Could Metro Bank in the UK be the next significant banking failure this year?

Metro Bank (MTRO.L) has had a challenging week as reports emerged that the UK-based challenger bank had been planning to raise up to £600 million from investors. In response, financial regulators have requested a meeting with the bank’s management.

The troubles for Metro Bank actually began in mid-September when the Bank of England announced that it would not be offering fund relief for mortgage lending until next year at the earliest. This news caused shares in the bank to plummet nearly 30% on Thursday, with trading being briefly paused twice. Although today’s reports of a potential asset sale have led to a partial recovery in share prices, concerns still linger.

Metro Bank has been trying to obtain approval from the Prudential Regulatory Authority (PRA) for several years to use internal models for its residential mortgage unit, instead of standardized models. This would enable the bank to use its own historical data to determine loan risk, shifting away from standard capital rules. This move would result in the bank having to maintain less capital under Basel III and incoming Basel IV if loans are assessed as being less risky. Other challenger banks have also explored this option with the PRA.

To strengthen its balance sheet, Metro Bank reportedly held discussions with competitors such as HSBC, NatWest, and Lloyds on Thursday, exploring the possibility of acquiring a third of its mortgage book.

Metro Bank has enlisted the help of Morgan Stanley to advise on the potential capital raise, potentially utilizing the expertise of Guillaume Gabaix, an experienced banker who played a key role in advising UBS on the acquisition of Credit Suisse.

It is important to note that Metro Bank is not the only bank facing difficulties this year. The global economic environment and rising interest rates have led to the collapse or rescue of several other institutions, including Credit Suisse, Silicon Valley Bank, Signature Bank, and First Republic. These challenges highlight the volatility of the current economic landscape.

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