Anthony Curmi’s article ‘National Bank and fiscal surplus’ (May 17) is a repetition of misinformation that deserves our reply as international bank resolution experts.
The simple facts, based on clear evidence and sound regulatory practices, are the following.
The National Bank of Malta (NBM) failed due to mismanagement. The principal shareholders and managers of NBM had pursued a strategy of high-risk property-based lending with liberal underwriting standards and inadequate risk controls. Favorable profits were reported and dividends paid but potential loan losses had not been recognised or provided for.
The NBM was liquidity insolvent in December 1973. It was unable to continuing paying its obligations as they came due. The bank was equity insolvent. The values of NBM’s non-performing loans were so impaired that shareholder equity was wiped out; therefore, the shares of NBM had no value.
An audit performed by Deloitte & Co at year-end 1973 affirmed these findings. Also, at the time when the shareholders were asked to cede their shares in favour of the government, the proof that their shares in the bank no longer had commercial value is found in the decision of the First Hall of the Civil Court in October 2014 and later confirmed by the Constitutional Court without reservations on this issue.
There were no credible plans from shareholders. The board of directors and primary shareholders of NBM were aware of the bank’s financial difficulties at least a year earlier, yet they offered no realistic plans for recapitalising the bank and restoring it to a safe, sound condition. The minutes of the NBM meetings in 1972 regarding the forthcoming crisis were filed in court.
The government’s action saved depositors and the Malta economy. No one – neither outside investors nor the primary owners of NBM – was willing or able to save the bank. The government intervention in December 1973 was both timely and appropriate, and indeed was the only viable option.
The actions of the government, including Lm3 million new capital and changing management, effectively rescued the savings and fortunes of thousands of Maltese families and businesses. At the time, Malta had no deposit insurance scheme in place, and was not yet in the euro zone. Therefore, without government intervention, NBM failure would have caused a loss of deposits by a large number of Maltese families and businesses, and the potential financial chaos could have triggered an adverse impact on the economy.
The government intervention in December 1973 was both timely and appropriate, and indeed was the only viable option
Based on these facts, any compensation would be a reward for failure and an unfair blow to the Maltese taxpayers.
Curmi has suggested a ‘settlement’ whereby shares of BOV held by the government are simply transferred to the former NBM shareholders. Does he believe that this will not affect the government surplus? It makes no difference whether compensation is in cash or shares of BOV.
Any compensation takes money out of the pockets of citizens of Malta, and the government will be forced to increase taxes or reduce expenditures to offset the lost revenue.
History, recent and over several decades, provides numerous examples of bank failures where a government stepped in to save depositors and national financial systems, but in all instances the shareholders received nothing. In the failures of Barings Bank (banker to the Royal Family), Northern Rock, Swedish banks, and hundreds of banks in the US including even the largest ones like Washington Mutual, shareholders were wiped out. They received no compensation.
In Italy, in December 2015, when three banks failed (Banca Etruria, Cassa di Risparmio di Ferrara, and Banca delle Marche and CarriChieti), a rescue package was financed by three large banks, but again shareholders received nothing.
Recent bail-in legislation in the European Union is further evidence that the Maltese government acted appropriately when it intervened in December 1973 to protect depositors and the Maltese banking system. The current EU bail-in rules are designed to shield taxpayers from having to bail out troubled lenders.
The rules ensure that creditors and shareholders of failing and mismanaged banks cover losses before depositors and the public purse.
If NBM shareholders – zero value of shares – are compensated for their failures, Malta may be seen in the EU as a country that disregards international standards for treatment of bank shareholders and the EU bail-in principle. The compensation will also create a dangerous precedent in the country in the event of future bank failures.
The amount of compensation calculated by Curmi – €426 million – by using an unrealistic and absurd methodology, is roughly five per cent of Malta’s GDP and 40 per cent of total government revenue. The bulk of this amount will go to those responsible for NBM’s failure.
No amount of mathematical gymnastics can change the fact that NBM failed and its shares were worth nothing. So, any compensation to NBM shareholders is unjustified.
Curmi makes reference to “foreign experts” suggesting that non-Maltese experts are less qualified to judge if a Maltese bank has failed, but nationality has no relevance to analyses of failed banks. We are independent and have many years of experience in bank failures worldwide. On the contrary, as Curmi admitted in court, he has no experience in supervising banks and zero experience in closing failed banks.
The court has decided to appoint two independent experts to review the case and advise it. The Attorney General and the plaintiff have both presented a list of experts to be considered for the case. The court has decided to take one expert from each list. Therefore, it is incorrect what was reported by Curmi that the Attorney General is delaying the process.
The factual evidence is abundant and clear – NBM had failed and its shares had no financial value. Therefore, the shareholders deserve no compensation. Government intervention was necessary and appropriate to protect the depositors and the Maltese economy.
Neither fiscal surplus nor the subsequent success of Bank of Valletta is a justification for rewarding the owners and managers of the failed National Bank of Malta.
Piero Ugolini is a former assistant director at the International Monetary Fund and senior financial sector consultant, Richard Nun is a former deputy director Texas Banking/Finance Commission, and Larry Chilton is a contributor.