IMF published a report on results of the Financial System Stability Assessment (FSSA) on Malta. Also published were the staff report and the selected issues report under the 2018 Article IV consultation with Malta. The FSSA report highlights that the banks are well-capitalized, liquidity is ample, and profitability is healthy. However, core domestic banks’ high exposure to property-related loans, together with the rapid house price appreciation, poses a risk. While nonperforming loans (NPLs) remain below the euro area average, there are pockets of distressed corporate loans that continue to impact bank balance sheets.
The FSSA reveals that the banking system remains resilient under a severe stress scenario, with weaknesses limited to a few small banks. The system is sufficiently capitalized to absorb losses in the event of a severe macro-economic shock, but risky exposures would lead to potential losses at a few small banks. On aggregate, the banking system is resilient to short-term liquidity pressures, but some banks would struggle to meet the liquidity coverage ratio (LCR) requirement under stress conditions. A liquidity stress test based on the net stable funding ratio (NSFR) showed that most banks do not face structural long-term liquidity risks. Contagion risk is estimated to be limited, but distress could impact smaller banks due to cross-border and cross-sectoral linkages. There is a need to closely monitor banks’ evolving business models to detect potential shifts in systemic risks, strengthen the stress test approaches, and enhance data quality and management. Furthermore, continued enhancements to the macro-prudential framework are encouraged. The macro-prudential policy toolkit of the country has expanded considerably in line with the EU Capital Requirements Regulation and Directive IV (CRR/CRDIV). While the recent strengthening of systemic risk monitoring is commendable, the legal framework should be enhanced, data gaps closed, and non-bank risk assessment strengthened.
Ensuring adequate resources is critical to preserve the effectiveness and operational independence of MFSA. 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. Shortcomings in bank supervision call for urgent action. Supervision should focus on main risks (credit, liquidity, and compliance) and the adequacy of risk classification and provisioning. Further actions are needed to align the related-parties framework with the Basel Core Principles. Actions are also needed to support the use of early intervention and resolution powers and to address weaknesses in the bank liquidation and insolvency framework. Responsibility for decisions on bank liquidation and insolvency post-license withdrawal should be shifted from MFSA’s supervisory function to its resolution function. MFSA should continue its efforts to strengthen the supervision of the evolving insurance and securities markets. Enhancing the risk-based supervision frameworks should be a priority. The risk-based supervision frameworks for the insurance sector and the investment firms assesses the licensees based on their risk impact and the probability of risk, which drives the annual supervisory plan.
The staff report highlights that the Directors noted shortfalls in supervisory capacity and gaps in bank liquidation and insolvency frameworks. They recommended that the long-term financial and operational independence of the supervisor should be guaranteed and the crisis management framework should be strengthened by adopting an administrative bank insolvency regime. In light of the rapid diversification of corporate financing, Directors also encouraged strengthening oversight of the non-bank financial sector and closing remaining data gaps. Findings from a stress test covering 11 banks confirmed that the overall banking system is well-capitalized and liquid, with vulnerabilities limited to a few small banks. The overall NPL ratio of core domestic banks was reduced from 9% to slightly above 4% over four years. However, this positive development seems to have stalled in 2018 and legacy NPLs in construction and real estate sectors continue to weigh on bank balance sheets.
Keywords: Europe, Malta, Banking, Insurance, Securities, FSSA, FSAP, Stress-Testing, Systemic Risk, Macro-Prudential Policy, Article IV, NPLs, LCR, NSFR, MFSA, IMF
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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