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UK challenger bank Metro has conceded it will not get capital relief from the Bank of England for mortgage lending until at least 2024, in the latest of a series of blows to its efforts to employ the kind of internal models used by larger banks to boost profitability.
“The [Prudential Regulation Authority] has indicated that at this stage more work is required by the company which means approval will not be attained during 2023,” the bank said on Tuesday of its long-running attempt to get approval to use advanced models for its mortgage book.
“Whilst Metro Bank continues to engage with the PRA on its application, there is no certainty that approval will be obtained.”
Metro has spent five years pursuing its bid to use advanced internal models for its residential mortgage business. These allow banks to use their own history to calculate the riskiness of loans rather than relying on more punitive standardised approaches.
Chief executive Dan Frumkin told the Financial Times in August that shareholders “are very interested in discussions with regulators [on moving to internal models] — it comes up in the majority of conversations with debt and equity investors”.
Other challenger banks, such as Close Brothers and Paragon, have also faced years of delays to approvals that could save them hundreds of millions of pounds, and could allow them to lend more or return capital to shareholders. Using the models would also boost profitability on a return on equity basis, since the banks would be required to hold less equity.
Some bank executives have put delays down to staff shortages in the specialist PRA teams involved in the talks, as well as the PRA’s heavy workload in the aftermath of Brexit, as officials deal with the government’s extensive regulatory reform agenda.
The issue of advanced models has become more urgent as these lenders want to reach an agreement with the UK regulator ahead of new global capital rules, known as Basel IV, which are due to enter force in 2025. Those rules impose harsher standardised treatments on some type of assets, including buy-to-let mortgages, so banks want to opt out of the standardised treatments before then.
Metro became the UK’s first new high street bank in more than 100 years when it launched in 2010, but it was embroiled in scandal in 2019 after investors were misled over risk-weighted assets, a key risk measure.
The ensuing fallout also led to the departure of co-founder and chair Vernon Hill and former chief executive Craig Donaldson, and more than £15mn in regulatory fines.
Shares fell 39 per cent after the bank admitted the £900mn error, and they remain down almost 98 per cent from their peak in 2018.
The bank has rallied in recent quarters, boosted by rising interest rates. In August, Metro reported a pre-tax profit of £16.1mn in the six months to the end of June, its first half-year profit since 2019.
The PRA did not immediately reply to requests for comment. Metro Bank declined to provide further comment.