Updated | Banks in good health but property boom poses risk, IMF country report says

Updated at 5.30pm with Nationalist Party statement

Retail banks are in “good health” but they face challenges coming from a property and construction boom, the International Monetary Fund said.

In its country report on Malta, focussing on the stability of the financial system, the IMF reported that core domestic banks are well capitalised, liquid and profitable.

However, the IMF also noted the risks key banks faced from the property boom.

“Core domestic banks’ high exposure to property-related loans, together with the rapid house price appreciation, poses a risk,” the IMF observed.

It said that house prices in Malta have been rising rapidly since 2014, well above the Euro area average.

In its overview of the sector, the IMF noted that weaknesses were limited to a few small banks. “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,” it said.

The IMF noted that exposure to the domestic economy of international and non-core domestic banks was limited.

MFSA substantially understaffed

The organisation called for “adequate resources” to preserve the effectiveness and operational independence of the Malta Financial Services Authority. This was needed in a scenario that saw financial institutions constantly changing their business model and in view of Malta’s attempt to harness blockchain and digital currencies.

“It is a challenge to meet the increasing demands of supervising the growing number of financial institutions in an evolving and more complex regulatory environment. The MFSA is substantially understaffed, which undermines its effectiveness and operational independence,” the IMF said.

It called on the authorities to upgrade the MFSA’s operational capacity and grant it full autonomy over its recruitment.

Although published today, the IMF’s critical review was carried out at the start of the year before the MFSA unveiled its plans to boost recruitment and enhance its supervisory role.

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Shortcomings in banking supervision

The IMF said shortcomings in bank supervision called for urgent action.

“To strengthen bank supervision, the MFSA should take timelier supervisory actions, increase the frequency of onsite inspections, make more use of monetary fines as part of the sanctioning regime, and ensure supervisory action is not delayed through judicial appeal,” the IMF said.

It called for “a more intrusive approach” to assess banks’ risk-management processes, including for asset recovery, related-party transactions, forbearance measures, and collateral valuation.

The IMF also proposed greater efforts on preventive measures at on-boarding stage through better customer due diligence and verification of beneficial ownership.

The IMF also called for additional supervisory resources for the Financial Intelligence Analysis Unit (FIAU) and the MFSA to bolster anti-money laundering supervision.

“The authorities should take appropriate corrective actions—including timely, dissuasive, and proportionate sanctions—in case of breaches of AML/CFT requirements,” IMF said.

Reports echo Opposition positions - PN

In a statement, the Nationalist Party noted that the IMF had been critical of the way Malta’s financial services sector is being regulated.

“In particular, the IMF noted how the Finance Ministry is required to endorse the human resources budget of MFSA and that the Office of the Prime Minister is required to approve recruitment ‘on a case-by-case basis’,” the PN highlighted.

The PN pointed out that the Ombudsman recently commented on the political intervention in recruitment and promotion exercises in public authorities, saying that such interventions have serious repercussion on the democracy of our country.

It went on to note that the report referred to the MFSA’s actions as not always being timely and effective.

The PN also made reference to the European Commission’s Country Report 2019 for Malta, published Wednesday, which it said had underlined that although Malta’s economic performance was positive, it is facing sustainability challenges.

“The report mentions a number of factors that are impinging on the country’s economic performance including inflation, and notes that ‘children in single-parent, and medium-skilled families are at greater risk of poverty’,” the PN said.

“With regards to public finance, the report comments on the increase in public expenditure stating that government is financing permanent expenditure with temporary income. This equates with what the Opposition has repeatedly stated, that is that government is recklessly increasing public expenditure basing its spending patterns on income, including income from proceeds of the IIP scheme, which might decrease sharply in the near future.”

“These two reports echo the positions adopted by the Opposition over the past months and those of other organisations. A few days back the CEO of HSBC said that the damage on Malta’s reputation is harming banking profits. These report clearly show that the government has failed in carrying out its duty of ensuring that our financial services sector is duly regulated,” the PN added, “The lack of proper and efficient regulation has led to high profile cases that severely damaged Malta’s standing as a financial services centre of excellence.”