Stress tests needed for commercial banks (2)

Through the state’s 25 per cent holding in Bank of Valletta, every Maltese citizen is at one go a stakeholder as well as a shareholder. Consequently, we should all be delighted at its impressive showing during this year’s stress tests in Europe, even more stringent than last year’s. And indeed we are.

Yet, the reporting media, while unanimously congratulating BoV on its “Core Tier 1 ratio” (CT1) score of more than double the five per cent “pass mark”, at times have betrayed an insufficient knowledge, and hence appreciation, of its significance: “Regardless of the recent controversy over the Property Fund” is a typical sideline statement. Totally irrelevant.

Financial journalism in Malta leaves much to be desired.

The CT1 ratio relates the bank’s shareholders’ total equity to its balance sheet’s many assets as heavily weighted down in an assumed economic and financial scenario even gloomier than that experienced during the recent “great recession” from which most countries are still struggling to exit. Very similar to the “gearing” we heard so often uttered during the Property Fund debacle, and about which there was (and still is) fundamental disagreement between BoV and the Malta Financial Services Authority.

Funds entrusted to a bank for investment in shares, bonds, trusts and other securities do not feature in the CT1 equation. Unfortunately, most investors I know are hardly aware of this: they merely repeat to themselves “the money I invested with BoV”. Little surprise, therefore, at the anger expressed by the Property Fund investors before they forcibly accepted a 30 per cent “haircut” from their original investment on top of an arid yield over six years.

Not even an apology from BoV for investing over 40 per cent of the funds entrusted to it in schemes not indicated in the prospectus and which turned out to have been “managed” by fraudsters, currently Interpol fugitives. Or, possibly, for “selling” them to the wrong investors. Or, worse, for allegedly permitting “privileged” shareholders to withdraw just before “calamity day” three years ago. On these last two issues we still await the MFSA to oblige us with its findings.

Such an “investment activity” is just one department in BoV’s organisation but without any impact on its stress tests resilience in the face of severe adversity, except perhaps insofar as a lucrative source of income has been allowed to dry up. BoV’s other funds have, more or less, experienced setbacks in recent years from which they have not yet managed to recover. But nowhere near the collapse of the Property Fund. Indeed, a number of these funds have at least the investor’s original outlay guaranteed by the bank itself. Why couldn’t BoV have given the same treatment to the Property Fund holders? Is it because Insight Management objected? I wonder.

It will take years for BoV to regain the confidence of the investing public for its “investment department”. Probably, other banks as well. However, this period can be shortened if BoV were, for instance, to admit its misjudgement in appointing Insight as its advisers on a joint-venture arrangement without proper monitoring, offer an ex-gratia additional payment of €0.25 per share by way of a three-year fixed deposit and restructure its “investment department” with more competent professionals than hitherto, locals not excluded.

Pragmatism before pride. Worth repeating.