A story as old as modern Malta: the National Bank saga

Justice delayed is justice denied. Hackneyed as a perennial truism, this motto unofficially adopted by the heirs of the National Bank of Malta’s shareholders is still fitting well over 40 years since the takeover of a private bank out of whose ashes came the Bank of Valletta.

In a court this week, it was finally declared that well over 80 separate groups will be entitled to €111 million from the State as compensation for the shares their forebears had to sign off back in 1973 to the Labour administration at the time. It is a bittersweet victory: so many passed away with no hope of seeing the endless roulette of court cases ever coming to an end, while having witnessed the flourishing of Malta’s small economic miracle, assisted by the role of Bank of Valletta.

Much of Maltese history tends to be coloured by party hues, yet the NBM saga is the one in which the ‘caudillo’ socialist Dom Mintoff is pitted against an old class of nobility and private bankers. It was a run on the bank in the first week of December 1973, that prompted the start of a government takeover of the private bank, with shareholders left without a cent for the share transfer. On one hand, this singular event proved to be one of the building blocks of Malta’s modern economy – a state-owned bank extending interventionist credit for a new industrial base. On the other, a tale of justice denied, reaching its apex only last week.

No compensation for share transfer

It was the first week of December 1973, when Prime Minister Dom Mintoff delivered a televised address to the nation in which he expressed his ‘concern’ at the apparent precariousness of the banking sector. It had been a year since crisis had hit another private bank – BICAL – and a trickle of depositors had already started withdrawing substantial amounts from a number of NBM branches. Mintoff’s address intensified the run.

The late Lino Spiteri, then a Central Bank assistant governor, was by Mintoff’s side during that address. His is a different view from other critics’, as recounted in L-Elf Lewn ta’ Mintoff (2014): “Mintoff got it in his head that he could stop the run on the bank by going on TV… I had to be by his side as he speaks. I did agree that, with his words, he could calm down the situation.”

On 6 December 1973, the management of the NBM was called in for a meeting with Lino Spiteri to assess the situation: the NBM then held over Lm39 million in client deposits and Lm3 million in deposits from other banks, facilities that were in excess of the Banking Act’s mandatory 25% of paid-up share capital. Even as the run intensified by 10 December – with Lm900,000 withdrawn in one day – the bank’s assets still totalled 30%.

But it was on this day that Dom Mintoff personally summoned the NBM’s senior management, together with finance minister Guze Abela, Central Bank governor RJA Earland, Spiteri and Attorney General Edgar Mizzi. An ultimatum: hand over the shares, “naturally without compensation”, or face the prospect of extending shareholders’ liability to their personal assets.

The bank’s owners were effectively forced to capitulate to the administration of the time, when the Central Bank of Malta refused to extend liquidity from the bank’s own reserves of Lm8 million, to cover the run. They were made to sign off their shares, without compensation, before other banks like Barclays or Midlands could step in to extend finance.

Spiteri insisted that the Central Bank’s quarterly data and inspections of the NBM clearly showed that the bank was under stress. “It was weakening. The bank had loaned out more cash than it had deposits. The finance minister reported the matter to the Prime Minister. The public started perceiving the problem and the run on the bank started… and the bank did not have the liquidity to pay out all these deposits.”

Mintoff believed a private shareholders’ bank should not be bailed out by the Central Bank, Spiteri added, trashing assertions made in the film Dear Dom that government representatives were sent knocking on shareholders’ doors to sign off their shares to the State. “It was banking union members who urged to have the shares transferred, in a bid to safeguard their jobs… the government had nothing to do with the run on the bank, and it was the NBM’s management that came asking the government for help.”

No lender of last resort

An administrative council was set up to take over both the National and Tagliaferro banks (Tagliaferro was one of several smaller banks that had merged into the NBM). Economist Alfred Mifsud, then a former Central Bank employee, had written back in 2012 in a personal blog justifying Mintoff’s belief that the Central Bank should not act as a lender of last resort for the NBM.

It remains a major bone of contention on whether there was a deliberate tactic to lay waste to the NBM before nationalisation: first allowing for a run on the bank’s reserves, and then denying it a lifeline. “Whether NBM was simply illiquid or insolvent at the time will always remain a subjective judgement… (Mintoff) did not feel that the Central Bank should risk its own funds by acting as lender of the last resort, unless there was adequate security,” Mifsud had said.

The NBM did ask for help from the Central Bank to withstand the run of December 1973 through a temporary advance facility, offering up its property and part of its loan portfolio with leading Maltese enterprises at the time, as collateral. Both Mifsud and former Labour minister Lino Spiteri have argued that the Central Bank was disinclined to risk taxpayers’ money, having been dissatisfied with the loan security.

Mintoff could have, at the time, taken the alternative course of instituting Malta’s first State-owned bank without cannibalising the ailing NBM. Critics of the strongman will agree he preferred seeing Malta’s nobility stripped from its power of retail banking and hold on a delicate island-state economy that now had to be planned by the government.

Certainly enough, there was also little to no resistance from the Borg Olivier Opposition at the time, with the House voting to first declare the bank insolvent before actually quantifying its equity value. The law came into force on Thursday 13 December 1973, with the NBM formally passed into the hands of the Maltese State.

