Standard & Poor’s decision to downgrade by two notches the risk score of Malta’s banking sector is considered by operators to be a major blow to the island’s reputation as an international financial centre.
The agency also downgraded the standing of Bank of Valletta even though, liquidity-wise, Malta’s largest bank remains a robust and highly-regulated institution with no risks for investors.
Banking experts, including a former Central Bank of Malta governor, expressed concern over the developing situation, fearing that more bad news would follow in the coming weeks.
The Central Bank and the Malta Financial Services Authority both played down the downgrade and pointed out there was no risk for Bank of Valletta.
Read: BOV shares plummet 9% as bank sets aside €75m for litigation costs
The government had not commented at the time of writing.
Standard & Poor’s said that, due to recent events, particularly the report by the European Banking Authority on the failures of the Financial Intelligence Analysis Unit and the saga of Pilatus Bank, it decided “to revise downwards the industry risk score for the Maltese banking sector to ‘6’ from ‘4’ (on a scale of 1-10, with one being the lowest risk).
It now classifies Malta as being in group 5 and revised downward its anchor for banks operating primarily in Malta to BBB- (minus) from ‘BBB’.
The downgrade, the agency noted, reflected its view that allegations of money laundering against Pilatus Bank and the perception of poor transparency at some banks “increased reputational and operational risks for the Maltese banking sector generally”.
Standard & Poor’s also downgraded the standing of Bank of Valletta from A- to BBB+, particularly due to the ongoing litigation about shares held in a trust at the bank by owners of a company whose subsidiaries included the collapsed Italian shipping company Deiulemar, which entered bankruptcy in 2012.
“We are reaping what was sowed over the last years. We have permitted a situation where the supposedly independent regulators have failed miserably and allowed things, like operations at Pilatus Bank, that should have never been tolerated,” a senior financial services industry insider said.
“This, together with many other money laundering claims that were never investigated, are now coming to a head in terms of Malta’s reputation,” he added.
Ex-Central Bank governor Francis Vassallo is very worried with this latest development.
Certain adventurous initiatives should not have been allowed
Noting, in relation to Bank of Valletta, that Maltese investors should not be affected because the institution had enough liquidity and was sound enough to take this blow, Mr Vassallo said what really worried him were international investors and the decisions correspondent banks could take because the Maltese banking sector could not operate without them.
He was also worried with Malta promoting itself as a blockchain and cryptocurrency island and warned the country should tread carefully in this area to ensure its reputation was not further damaged.
Paul Bonello, managing director of Finco Group, a financial services company, said he was not surprised with the downgrade, adding the MFSA was primarily to blame.
“The reality is that certain adventurous initiatives should not have been allowed to happen by what is supposed to be independent and authoritative regulators,” he said.
“Moreover, when such events did have serious consequences and came out in the open the necessary corrective action was not taken,” he added.
Mr Bonello called for a rethink of the government latest fad of marketing Malta as a blockchain island.
“Our reputation does not depend on GNP growth alone. The last thing that should be on the regulator’s mind to salvage our remaining ‘product’ and, indeed, start rebuilding our international reputation is further pushing the crypto psychosis that has taken hold of Malta, a phenomenon all other regulators shun. The dubious reputation we have acquired of being the crypto island of the world may in fact cause untold further damage,” he warned.
The financial services watchdog, the Central Bank and Bank of Valletta make a different assessment of the situation.
Bank of Valletta said the downgrade reflected the rating agency’s assessment of increased pressure on Malta’s reputation.
For the Central Bank, “the local banking sector remains sound, resilient and profitable and enjoys ample liquidity”.
The MFSA only issued a statement after the Times of Malta contacted it for a comment.
Underlining that it had always supervised the banking sector very closely, it added that “major reforms are under way in its organisational infrastructure including investment in top tier supervisory technology, increase in human resources and technical capacity in order to enhance the efficacy and governance of the sector”.
Nationalist Party finance and financial services spokespersons, Mario de Marco and Kristy Debono, again called on Finance Minister Edward Scicluna to shoulder political responsibility.
“This downgrade is the direct result of the deterioration in level and quality of supervision of the financial services sector. Pilatus Bank should never have been licensed to operate in Malta,” they said.
“The authorities not only licensed it but also allowed this bank to operate with impunity.”