Accounts easier for companies with substance
Companies which have economic substance in Malta would find it much easier to open accounts, the chairman of the Malta Bankers’ Association Mario Mallia said, responding to criticism that companies were finding it too hard to open accounts.
“Where there is a rationale for a corporate to open an account in Malta, then it makes it all the easier for banks to consider. Obviously, when you have a client that has no link with Malta, then we have to ask questions. What is economic substance? Trading with Maltese companies, trading with foreign companies out of Malta, having a back-office operation here, having a headquarters in Malta – and not just a brass plate but one with people working in it…” he explained.
“What we are after is a relationship with a client, not a one-off transaction.”
He said that commercial banks had to fit new clients into their risk appetite and that those who were licensed by Maltese regulators – such as the Malta Financial Services Authority or the Malta Gaming Authority – would also be more likely to find a bank willing to take on their business.
Banks are also accused of being xenophobic about companies from particular countries but Mr Mallia explained that this was absolutely false, as judgments are not based on race – or any other discriminatory criterion – but on the EU’s international classification of jurisdictions.
“Countries range from low risk such as EU member states, the US, Australia, Canada, Japan – ‘EU equivalents’ as we call them – all the way to ‘no go’ jurisdictions – like North Korea,” he said.
“There is no discrimination as this established list is based purely on risk, reflecting the stability and level of development of the jurisdiction, its justice system, and the stability of its financial markets.”
Although the list is just a recommendation, he stressed that the Maltese commercial banks had long ago taken a decision to take a wiser, long-term view rather than to take on business that might turn out to be toxic.
“The directions are there for guidance and you are not prohibited from taking on high-risk business – but then you have to shoulder the responsibility, not only as a bank but also as a country. All it would take is one scandal and it would leave us all high and dry…
“When the Cyprus banking crisis broke in 2013, there was consensus between the commercial banks, the Malta Bankers’ Association and the Central Bank of Malta that we would not be taking business coming out of Cyprus unless it fitted within our local risk appetite,” he reminded.
“Banks have to keep the local financial sector stable and clean: we cannot afford to allow ourselves to be exploited by criminals.”
The overwhelming due diligence required by regulators is one of the reasons that correspondent banks have terminated services to smaller banks where the cost of providing the service and the risk of getting it wrong is rarely justified by the transaction volumes.
“It is not a problem for sterling transactions as the regulation is not as onerous, but it is with the US, especially for jurisdictions where there is gaming. But this is where that all-important word – relationship – cannot be stressed too much. Even small banks need to show the correspondent banks that they are serious about fighting financial crime and money laundering, as they will treat them accordingly. It is important to invest in your track record…
“And the jurisdiction needs to showcase the levels of due diligence that is done by the Malta Gaming Authority as this will also put their minds at rest.”
The MBA is meeting the Finance Ministry and the Institute of Financial Services Practitioners to discuss these concerns, and he said that there was understanding.
“No one would turn away business capriciously but the dialogue is getting results, although there is no solution as yet,” he said.
The situation for bankers has become ever harder since the financial crisis, squeezed between ever-increasing compliance and low to negative interest rates.
The long delays in opening accounts were also to some extent due to the extra due diligence mandated by regulators, which was introduced before the banks had had time to boost their resources.
But Mr Mallia reassured that local banks had made considerable investment to catch up.
“The Maltese economy grew and internationalised at a very rapid pace and banks had to catch up on their resources to fight international financial crime.
“I am aware that investment in both human resources and in IT is currently being made by local banks as well as by other service providers – that banks might outsource to – in order to strengthen our anti-financial crime systems,” he reassured.
With regards to interest rates, the situation is out of the hands of banks – and Mr Mallia stressed that the MBA anticipates that low to negative interest rates would continue for the long term, especially in the case of the euro.
“There is some movement in the US where the Fed recently gave signals that the rates might be going up. But with the euro, we do not see much movement over the medium term.
“The longer this lasts, the harder it is for banks because the core income of local commercial banks is the interest margin and obviously when the interest rate is low, margins naturally get squeezed.
“That is one aspect of the problem. The other is the negative rates being charged on liquidity parked at the European Central Bank. Obviously, the aim there is to encourage banks to divert funds into lending and thereby the real economy. But this is taking its toll on banks because the economy in Malta is performing so strongly that huge volumes of liquidity are being generated, outstripping the demand for credit.
“That liquidity has to be deployed somewhere and in accordance with the risk appetite of the individual banks. Obviously if it is deployed in high quality assets then you get either zero or negative interest rates, which is another burden on profitability on banks,” he lamented.