BoE hit Monzo with tougher capital demands during fundraising

The Bank of England hiked Monzo’s capital requirements while it was attempting to raise money this year, in a sign of the regulator’s willingness to put the brakes on expansion at fast-growing lenders.

The changes were one of the first concrete signs of the central bank’s following through on a recent pledge to strengthen capital planning and governance at smaller lenders.

As a result, Monzo’s capital requirements were temporarily more than twice as high as many mainstream UK banks. 

The intervention affected Monzo’s most recent fundraising, which was completed in June at a significant discount to its previous valuation. Documents circulated by an existing Monzo investor in May noted that the bank “needs at least £20m to avoid breaching regulatory capital requirements”.

Regulatory experts said the central bank was enforcing higher standards among fast-growing banks as a condition of easing restrictions that have held back competition in the UK market.

Starling Bank, Monzo’s closest start-up rival, is expected to provide an update on its capital requirements alongside its annual report this month.

Monzo was previously required to have capital worth around 9 per cent of its risk-weighted assets to protect against potential losses. Recent regulatory filings showed that, in May, that number was increased to 13.65 per cent, plus a fixed amount of £21m — equivalent to a further 10 per cent of its risk weighted assets at the end of its last financial year.

The total as a proportion of assets is likely to fall over the course of this year as Monzo’s balance sheet is growing. However, even the base level excluding the additional £21m is higher than more established challenger banks, such as Metro Bank, and systemically important lenders such as NatWest and Lloyds.

Small and midsized banks have long argued that high regulatory costs make it particularly difficult to grow in Britain. The Prudential Regulation Authority, the arm of the BoE that supervises large banks, said last month that it would consider new ways to “create a smoother path” for growing banks.

At the same time, however, it warned that some new lenders had “underestimated the development required to become a successful, established bank”, and called for more effective planning, stronger governance and clearer paths to profitability. 

Monique Melis, global head of compliance and regulatory consulting at Duff & Phelps, said: “They’re saying, ‘you wanted us to treat you like adults and we’re doing so. We will flex requirements a little bit to make it a survivable environment for mid to small banks. However, if we do this you’d better behave as grown-ups too and listen to everything we say both in terms of conduct and prudential regulation.’”

The BoE has been concerned by standards in challenger banks for more than a year, after stress tests showed many new lenders cutting corners in an aggressive pursuit of growth. 

David Strachan, a former regulator who now leads Deloitte’s Centre for Regulatory Strategy, said the PRA wanted to avoid “getting to a situation where there is a rapid growth . . . but then a bank has to stop very sharply and suddenly and invest to make sure control structures and governance catch up”.

One person close to the regulator stressed that its recent comments were not targeted at a single bank, but Monzo’s latest annual report, released last week, showed auditors raised concerns by some of the same issues.

EY noted that “the pace of improvement [in governance and controls] is not keeping up with the pace of growth in the business and the accompanying risks”.

The PRA adjusts so-called Pillar 2 capital requirements to take account of “firm-specific risks”, ranging from loose credit standards to pension obligations. It has previously implemented big rises at companies such as the Co-operative Bank after it came close to collapse in 2017.

Monzo said: “All banks, including Monzo, must ensure they plan their capital requirements effectively and hold sufficient capital to meet their current and future needs. Monzo continually reviews its capital requirements as part of the Internal Capital Adequacy Assessment Process”. The PRA declined to comment.