The Strength of Maltese Banking

Dr Jonathan Pisani | 18 Apr 2012

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1.   European banks look to Malta as an example of safe banking

Malta banks proved impervious to the 2007 – 2009 global financial crisis, averting the impact of systemic shocks including banking failures during this period.  The resilience demonstrated by the Malta banking sector is in no small part due to the sound regulations of the financial industry and the conventional banking model which local banks adopt.  That is, they have not moved away from acting as financial intermediaries.  In spite of the inherent difficulties associated with the originate-to-hold model, such as the mismatched maturity a date, retaining this system has kept the banking model more self-reliant.  Malta banks need not issue commercial paper to meet the short term liabilities.  They have kept leverage within strict limits, and retained adequate liquidity levels to meet their liabilities as they arise.

2.   Malta financial industry reports increasing growth

Malta has gained prominence over the last decade or so as an international banking centre and in general it has built a strong reputation as a financial services centre of choice in Europe.  The financial services industry accounts for 12% of the island’s gross domestic product (hereafter referred to as ‘GDP’).  The Malta government has expressed continuing commitment to the industry; by its own declaration the financial industry should account to 25% of Malta GDP by 2015.

This success is owed to a number of key components which feature in doing business in Malta.  Malta acceded to the European Union on the 1st May 2004, and adopted the Euro in January 2008.  Malta offers a stable political and legal environment with a highly competitive fiscal regime.  Institutions setting up or moving to Malta can benefit from a highly efficient corporate structure for tax purposes.  The Fiscal regime which boasts a rich history, has been tested and subsequently approved by the European Commission and is fully compliant with EU standards.  Moreover, the islands can offer professionals with qualifications in the fields required for servicing institutions operating in the financial services industry.  The average salaries are one-third to one-half of the EU Level.  The local workforce is fluent in English on account of English being one of Malta’s official languages.  Institutions operating from Malta would consequently benefit from a relatively low cost base when compared to other European centres.

Malta’s development as an international financial services centre is reflected in the range of financial services operating from Malta; including captives, hedge funds, FOREX, and others.  Malta has been recognised on numerous occasions for its performance in the financial sector. The Global Competitiveness Report 2010-2011 issued by the World Economic Forum ranked Malta 13th out of 133 countries for its financial market sophistication. 

3.   Traditional originate-to-hold banking model

As explained in point 1 above, the focus of Malta banks’ business is on acting as financial intermediaries, taking short-term deposits from retail depositors, and lending a fixed portion thereof where liquidity is needed.  In spite of the already mentioned difficulties which this model presents, Malta banks have shunned the adoption of off-balance sheet financing and other ‘innovative’ financial practices to turn long-term illiquid loans into liquid ones.  In practical terms, this means that Malta banks generally enjoy a lifelong relationship with their customers.  They consequently test customers’ credit worthiness thoroughly before providing credit, and also look to obtaining good collateral. 

By Malta banks holding onto all loans which they have originated means that the statutory capital levels adequately reflect the banking practices.  The banking framework is consequently stable, and their growth sustainable.  Malta banks have strong liquidity, with an average ratio of about 48% and the capital adequacy average of 14% to 15%.  Maltese banks at present maintain a Tier 1 capital which is above the minimum threshold of 9% which all EU member states should enforce by June 2012.   

Mr Michael Bonello, the governor of the Central Bank of Malta in 2009 had then expressed that the country’s good fortunes during the global financial crisis could be put down to this model of banking, which he added ‘is what banking is supposed to be about’.

4.   The single regulator

The Malta Financial Services Authority (MFSA) is the single local institution which regulates, monitors, supervises and authorises the local financial services industry. The MFSA is an autonomous public body which reports to Parliament on an annual basis.

Professor Joseph Bannister, who has chaired the MFSA for over ten years, boasts that the regulator takes a hands on approach to carrying out its functions.  Of course the MFSA ensures that the framework of laws and safeguards established by EU and national legislation are implemented and followed.  However, the MFSA also ensures that this legislation remains relevant.  That is, the regulator understands that it owes responsibilities to also service clients.  Therefore, in those areas where the legal framework permits flexibility, the MFSA sees to it to that legal standards are applied reasonably.  The authority takes a risked based approach to application of the rules, analysing them on an ongoing basis against the needs of clients.  Regulations which may from time to time be deemed unnecessary are repealed. 

This stance is not intended to mean that the MSA takes a soft touch approach to regulation.  Rather, by closely supervising all licence holders, the MFSA enjoys a better understanding of the business affairs of licence holders and the adaptations of rules when possible.  

5.   Investing in financially sound assets

The announcement on early 15th September 2008 as markets in Europe woke for trading that Lehman brothers had filed for Chapter 11 bankruptcy in the US brought the full impact of the financial crises to Europe. 

Fortunately for Maltese banks, the amount of toxic debt which they held and the strong capitalisation meant that losses suffered were not significant enough to threaten depositors’ monies.  One of Malta top two prominent banks reported a net profit for 2008 of €40.6m.  This figure accounted for the write off of €12.7m of Lehman Brothers’ debt and also €41m in other securities which it then held.  Its chief executive at the time reported that “It was always our policy to have very high-quality assets which are also liquid’.

The other most prominent bank on the island, went on to report a larger pre-tax profits that year on account of lower exposure to assets affected by the global downturn.  Its chief executive officer, echoing the thoughts of other bank CEOs remarked on the well regulated market in Malta on account of the efforts of the MFSA, government and the central bank.  While the global downturn was bound to affect all global participants, the direct consequences could fortunately be avoided.   

Similar resilience was demonstrated by Malta banks in late 2011 with the onset of the Greek sovereign debt crisis and the announcement by all private banks in EU member states of a voluntary haircut to the tune of 50% of their exposure to Greek debt.  Mr. Josef Bonnici, Malta’s Central Bank Governor, explained that local banks would not be negatively impacted by the 50% voluntary discount on account of their extremely limited exposure to Greek debt.  The Hon. Mr. Tonio Fenech, Malta’s Minister of Finance, The Economy and Investment, has corroborated these claims.  The positive news was also supported by the European Banking Authority, which declared Maltese banks to be in a sound position to even resist the unlikely event of fresh sovereign debt trouble in neighbouring EU countries.

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