Challenger banks lack adequate risk monitoring and forbearance practices, and are “overly-optimistic” about the impact of an economic shock, according to a confidential review of the fast-growing sector by the Bank of England (BoE).
The intervention, unveiled this week in a letter to Prudential Regulation Authority (PRA) chief executive Sam Woods, could temper investor appetite toward lenders operating in supposedly riskier segments of the UK credit market.
The BoE acknowledged these while small relative to the major UK banks, these so-called “fast-growing firms” play an important role in lending to SMEs and buy-to-let investors, some of whom have been abandoned or neglected by larger banks in the decade since the financial crisis.
None of the 20 deposit-taking banks included in the review were named, though the stock market is home to several, including Paragon Bank (PAG), CYBG (CYBG) and One Savings Bank (OSB) and Charter Court Financial (CCFS), which are in the process of merging.
A stress-test of the non-systemic lenders provided the BoE with “reassurance about the overall resilience of the sector as a whole”, though risk management practices were found to be mixed, and underwriting standards at some challenger banks were guilty of “weak financial analysis, limited evidence of challenge and high levels of lending outside of policy”.
Corporate governance and compliance standards in the sector were thrown into sharper relief in recent months by Metro Bank (MTRO), which was forced into a highly-dilutive rights issue to boost its capital levels, after the PRA found the lender had miscalculated the risk-weighting of certain property loans.
