Governor: Risk aversion of correspondent banks impacting heavily on Malta

The profitability of Malta’s domestic banks has been 'slimming', Central Bank governor Mario Vella said, because of traditional banking models and the challenge of ‘no-fee’ products from fintech competitors

Central Bank governor Mario Vella
Central Bank governor Mario Vella

The profitability of Malta’s domestic banks has been “slimming”, Central Bank governor Mario Vella said, because of traditional banking models and the challenge of ‘no-fee’ products from fintech competitors.

In his speech to Malta’s Institute of Financial Services, Vella said Maltese banks were facing a more rigorous and intrusive supervisory approach coupled with more rigorous standards of anti-money laundering rules.

Additionally, banks were facing competition from ‘no-fee’ alternative products by fintech players which operate with a lower cost base and hail from a less intrusive regulatory environment.

“This changing environment requires significant investment in technologies and human resources with added pressure on banks’ bottom line. Also it may potentially encourage more risk aversion, despite the ultra-accommodative monetary policy stance,” Vella said.

Vella said banks should be free to set their own risk appetite, and chase opportunities avoided by more risk-averse banks. “In well-functioning markets, business opportunities shunned by one bank will be taken up by a competitor, if the latter feels more confident that it can manage the underlying risks more effectively.”

He also said that there was no reason why Malta should not welcome specialist banks which welcome “risky but legitimate” business, and are capable of withstanding “the most rigorous standards of supervisor scrutiny.”

Malta’s financial services sector directly contributes to a significant 5.3% of gross value added and provides for the livelihood of over 11,600 employees.

But Malta has been in for its fair share of criticism over due diligence shortcomings and the publicised arrest of Pilatus Bank owner Ali Sadr Hasheminjead in the United States, as well as the shuttering of small banks like Nemea and Satabank in recent years.

“Banking is all about risk management and banks with a zero-risk appetite will eventually starve and be forced out of the market. Such risk aversion should not come at the expense of the right of all citizens to access basic banking services, as this will fuel financial and social exclusion.

“Banks should therefore be encouraged to use their judgment and sense of proportion when exercising due diligence, and to consider their responsibility given their pivotal role in the financing of the economy. Although certain AML/CFT vulnerabilities had already been identified at a national level and actions were already underway and although the Authorities pledged their commitment to fully address these issues, the Moneyval report has set targets that we must reach,” Vella said.

The governor said that unless Malta addresses its shortcomings in confidence and credibility, it would be unable to develop the sector further.

“The most challenging recommendations found in the report are those requiring a change in mindset, such as the identified lack of awareness of AML risks in non-bank financial institutions and the wider professional community, resulting in a very low number of suspicious transactions reports being filed by them.”

Malta has also faced a curtailed channel for large correspondent banks who see the Maltese market as too small to process payments related to activity such as gaming transactions, which may be considered as too risky.

Vella said the risk aversion of correspondent banks was impacting more heavily on smaller jurisdictions like Malta, saying they had neither the time nor the interest to understand risky business models or overly-complex structures of clients in Malta.

“As practitioners, you are the system’s first line of defence. The more layers of controls in the system, including a thorough understanding of clients and business models, and the less complex their corporate structure, the easier it is for banks to service them,” he said.