The banking industry has arguably seen more changes in the last decade than in the previous four decades. The determination of Margaret Thatcher to inject the banking industry with new blood uncontaminated with over-regulation and the prevalence of the ‘old boys network’ that populated the leadership of British banks up to the 1980s had some positive effects, but also sowed the seed of future crises.
The accession of Malta in the EU in 2004 saw a surge of enthusiasm for the expansion of financial services. The opening of the European market to local financial services operators, including insurance companies and banks, was perceived as an opportunity to create our own version of universal banks – banks that provided all services, from retail to wholesale banking and from investment services to insurance.
I distinctly remember a senior bank leader telling a local bank’s branch managers’ conference that from now on they should forget that they are bankers and see themselves as salespersons. Inflating the balance sheet, earning commission on sales, lending to businesses with international expansion ambitions, and introducing non-traditional banking services like trusts was high on the list of priorities for some of our banks.
Banks competed to open new branches in the cores of our towns and villages, branch staff were given ambitious sales targets for a myriad of banking products that had various risk profiles, and special units became pedlars of ‘new’ services that they hardly understood. Sparkling wine bottles were popped whenever a foreigner walked into a branch with a suitcase full of dollar notes as this helped the banks reach their ambitious deposits targets.
BOV is today dealing with legacy issues that have nothing to do with decisions taken by the present leadership of the bank
Of course, this is only a partial picture of the light regulation phase that European banking passed through more than a decade ago. Many professionals stuck to the virtue of prudence that underpins the formation of any banker worthy of the name.
It is in this context that one has to interpret the big changes that have happened in the last few years in European, and in particular in Maltese banking. My own assessment is that Maltese banks are now stronger than they were before, thanks to the tightening of regulation and a realisation by bank leaders that stability and sustainability of business growth are what matters in the long term for shareholders.
Bank of Valletta’s 2018 results are clear evidence of the big changes that influenced the banking sector in the last decade. BOV is today dealing with legacy issues that have nothing to do with decisions taken by the present leadership of the bank. When the bank introduced trust services more than a decade ago, the full risk implications of promoting trusts, especially in foreign countries, may not have been clearly understood and managed. The same argument applies to other services, including custody services and the opening of accounts for foreign nationals following what is today considered as a superficial due diligence process.
Today, banks supervised by the European Central Bank have to follow much stricter directives on the way they should handle their business. The emphasis on adopting business models that are sustainable and hardwired with effective risk management processes is increasing. The lessons learnt from rescuing various European banks are now applied to all banks in the eurozone.
Banks are building a much thicker buffer of equity capital to protect depositors from unpleasant experiences when a crisis erupts. It is for this reason that BOV did well to plough back to reserves all its available profits in 2018. Holders of bank shares often consider their investment as a kind of deposit account that pays regular interest. This is certainly not the case. However, the fact that quoted businesses occasionally fail to pay a dividend to strengthen their capital base is a positive thing for shareholders in the long term.
Strong capital buffers will continue to be an essential element for every bank that aims to grow its business in an environment of stability and sustainability. It will also be a requirement of regulators as light-touch regulation is now a thing of the past. Banks need to be strong and safe to preserve the trust of their depositors even if other stakeholders may prefer our banks to be more ‘adventurous’.
Retained capital will be put to good use when banks invest more in technology, the recruitment of staff to make the control and risk management function more effective, and the training of employees to give the best service to clients.
Note: The author is a former chairman of BOV.