Devaluing the NBM’s collateral

Apart from Central Bank refusing to extend the NBM a lifeline, the picture of its liquidity was compounded by the 1974 annual figures issued by BOV: its loan book with major Maltese companies had been revalued, to make it look as if the debts incurred by the NBM would have been unrecoverable. This was achieved through the creation of a new property index that devalued the collateral against which the NBM had issued credit to so many Maltese enterprises, so as to present the bank as having negative equity.

Some of the NBM’s shareholders and heirs believe that even members of the business community of the time, welcomed Mintoff’s forced nationalisation.  “One of these adjustments was to present the Corinthia loans, which were the largest the Bank had given out to kick-start the tourist industry, as bad and doubtful advances that could never be recovered,” Jeremy Cassar Torregiani, whose family was one of the bank’s major shareholders and directors, told MaltaToday in 2022 of the Maltese-owned international hotel chain.

“As such they had to be paid for by the predecessor shareholder. If Corinthia were presented as a bad debt, how and why were the personal guarantees never called in so as to make good for the losses? If reversing this one transaction alone could have put the very bank that funded the enterprise, back into positive equity... how is it possible that the government was able to justify the transfer of this business to Bank of Valletta for no consideration?”

Upon takeover, the new Council of Administration produced a balance sheet claiming a negative equity of Lm253,000. The NBM’s shareholders accused the Council of having significantly undervalued its properties, with no provision for goodwill on its 27 branches across Malta and Gozo, and of raising bad debt provisions by 151% to Lm5.9 million – obtained through a property index that claimed prices of villas, houses and apartments had fallen by 36.6%, and the price of undeveloped land by 84%.

By 1978, Bank of Valletta managed to reduce its bad debts by Lm4.3 million over a period of just five years, and debts that had previously been classified as ‘unrecoverable’ were nearly all recovered in full. The rest, for BOV, was history: a successful state-banking enterprise that extended millions in credit for homes and businesses, just as another nationalised bank, Mid-Med – formerly Barclays Bank International – would follow suit in 1975.

Mintoff: abrasive socialist

A simplistic view of the NBM takeover is that Mintoff had waged war on the island’s capitalistic class early on in the nascent years of Malta’s socialist reinvention as a republic.

But in the 1970s, Malta was not a ‘normal’ economy. A working class accustomed to poverty, mortified by the overweening Catholic junta of Michael Gonzi, with economic aspirations limited by the British military powers, was now forcefully represented by a new Labour administration.

As recounted by Lino Spiteri, Malta had to nationalise many strategic assets under British control even after Independence. “Barclays dominated the Maltese economy,” he said, so Mintoff worked to introduce the State as a shareholding partner before later exercising full nationalisation – and with mutual agreement of both sides.

“The historic circumstances of the day were that the commanding heights of the economy were in the hands of foreigners. Mintoff did not want this.” Ironically, the late Spiteri noted, the situation had all but been reversed four decades later.

Secondly, Malta’s industrialisation had failed to take off under the Borg Olivier administrations. Malta was left to depend, too much, on the engulfing British military presence. Mintoff had to affect a financial and economic revolution to switch Malta from a military base to a job-creating and exporting economy. That required an interventionist government strategy that could not be left in the hands of Malta’s old bourgeoisie – perhaps another story requiring reams of newsprint.

Spiteri conceded that after the NBM takeover, “it resulted the problems had not been as big as it seemed throughout the run on the bank, but at that point in time the problems looked big.”

But certainly enough, Bank of Valletta and Mid-Med were part of a national, political and economic strategy to extend credit towards Malta’s new capitalist class of industrialists.

Court compensation order

Well over four decades later, the shareholders of the National Bank of Malta and their heirs are seeing light at the end of the tunnel.

For years, they have insisted they were owed, in present-day terms, €325 million as “fair and reasonable compensation” compensation for the Lm7 million that was the net asset value of the bank in 1973. The financial appraisal was carried out by banker Anthony R. Curmi (brother to the late Vincent Curmi, director of Sciclunas Estates, the landholding company for the heirs of Marquis John Scicluna, whose Scicluna’s bank was a precursor of the NBM).

The government, on its part, has always claimed the NBM shares had no value at the time of nationalisation; previous settlement offers ranged from a mere Lm8 million to around €25 million under Nationalist administrations. Its consultants – former IMF consultants Piero Ugolini, Richard Nun, and Larry Chilton – claim Curmi’s assessment was “unrealistic” because it was the Maltese government that later made BOV a success by restoring public confidence in the bank and fully guaranteeing all deposits which the NBM was unable to do.

They also blamed the NBM of having a “history of self-serving and imprudent management practices”, which endangered the bank through non-performing loans that increased bad debts. “Government had no choice except to intervene in order to protect the depositors and creditors and to preserve stability of the broader financial system.”

In October 2014 a Constitutional Court finally confirmed that shareholders’ rights had been breached when they were forced to surrender their shares without any compensation. Another decision upheld by the Constitutional Court recognised their right for compensation.

The latest judgment in this case is however clear on one thing: that government’s takeover of the NBM was “necessary in the circumstances and served to relieve the bank of the repercussions the run would have had on Maltese banking and the economy, not least in the interest of depositors and employees. There is no turning on what is a foundational belief of this Court, and on which the resulting compensation will be based.”

So the €111 million compensation is now based not on asset values, but on the breach of the right of shareholders’ private property: and based on European Court rulings, this would come at a discount first of 30%, given the government’s legitimate aim at nationalising the bank, and on that resultant value another 20% discount to factor in “uncertainties” had the government not intervened to ‘rescue’ the NBM.