Bank of England fail spotted by regulator

Metro Bank’s accounting error that could lead to the firm needing a vast round of capital from investors was discovered not by their own executives, but by the Bank of England. FinTech is moving the whole business of financial services forward, largely from London, but experience is everything

The Bank of England is one of the world’s most esteemed central banks.

Established in 1694, only a short period of time after King Henry VII had finished spending his life reducing dissenters to kit form, it is regarded as one of the mainstays of the entire world’s financial, industrial and trade infrastructure and is issuer of the world’s highest valued currency, the Pound.

Perhaps due to its impeccable record over several centuries which saw it underpin the entire colonial enterprise and be the backer of the global industrial revolution before becoming the world’s most reliable and arguably most powerful post-war institution, the Bank of England’s eye for error is still superior to the new, more modern banks that England is a pioneering force in the establishment of.

This week’s example involving one of Britain’s new, technology focused retail outlets, Metro Bank, concerns an accounting error which no staff from Metro Bank were able to decipher.

Metro Bank last week admitted that it underestimated the risk in a string of commercial exposures, a mistake which could force it to raise another £300 million from investors, after the error was flagged by the Prudential Regulatory Authority (PRA) which is the regulator that is responsible for overseeing banks in the United Kingdom.

This error may well not be related directly to electronic trading or application-based banking which is now gaining huge traction in the UK, but it does demonstrate what happens if relatively newly established firms gain vast economies of scale without the vast experience of the established City giants when assessing risk.

The error, which caused Metro Bank’s share price to decline by 39%, was in fact first identified by the Prudential Regulation Authority which is a division of the Bank of England.

Since the admission last night that it was the Bank of England that identified the error rather than its own senior management, the bank’s shares have now lost more than 50% of their value in total since Metro Bank had to report the mistake on January 23.

The bank warned the errors, in the way it had calculated the weight of some commercial loans and buy-to-let loans to major landlords, would take a chunk out of its risk-weighted assets. In a statement yesterday, the company said: “Ongoing supervision by the PRA helped to identify potential inconsistencies in certain loans which were raised with the bank.

This is a very important occurrence, and at this time during which new investment platforms and banks are being developed with technology-led interfaces allowing investors to take control of their entire portfolio via a single dedicated platform – a direction which FinanceFeeds endorses – it is important that risk management and counterparty risk control are considered paramount.

In an industry that is continually evolving its technology to appeal to a sophisticated new generation of investors and traders in order to move on from the white label third-party spot trading platforms and affiliate style structures in third-tier jurisdictions that increased the number of identical offerings and a created a short term client base of ‘conversions’ rather than customers, it is important that firms embrace the new methodology which Metro Bank and its peers have brought to the UK.

There are several other examples of much needed new platforms, often highlighted by FinanceFeeds, that our industry could work very well with in terms of providing liquidity, risk management solutions and market integration, especially those which provide stock trading as well as traditional banking on one application as this simplifies the financial services industry at the same time as elevating our retail business into a new high quality environment with good sustainable first-tier jurisdiction client bases.

It’s just important to get the calculations right…. Evolution, as they say, may be better than revolution, however our developed financial technology industry has the ability to create a revolution which moves the game on whilst avoiding incidents such as this one.

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