The resilience of Malta's banking sector is being scrutinised by Brussels to establish whether its two major banks, HSBC and Bank of Valletta, are strong enough to resist a sudden financial storm or economic crisis.
A list of 91 banks undergoing "stress tests" by the EU's Committee of European Banking Supervisors (CEBS), includes BOV and HSBC Malta together with other European major banks in all 27 member states.
BOV chairman Roderick Chal-mers told The Times on Thursday the bank was confident it would pass the EU stress test very comfortably.
Sources close to CEBS said BOV had been selected directly to undergo this scrutiny while HSBC Malta was being tested under the bigger umbrella of HSBC Holdings plc. "Subsidiaries and branches of EU cross-border banking groups, like HSBC, have been included in the exercise as a part of the test of the group as a whole," the sources said.
"The results of the stress test of the two major Maltese banks, both on an aggregated and on a bank by bank basis, should be published in two weeks' time," the sources added.
The objective of the exercise, a first for Maltese banks, is to assess the overall resilience of the EU banking sector and the banks' ability to absorb further possible shocks on credit and market risks and to assess the current dependence on public support measures.
The exercise is being conducted using commonly agreed macro-economic scenarios (baseline and adverse) for 2010 and 2011, developed in close cooperation with the European Central Bank and the European Commission.
These include a set of key macro-economic variables (like the evolution of GDP, unemployment and the consumer price index), differentiated for EU member states, the rest of the European Economic Area countries and the US.
The exercise envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk premiums linked to deterioration in EU government bond markets.
"On aggregate, the adverse scenario assumes a three percentage point deviation of GDP for the EU compared to the European Commission's forecasts over the two-year time horizon. The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010," CEBS explained.
Until now, Maltese banks are perceived to be among the most robust in the EU, mainly due to their traditional conservative approach towards lending.
Despite the banking crisis of two years ago, which triggered a global financial and economic crisis, Malta was one of the few member states that did not have to intervene directly to bail out any of its banks.
Other member states, such as the UK, France and Germany, had to fork out billions of euros of taxpayers' money to save their main banks from collapsing.
This has resulted in ballooning deficits and public debts with no other option but to announce major austerity measures to get their national accounts back into the black.
CEBS, which published the list of the 91 banks included in the exercise, said, collectively, the banks represented 65 per cent of the EU's banking sector. Within each member state, they represent at least 50 per cent of the banking sector.
The results of the tests are meant to reassure the international financial markets on the soundness of the institutions following fears that the balance sheets of some were burdened by bonds from Greece, Spain and Portugal.
These bonds have lost significant value throughout the debt crisis.