneurial than its British counterparts precisely because it is not weighed down by onerous regulation.

There may be no other choice than plotting a rescue for Metro.

Nevertheless, the Old Lady’s burdensome and defensive capital rules have become part of the problem.

This post first appeared on Dailymail.co.uk