Bank of Valletta is selling some of its holdings of government bonds and is even “drastically” reducing its lending to state-owned organisations, according to sources.
And it may have to sell even more Malta Government Stocks if the head of the Single Resolution Board Elke Koenig gets her way and sets a limit on the amount of sovereign debt that eurozone banks can hold.
Banks of systemic importance like BOV are now under the direct supervision of the ECB, which has pointed out concentration risks in balance sheets that were perceived to be too high.
“Concentration risk is distinct from credit risk. Put simply, concentration risk is the risk of ‘putting too many eggs in one basket’,” the sources said.
“BOV is effectively reducing its risk to the public sector by selling some of its bond holdings (even as part of the Quantitative Easing programme promoted by the ECB) – the major part of its exposure – and reducing drastically its lending to state-owned organisations.”
BOV is spreading its risk by buying other assets, including sovereign debt of other reputable EU member states. However, this diversification comes at a cost: “BOV will be a safer but a less profitable bank in future because its risk appetite has to take into consideration the greater regulatory emphasis on de-risking the business,” the source said.
BOV is spreading its risk by buying other assets, including sovereign debt of other reputable EU member states
“There are very few good investment opportunities in the present low interest rate scenario. The bank would not speculate by going in for low quality assets even if the returns were lower. Profitability may suffer, but the long term interest of depositors as well as shareholders is to de-risk its business.”
According to the European Banking Authority’s stress tests, in 2014, domestic banks held 92 per cent of all sovereign debt, the highest in the eurozone, and well above the eurozone average of 57 per cent.
However, the Central Bank of Malta Quarterly Review gives a very different picture, putting the amount at 43 per cent held by resident banks in the third quarter of 2015.
The European Commission, in a November 2015 report, gave an international context, saying that the US average was 45 per cent, and adding that the high figures for countries like Malta “reflect factors like the size of the existing stock of national public debt and its attractiveness to non-national banks”.
The Finance Ministry, when questioned, analysed it from another point of view, looking at only core domestic banks, i.e. those banks that primarily operate to serve the domestic economy.
The percentage of local banks’ total assets invested in MGS has been consistently decreasing over the last five years. In 2011, the relative percentage was 11.1 per cent but by the end of 2015, this had fallen to 8.8 per cent.
“The relative 2015 figure for the eurozone is not yet available but for 2014 the average was 8.4 per cent,” the ministry spokesman said.
“Our banks were somewhat above the eurozone average but not necessarily the highest. Obviously individual banks had different readings with the smallest having 0.5 per cent [in MGS] and the highest 13.4 per cent.”
The implications of domestic banks reducing their MGS uptake are not limited to the banks’ treasury operations, of course. It also means that the government will need to find enough retail investors to take up that demand.
The Finance Ministry spokesman said that the timing of this change was auspicious.
The percentage of local banks’ total assets invested in MGS has been consistently decreasing over the last five years
“We are confident that retail investors can support government debt issues even if the banking sector, for regulatory reasons, has to reduce its exposure. This was amply demonstrated in the last MGS issue where the retail sector fully subscribed the issue even in its over-allotment dimension and the auction process for the wholesale market had to be cancelled.
“Furthermore with government deficit reducing and approaching balanced Budget status over the medium term, the need for new MGS financing beyond rollover of maturing debt will be limited.”
Of course, the MGS will not be limited to retail investors, and just as the domestic banks will be able to buy sovereign debt from other member states, their banks will be able to buy Malta’s. Is this is good thing – and would it be as easy as replacing local banks with foreign ones?
“There is no prohibition for other member states actors to participate in our capital market including MGS. Obviously, given the size of our market and the tendency for domestic investors to ‘buy and hold’ – thus offering limited liquidity on the secondary trading markets – few non-Maltese actors have so far participated.
“Given the highly liquid state of the Maltese financial sector the government would continue to prefer its issues being subscribed by ‘buy and hold’ investors,” the spokesman said.
HSBC Bank Malta politely deflected the questions, saying: “HSBC is committed to work with the European and local regulatory authorities to ensure that Malta continues to benefit from a strong and well-regulated financial sector.”
BOV also declined to comment.
Interestingly enough, the Central Bank of Malta also deflected questions, saying: “You may wish to approach the Malta Financial Services Authority since the Single Resolution Board falls within their responsibility”.