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Financial services under scrutiny

Regulators and rating agencies have once again put a spotlight on Malta’s financial services industry. They took concrete action to show their concern about the risks this industry faces. Trust is the cornerstone of this industry and while it takes decades to build a good reputation a few well-publicised adverse incidents can destroy this trust in only a few months.

Standard & Poor’s has highlighted reputational and operations risk for Malta’s banking industry, raising the risk score by two notches in its 10-point scale. S&P also downgraded Bank of Valletta’s long-term rating to BBB with a negative outlook. This downgrade was mainly driven by the bank’s litigation on three trusts it had established for Italian shipping families in 2009.

S&P also referred to the money laundering allegations against Pilatus Bank and its “perception of poor transparency at some banks” on the island. Earlier, the European Banking Authority chastised the FIAU, the government’s anti-money laundering watchdog, for its failure to impose effective sanctions against Pilatus Bank and for breaching EU money laundering directives in failing to act.

The Central Bank of Malta insists that “the local banking sector remains sound, resilient, profitable and enjoys ample liquidity”. The Bank of Valletta chairman has confirmed that the bank is continuing with its process of de-risking its business model that should see its safety enhanced.

S&P, while arguing that Malta’s banking reputation “could be at risk”, rightly commented that Bank of Valletta’s franchise did not suffer as a result of litigation in Italy. BoV CEO Mario Mallia said the bank was actually downgraded on the basis of 'industry risk',that means the agency's perception that the risk of the entire local banking sector has increased. Litigation risk influenced the agency's attribution of a negative outlook for the bank, but not its credit rating.

Corrective action needs to be taken to ensure that Malta’s financial services industry does not suffer any further deterioration in its reputation.

Bank of Valletta will probably have to continue strengthening its capital base to ensure it has a strong enough buffer to absorb financial shocks as a result of adverse developments. This exercise will be a tough nut to crack as shareholders’ disappointment with not earning any dividends in 2018 may discourage them from buying new shares.

But institutional investors may see a good opportunity to buy the bank’s bonds that can be converted to equity if they are rightly priced to reflect the risk element.

Regulators must be allowed to do what is right for the industry rather than worry about what the political administration would like to see happening in the sector. It is time for the Malta Financial Services Authority to be more selective in the licences it grants to operators and weed out any licence-holders not adhering to strict regulatory guidelines.

Politicians must be careful in what they say about the way that banks should conduct their operations. Some years ago, the Prime Minister had criticised local banks for being too conservative in their lending policies. While this could be justified as a fair comment if made by a disappointed bank client, coming from the head of government such an observation could easily be equated with moral pressure.

The media, too, must be as objective as possible in its evaluation of incidents involving banks. Of course, they have to speak out when they have reasonable indications of abuse of authority by bank leaders and/or regulators. However, they should stick to facts and always seek the best-placed sources, which means the authorities need to be more accessible, within the limits of the law.

This is a Times of Malta print editorial

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