Digital-First Banking

Bank Of England Ups Monzo’s Capital Requirements

Monzo Bank Ltd,  the London-based online bank, must now have a capital worth of 13.6 percent of its risk-weighted assets to guard against potential losses.

The Financial Times (FT) reported the new requirements are among the first signs the Bank of England (BoE), the United Kingdom’s (U.K.) central bank, will implement its promise to strengthen capital planning and governance at fast-growing, smaller lenders.

Before the rule change, Monzo was required to have capital worth at 9 percent of its risk-weighted assets as a shield against losses.

FT reported a check of recent regulatory filings revealed the number was increased by more than half. That’s more than more than twice as high as many mainstream banks in the U.K., the newspaper reported.

In May, a Monzo investor noted that the bank needs at least 20 million pounds ($26.3 million) to avoid violating the BoE’s revised regulatory capital requirements.

Regulatory experts told FT the central bank was implementing higher standards among fast-growing, so-called challenger banks, the name given startup digital banks, as a condition of easing restrictions that have limited competition.

Small- and mid-sized banks have objected to the costs, insisting that it makes it a challenge to grow in the U.K.

In July, the Prudential Regulation Authority (PRA), the BoE division that supervises large banks, warned that some new lenders had underestimated the cost required to become an established bank, and called for improved planning, stronger governance and clearer paths to profitability.

“They’re saying, ‘you wanted us to treat you like adults and we’re doing so’,” Monique Melis, global head of compliance and regulatory consulting at Duff & Phelps in New York, told the FT. “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.”

A source close to the regulator told the FT that its recent changes were not targeted at any one bank. Monzo’s annual report, released last week, showed auditors raised some of the same concerns.

In its audit, Ernst & Young  wrote the pace of improvement is not keeping up with the pace of growth in the business and the accompanying risks.

Last month, Monzo CEO TS Anil said the bank,  damaged by the pandemic, is betting new products will help it to survive. He pointed to new services including business and premium accounts as ways Monzo would be able to weather the pandemic and come out solvent.

 

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