Metro Gaffe Highlights Banks' Flimsy Risk Arithmetic

Metro Bank, once the darling of Britain’s challenger lenders, has lost half its stock market value over the past six weeks or so.

- Patrick Jenkins

There has been no nasty loan loss, no vast money laundering scandal and no funding squeeze to rival the nightmares visited on other troubled banks.

Metro’s problem is far geekier. But as the share price slump shows, being found by regulators to have miscalculated your risk-weighted asset tally — and overreported your capital ratios as a result — is a serious gaffe.

Last week, it emerged that the Bank of England’s Prudential Regulation Authority was probing how the mistake had happened, while the Financial Conduct Authority is to examine whether the miscalculation resulted in a false market in Metro’s shares.

A bank’s tally of risk-weighted assets, or RWAs, is calculated by assigning its various loans — mortgages, commercial loans and so on — into different buckets. Each carries a “risk weighting” that mitigates the gross value of the relevant loans. Metro had £8bn of RWAs — relative to £22bn or so of total assets — until regulators caught its mistake, whereupon the RWA number jumped 11 percent.