Maltese bank system in ‘good health’ amid ‘challenges’, says IMF

Central Bank of Malta in the Maltese capital; Valletta. (source: Wikimedia Commons/Frank Vincentz)

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Key metrics suggest that the banking system of Malta is in good health, despite existing challenges, according to the Financial System Stability Assessment Report published by the International Monetary Fund (IMF). At the same time, the report calls for ‘urgent action’ in bank supervision as well as a ‘multi-prong approach’ for addressing anti-money laundering (AML) weaknesses.

The IMF report summarises the findings of its assessment of Malta’s financial sector known as the Financial Sector Assessment Program (FSAP), according to a press statement issued by the Central Bank of Malta (CBM).

The IMF report says that the local financial sector is large as compared to the island’s economy, holding strong connections with the “rest of the world”. The banking system is thought to be in “good health”, with current challenges, the report adds.

“Banks’ total capital adequacy ratio is high (21.2% of risk-weighted assets (RWA) in 2017; Tier 1 Capital ratio at 19%), and liquidity is ample,” the CBM cites the IMF report.

The IMF says the local banking sector “remains resilient under a severe scenario”, saying that weaknesses are limited to few small banks only. “The system is sufficiently capitalised to absorb losses in the event of a severe macroeconomic shock, but risky exposures would lead to potential losses at a few small banks,” the IMF report says according to the CBM press release.

The IMF calls for continued enhancements in the macroprudential framework. Beyond the recent strengthening of systemic risk monitoring, the IMF further raises attention on enhancing the legal framework, closing data gaps and strengthening nonbank risk assessment. In its report, the IMF welcomes the planned introduction of borrower-based measures to address the build-up of vulnerabilities in the housing and household sector.

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‘Urgent action’ needed in bank supervision and AML

The IMF report outlines suggestions for the Malta Financial Services Authority (MFSA) to preserve efficiency. The report says that providing adequate resources is vital in maintaining the effectiveness and operational independence of the MFSA. At the same time, the report says that shortcomings in bank supervision system should be dealt with urgency.

According to the IMF, the MFSA “should take timelier supervisory actions, increase the frequency of on-site inspections, make more use of monetary fines as part of the sanctioning regime, and ensure supervisory action is not delayed through judicial appeal,” the CBM press release reports.

The IMF calls for further actions for supporting the use of early intervention and resolution powers, as well as addressing weaknesses in the bank liquidation and insolvency framework. “Containing financial integrity risks is critical to financial stability,” the report says according to the press release.

“A multi-prong approach is needed to address anti-money laundering and combating the financing of terrorism (AML/CFT) deficiencies. Enhancing the AML/CFT system is required to protect the financial sector and the broader economy from the ML/TF threats,” the IMF report says, cited by the CBM.

Officials welcome the report

“The Maltese banking sector was found to be well capitalised, liquid and operating with healthy profitability levels. The banking system was also found to be resilient under rigorous stress scenarios, with vulnerabilities limited to a few small banks under very severe stressed conditions,” says Dr Mario Vella, the Governor of the Central Bank of Malta.

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“With respect to the recommendations made by the IMF, the combined initiatives taken by the Maltese Authorities, some of which are already underway, should strengthen further the resilience of the country’s financial system. Within a broader perspective, these recommendations will strengthen further Malta’s credential as a jurisdiction of repute and the Bank stands ready to contribute towards their effective implementation,” Mr Vella says.

“The IMF Assessment confirms the importance of the financial services sector to the Maltese economy and its strong connections to the rest of the world. Banks continue to be key players in the financial sector which remains healthy and resilient despite the challenges,” says Professor John Mamo, Chairman of the Malta Financial Services Authority.

“The MFSA also takes note of the key recommendations made in the report, namely to strengthen supervisory and enforcement capacity through increased resources, investment in technology and a number of operational and technical initiatives intended to enhance sectoral risk-based supervision, enforcement and judicial processes. Going forward the report also provides valuable inputs into the ongoing improvement processes undertaken by the MFSA in conjunction with other national authorities and stakeholders to continue to safeguard stability and address the risks that may stem from different sectors of the financial market,” Mr Mamo says.

About the report

The International Monetary Fund Financial Sector Assessment Program (FSAP) encompasses an in-depth and comprehensive assessment of a country’s financial system, with the intentions of assisting countries to identify key sources of systemic risk in the financial sector and to propose the implementation of policies to enhance country resilience to shocks and contagion.

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The Maltese authorities requested the IMF to undertake an FSAP for Malta in 2017 given that Malta had initiated its first FSAP in 2002. The Malta FSAP exercise formally commenced in March 2018. The IMF expert team conducted assessments by Principles for Effective Banking Supervision, Insurance Supervisory Principles, Objectives and Principles for Securities Regulation, and Financial Action Task Force’s (FATF’s) 40+8 Recommendations, and other relevant standards and codes, the CBM press release says.

“The results of the Malta assessment are published in the Financial System Stability Assessment (FSSA) which also focuses on issues of relevance to IMF surveillance. The FSSA was discussed at the IMF Executive Board together with the country’s Article IV report and was approved by the IMF’s Executive Board on 22 February 2019. It was published on 27 February 2019, and the report is available on the IMF website,” the Central Bank of Malta says.

The report is scheduled to be followed by the publication of Technical Notes by the IMF on specific topics covered in the FSAP.