Over the last few articles I examined some suggestions by a number of international economists on the causes of, and possible solutions to, the present cycle of financial crises. This time I thought I’d contact the Central Bank of Malta for their input from Malta’s perspective.
The Central Bank’s stance in terms of level of bank capital is that banks should continue improving on their capital buffers to be able to meet for any potential shocks- Piers Allen
When asked about the level of capitalisation of Malta’s banks, the Central Bank responded that “the Central Bank’s stance in terms of level of bank capital, as also reflected in its analysis, is that banks should continue improving on their capital buffers to be able to meet for any potential shocks and particularly in view of the prospective new regulatory capital requirements (Basel III/ CRD IV) which are more onerous in terms of level and quality.”
CRD refers to the European Union’s Capital Requirements Directive, and CRD IV specifically refers to the implementation of the requirements, through the CRD, of Basel III. Basel III itself includes a complex set of requirements to address weaknesses within the banking sector exposed by the crises of the late 2000s, and will be implemented between January 1, 2013 and 2021. Essentially these cover three areas: capital adequacy of the banks (including measures to limit excessive leverage); stress testing of banks against their exposure of potential future crises; and measures against market liquidity risk. CRD IV will be implemented with an EU regulation and an EU Directive (in turn implemented through national laws).
On the subject of bank capitalisation the Central Bank was also happy to confirm that “the capital levels of the banking sector in Malta comfortably exceed the regulatory minima.”
Indeed in 2011 the core capital adequacy ratio of Maltese banks rose to 12.4 per cent, in contrast to the statutory requirement of four per cent. The Bank also explained that the two leading local banks, Bank of Valletta and HSBC, had both passed the banking stress tests as conducted by the Committee of European Banking Supervisors annually (for the sake of testing HSBC was treated as being part of the same entity as its holding company).
In their [Malta] Financial Stability Report 2010 (and also in their 2011 FSR update) the Central Bank flag that credit and concentration risks are elevated; which is to say that the Central Bank is concerned that local Maltese banks have too much exposure to a limited number of commercial borrowers in the real-estate and construction sectors (both of which have been weak over recent years). The Central Bank explained that it “recommended that banks should increase their provisioning levels, improve on their internal ability to accumulate capital, and adopt adequate haircuts on their collateral value.” However “measures by the banking sector are on-going in this respect and the Authorities are also considering the adoption of stricter policy requirements to address these issues.”
An open question is the appropriate size of a nation’s banking sector with regards to the rest of its economy. In the 2010 Financial Stability Report the Central Bank discloses that the total assets of credit institutions in Malta amount to 244.3 per cent of the Maltese GDP. The question would then be whether the Maltese economy could hope to underwrite the savings of account holders if necessary. The Central Bank does not feel the size of bank assets to be a risk stating: “The size of the local banking sector in relation to GDP, in particular those banks having close ties with the domestic market, is considered to be reasonable and to represent an acceptable level of risk to the Maltese economy. It is the Bank’s considered view that the relative size of the banks that are of systemic importance both from a financial stability perspective and also in terms of economic relevance is comparable to that of most other EU countries.”
It is certainly true that Malta’s figure for banking sector assets as a percentage of GDP is not significantly high by the standards of the EU, however considering the EU’s present financial predicament it isn’t entirely clear how reassuring that is.
When asked about the measures they were taking to implement Basel III, the Central Bank explained: “Locally the Central Bank, in close collaboration with the MFSA, is gradually expanding its monitoring activities on the banking sector to keep track of the implementation and the possible impact of Basel III requirements and more importantly the CRD Framework from an EU perspective.” Overall the Central Bank observed that they were “confident that the new regulatory framework is a significant improvement in addressing, on a global level, issues of vulnerability brought to light by the recent crisis.”
The Central Bank also point out that “new CRD Framework will provide a more solid framework since it will also cater for systemic type risks which are macro-prudential in nature and thus it will allow the authorities to be in a better position to take appropriate measures to try to avoid a crisis.”
While all of this is immensely reassuring, and very necessary, it is probably also true that the law of unintended consequences will apply and that the new regulatory regimes being implemented will contain the causes of the next disaster. After all, one argument often advanced is that Basel II, as implemented through the CRD, encouraged the outsourcing of risk measurement to unregulated and privately owned credit rating agencies, whose miscalculation of housing and sovereign did so much to cause the present mess. So fingers crossed then!
Mr Allen has worked internationally in the technology sector, earning his first masters qualification in engineering from the University of Durham. For his second masters (in business administration, again from Durham) he researched the Maltese financial sector.