Metro Bank used billions in cheap loans from Bank of England to invest in same type of risky deals blamed for 2008 financial crash
Metro Bank has used billions of pounds of cheap loans from the Bank of England to invest in the same type of risky deals blamed for the 2008 financial crash.
Figures show the challenger bank drew £3.8 billion from the BoE’s Term Funding scheme, which was intended to boost affordable loans to families and businesses.
But The Mail on Sunday can reveal that rather than lending the cash to mortgage customers or small firms, as its rivals did, Metro Bank instead invested in so-called mortgage-backed securities.
‘Dead man walking’: Banking insiders believe Metro Bank’s colourful chairman Vernon Hill will lose his job
These are bundles of home loans, packaged up and sold as a single investment.
The deals rose to prominence in the run-up to the financial crisis – only to unravel when many were revealed to be over-priced and based on so-called sub-prime loans to American borrowers unable to pay back their debts.
Mortgage-backed securities have since featured in The Big Short film starring Steve Carell and Christian Bale.
Metro Bank is separately under investigation by regulators for mis-labelling £1 billion of loans in its accounts. The error forced the company to raise £375 million in new capital and caused its price to fall spectacularly. The shares, at £7.52, are more than 60 per cent lower than they were in January before the scandal erupted.
Banking insiders said they expect the Financial Conduct Authority and Prudential Regulation Authority reports to spell the end for Metro Bank’s colourful chairman Vernon Hill when the investigation is concluded. A senior executive at a rival described Hill as a ‘dead man walking’.
The Bank of England’s Term Funding scheme was set up in August 2016 to ensure that cuts to base rate were passed on to families and businesses. The BoE said the funds would also ‘support additional lending to the real economy’. However, policymakers provided no restrictions on how the cash could be used by banks.
A Mail on Sunday analysis found that Hill admitted in 2017 that Metro Bank invested money borrowed from the Term Funding Scheme into securities because ‘we make money’ doing that.
Metro Bank paid the Bank of England £22.7 million in interest in 2018 on its borrowing while making £79.2 million from investing the cash – meaning the bank pocketed £56.5 million. In 2017, Metro’s then finance chief, Michael Brierley, told analysts on a call the money was used to buy ‘gilts’, or Government bonds, and ‘RMBS’, residential mortgage-backed securities, ‘to provide a boost to net interest income’. He told analysts that the securities were rated ‘AAA’ by ratings agencies.
‘We don’t use that money to fund lending,’ he added.
James Daley, founder of campaign group Fairer Finance, said: ‘Metro’s use of the money goes against the principle of what the Bank of England was trying to do. The Term Funding Scheme was certainly not designed to line the pockets of bank shareholders. There were very clear aims and intentions and it would seem Metro Bank abused that.
‘If what they did was not against the letter of the law, it certainly seems to be against the spirit.’
Metro Bank and the Bank of England declined to comment.