At the recent conference ‘The Evolution of the Banking Industry: Strengths and Challenges’ organised by Bank of Valletta and the Maltese-French Chamber of Commerce, Jean C. Farrugia, senior partner at DF Advocates, interviewed Mark Scicluna Bartoli, executive EU & Institutional Affairs at the bank, regarding local banking regulation, innovation and capital markets.

Regulatory challenges facing the banking industry

Would you say that the current regulatory environment is leading banks to become unnecessarily risk-averse in areas that, until recently, have always been regarded as being low-risk?

Yes, I would agree that from a regulatory perspective the environment is leading banks to be more risk averse. But the risks are no longer limited to banks; they have spilled over to a country risk, which have also spilled over into European risk, following the unfortunate incidents at Danske and ING, to mention just two European banks. So the reactions of European banks needs to be taken in this context. 

Given the regulatory restrictions imposed on banks, is there still scope for banks to diversify into service offerings that are currently not being offered locally?

The implementation of cumulative regulations on the various areas of banks’ operation means it will get harder before it gets better. So, at this point in time, diversifying into new service offerings is not at the top of the Bank of Valletta’s priority list.

That said, it should also be pointed out that over the past 12 months we have developed, via the Malta Development Bank, three new credit products for the Maltese market: (i) the BOV Family business scheme, (ii) the BOV SME Invest scheme and (iii) the BOV Studies Plus scheme, the latter being the first risk sharing instrument in Malta using European Social Funds.  

Are banks being forced to react to situations that are extraneous to their existence or should the banking industry have been pro-active and sought to stay ahead of the curve at all times?

It very much depends on the area concerned. In the area of technology, where banks had full decision-making powers, it is clear that they could have upped their game earlier to stay ahead of the game.

As the governance and anti-money laundering culture in Malta makes progress, the engagement with global correspondent banks will surely improve

In banking regulation, the setting up of the single European supervisor mechanism is a recent concept where both banks and regulators are learning by adopting best practice solutions as new regulatory risks emerge.

Industry’s views of ease of banking

Ever-increasing know your client (KYC) and ongoing due diligence (DD) requirements are not always easily digested and accepted by bank customers. Do you think this is due to overly-complicated processes banks are adopting or is it the result of a deeply rooted aversion to KYC compliance in the local retail and business communities? 

The issue here is a question of communication between both parties. Most businesses and introducers want the same governance and KYC checks we seek as banks, and when all the players are on the same page the issues are minor.

They become significant when businesses are not comfortable in providing additional information to the introducers and the bank. Banks, on the other hand, when identifying higher risk operations, may not sufficiently justify the rationale for the request for additional information – and may have their reasons for doing so – and here the delays and issues start.

It must also be pointed out that the speed of change is significant and possibly the market is finding it hard to adapt to changes in such a short time frame. Nevertheless, I am sure this short-term pain will be in the interest of all players in the market well beyond the banks.

Banking relationships have recently become more strained due to the non-presence of global correspondent banks. Can this be resolved in the short to medium term? 

I believe that a solution can be found in the short term, but the hesitance of global correspondent banks to service small jurisdictions will take time to change in the medium to long term.

As the governance and anti-money laundering (AML) culture in Malta makes progress, the engagement with global correspondent banks will surely improve while keeping in mind that volumes will always remain a key barrier when operating in such a small market.  

Operators in a number of business sectors feel that they are under-served by local banks. Certain industries in particular are finding closed doors, even at account opening stage. What is leading banks to end relationships with certain industries? 

Banks see every sector as a business opportunity and it is really not in their interest to under-serve any sector.

That said, however, there are certain sectors and clients that are proving to be higher risk than others, sometimes even outside the banks’ risk appetite, when dealing with our regulators and correspondent bank relationships.

It is becoming an increasingly difficult balancing act to be able to continue servicing certain sectors and clients while at the same time living up to our regulatory and correspondent bank obligations.

Technology and banking

Given the speed with which technological advancements are being made, how prepared do you think banks in Malta are in the wake of such progress? Have banks invested enough over the years to remain relevant?

I have to reluctantly say not enough over the years; however, investment in technology is a difficult call when it expires so quickly. Bank of Valletta is taking the leap with the change in our core banking system. 

Malta has made huge leaps forward in pioneering the regulation of innovative technologies, particularly through the introduction of the Virtual Financial Assets Act and the setting up of the Malta Digital Innovation Authority. Do you think this pioneering spirit is shared by the local banking community?

Yes, we support such initiatives which can have positive implications on our business model at a global level going forward.

Nonetheless, we need to appreciate that the discretion to service such new business sectors would need to be aligned with our risk appetite, regulatory obligations and demands from our correspondent banking relationships.  It is a delicate balancing act.

We have heard a lot of talk of new entrants to the banking sphere. Do you believe that, going forward, the deficiencies that the market is currently experiencing with the local banks can be cured by these new players?

Any new entrant to the Maltese banking sphere would need to apply for a banking licence which will be issued by the MFSA via the ECB which are the same rules to which we are adhering.

So one would need to see how new players adopting the same rules can address these deficiencies in the market.

When one considers that a lot of the capital being raised is in the bond market and is being used to refinance bank loans, then the question of competition is a fair one to ask

The capital markets as an alternative

How easy is it for local start-ups to access the Maltese capital markets?

The Malta Stock Exchange’s new Prospects scheme has opened up the doors for local start-ups to seek capital through the stock exchange.

This is positive; however, in my view, the obligations of Prospects, while less onerous than those on the main market, are still quite onerous on a start-up outfit. 

Are Malta’s capital markets complimentary to the banking industry or are they direct competitors?

I see them as complimentary as there are areas where banks cannot assist and the capital markets can adequately address, such as increasing equity and accessing the bond market to complement bank lending. 

However, when one considers that a lot of the capital being raised is in the bond market and is being used to refinance bank loans, then the question of competition is a fair one to ask.

Are we the victims of our own success in trying to bite off more than we can chew effectively, meaning that while there is the legislative will to regulate, from an infrastructure point of view the jurisdiction is still getting to grips with progress?

As a small island with no natural resources, the past has shown us that we need to be bold and push the boundaries, and the fact that we are biting more than we can chew is pushing our boundaries in a fast-moving globally competitive world.

At an EU level I see other Member States adopting innovative Maltese legislative principles and transposing them into their legislation to beat us at the game. We need to be first-movers at both conceptual and implementation stage to stay the global map.

It is a simple question nowadays: you either have a strained system and stay on top or have a less strained system and follow.

Any views, assumptions or opinions expressed in this interview are those of the interviewee. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of any information, opinions or conclusions expressed herein.