National Bank was solvent in 1973

Christian Peregin’s story, ‘Historian sees shades of grey in banking saga’ (June 17) is based on the interview John Consiglio was asked to give during Dissett (TVM) in which I appeared with Alfred Mifsud, who tried to defend the Central Bank’s decision not to lend, as it was legally bound to do on the basis that it felt that the National Bank was insolvent at the time.

Although I tried to explain the facts relating to the bank’s solvency, as witnessed by all, I was not easily allowed to make the necessary points.

I have therefore decided to pen them here in an attempt to clarify what is otherwise a misleading representation of the facts by those who choose for reasons of their own to defend the takeover.

To start with, the Central Bank, contrary to what some who defend the forceful takeover like to imply, did have the obligation to act as lender of last resort. This was not some loose agreement that might or might not have been respected. This obligation arises from the Central Bank of Malta Act of 1967.

Let me quote from the statute of the Central Bank of Malta that specifically spells out this obligation:

Fil-qadi ta’ dan l-obbligu statutorju, il-Bank jikkontribwixxi wkoll għall-istabbiltà finanzjarja fiz-zona. Il-Bank Ċentrali ta’ Malta hu responsabbli wkoll biex jipprovdi finanzjament lis-settur bankarju permezz tal-funzjoni tiegħu bħala lender of last resort.

Dan is-self normalment jingħata f’ċirkostanzi eċċezzjonali meta jinħass li l-istabbiltà tas-sistema finanzjarja tkun mhedda.

So anyone who implies that this was not the case is wilfully misleading the public and distorting the truth. This obligation by the Central Bank was not optional but clearly laid down in black and white.

Let me now turn to the accounts.

Once the government had in effect taken over the bank, the auditors were replaced and, based on the information supplied to them from the Central Bank itself, the following pivotal adjustments to the accounts were made:

First of all, long-term securities held by the bank in both local and foreign government stocks were sold prematurely to provide the National Bank with immediate liquidity. This early encashment of these assets led to a loss of Lm629,000 which in turn were depleted from the balance sheet of the National Bank shareholders.

The second adjustment, which was fundamental to the changes in the balance sheet, was an increase of the provisions on bad and doubtful debts to 300 per cent of its previous value.

As pointed out during Dissett, the provisions as at December 1972 stood at Lm2 million. After the government took over these were increased to Lm6 million on the assumption that local business would not be able to repay the loans given to them by the National Bank.

Bear in mind that until then, most loans were being repaid and there was no alarm that businesses in Malta were failing. Although there is little more than a two-page report to back this decision, the assumption was made on the hypothesis that property values in Malta had fallen by 36.6 per cent and as a result businesses that had until then always been able to service their loans would be unable to continue to do so.

While one would quickly argue that such an assumption should never have been made, today, with the benefit of hindsight, we can see exactly how untrue it was. On review, BoV confirmed that 80 per cent of the provisions were collected and that in fact these businesses had repaid as contemplated.

In so doing, BoV itself therefore confirmed the position held by the NBM that the provision, which stood at Lm2 million, was sufficient to cover any eventual shortfall.

Thirdly, although deemed to have made a loss in 1973, a tax on the bank’s operation of Lm216,000 was paid on its operating profits. Not only does this break the law; it also goes against all common sense.

Another adjustment made was a subsequent devaluation by 40 per cent of all property assets put down at cost and held by the NBM. By doing so, the government further distorted the correct value of the properties and as a result acted maliciously to the shareholders’ detriment.

One must therefore look at the facts to see whether or not the bank was solvent at the time of the run. Had these adjustments not been made, it would be clear that the bank was both liquid and solvent.

After the run and the Act of Parliament, it is clear that they were made to make the bank appear insolvent so as to justify the takeover and not because they had any plausible reasons for doing so.