It is a pity that an article in a foreign newspaper questioning the substainability of the Maltese banking industry grabs immediate media attention, while official statistics that give witness to the strength of the local sector, and which are published on a regular basis, are largely ignored.
The Maltese banking system is most solvent in the EU
The article in question attributes the breakdown of the Cypriot banking system to its size, when related to the economy.
It then comments that “tiny Malta’s banking sector is even bigger”, with all the implications that such a statement entails.
The size of the banking sector to the economy matters because banks and the economy are so closely intertwined. The collapse of one can very quickly cause the collapse of the other.
The larger the banking sector, the more difficult it will be to ‘bail out’ the banks by injecting fresh capital and liquidity into the system.
This was the case in Cyprus, where banks could not be ‘bailed out’, so they were ‘bailed in’ instead.
This means the banks were not stabilised solely through the injection of fresh funds but also by the creditors of the banks (shareholders, bondholders and depositors) being compelled to waive part or all of their claims.
So is the banking sector in Malta, like that of Cyprus, ‘too big to fail’? The article in question implies that it is.
There is a superficial resemblance, since both countries have a banking sector that (measured in terms of total assets) amounts to around eight times GDP.
But even a cursory look at the Financial Stability Report published annually by the Central Bank of Malta would be enough to show that the Maltese situation is radically different.
The report distinguishes between “core domestic banks” and the others, which are classified as “non-core domestic” and “international banks”.
Core domestic banks are defined as “the main financial intermediaries providing banking services to residents in Malta and which have a significant link to the domestic economy”.
These are the banks that are embedded in the local economy, which finance Maltese industry and that provide Maltese households with savings and investment opportunities. These banks make up the financial engine that drives the economy.
It is important to point out that the size of this core sector is only around two times GDP, which is about 50 per cent of the EU average.
It is therefore clear that the size of the core, Maltese sector is very manageable and can in no way be seen as being ‘too big to fail’.
The remainder of the sector – which amounts to six times GDP – is made up of “non-core domestic” and “international” banks.
The majority of these banks are subsidiaries of EU banks offering a range of services that include trade finance, investment banking and group funding operations.
The business they carry out with residents is very limited; their contribution to the Maltese economy is marginal because the bulk of their business is situated overseas.
Unlike the core domestic banks, in no way can they be considered to be ‘intertwined’ with the Maltese economy.
It is therefore completely misleading to put Malta and Cyprus in the same bucket. The two models are completely different.
The Cypriot domestic banking sector is relatively huge, and is financed primarily through offshore (Russian) funds. The Maltese domestic banking sector is relatively much smaller and is financed primarily by Maltese households and businesses.
The main cause of the downfall of the Cypriot system was its exposure to Greece. When the Greek sovereign effectively defaulted, the assets of Cypriot banks lost most of their value overnight.
In contrast, most of the exposure of the core banks here is to the Government of Malta and to local households, SMEs and corporates.
Malta has been one of a handful of EU countries that have not had to resort to any bank bailout measures in the wake of the great financial crisis of 2008-9, which has forced so many other countries to open up their State coffers.
Statistics published by the European Central Bank consistently place the Maltese banking system as the most solvent in the entire European Union.
The World Economic Forum, in its Global Competitiveness report for 2011-12, placed the Maltese banking system as the world’s 12th soundest banking system.
It is important that we base our opinions on authoritative and official data, which abounds and is readily available online, rather than on the musings of commentators who may not be sufficiently qualified or well-informed to do justice to the subject.
Mario Mallia is chief officer risk at Bank of Valletta.