Banks managing reputational risk
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Banks managing reputational risk

Banking thrives on trust that is so hard to cultivate and so easy to lose. The sector in Malta is made up of three major banks and a few smaller ones that serve mainly the local community and some that do business exclusively in other markets. However, when one bank is affected by negative publicity, the whole sector suffers.

When the Malta Financial Services Authority stopped the operations of Satabank, it must have had good reason to do so even if, so far, details on why the regulator acted this way remain unknown. The bank’s clients, including some local businesses, argue they had opted for Satabank because they found that other local banks were not satisfying their business needs, including the opening of accounts, with as little hassle as possible. They now want the government to act and, presumably, put pressure on other banks to allow them to transfer their banking relationships from Satabank.

Banks are just like other businesses that exist to make money by taking risks they believe they can manage. One of the most challenging issues banks have to manage is reputational risk. Many are baffled by the phenomenon that seems to be affecting most banks in Malta and, indeed, in all the Western world, that adopt a lengthy and intrusive process before they open an account for a potential client. The reality is that banks do not turn down business that could be potentially profitable without a sensible reason.

The sensible reason is that once a bank decides to cut corners and discard the stringent due diligence process that regulators impose before and during a relationship with a client, it risks heavy financial penalties and, even more critical, loss of trust in the international banking community. This is a risk that no professional banker is prepared to discard lightly. Major banks, like ING and Danske Bank, are still facing a substantial crisis because they acted imprudently when conducting the due diligence of some of their clients who were eventually accused of money laundering.

The Malta Bankers Association is right in confirming its commitment to support the local economy while insisting that its members are free to determine which clients to take on or not. Clients should decide what banks to entrust with their money after they examine the robustness of the corporate governance of their targeted banks and the way they manage risks.

When clients make a wrong choice merely as they believe that a particular bank is more user-friendly because it dispenses with a stringent due diligence process prescribed by regulators they cannot blame the banking sector for their short-sightedness. Still, it is the whole local banking community that suffers when small banks adopt a high-risk appetite that endangers their own and other banks’ reputation.

Regulators must act fast when they suspect irregular or even inappropriate practices by local banks. Unfortunately, this was not the way the financial services watchdog acted in the case of Pilatus Bank. The duty of care towards banks’ clients implies that sanctions against financial institutions found discarding regulations should be taken speedily.

Malta’s reputation as a respectable financial services sector is under constant pressure. Well-managed banks should not be made to suffer because of small banks that are less than prudent in their operations.

This is a Times of Malta print editorial

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