Recently, a friend SMSd me: “The banks were blamed for the crisis of 2008… but now we count on them to get us out of this one!” It was, of course, a general remark about the last global financial crisis and only partly relevant to Malta and its banks.
In its Malta Financial System Stability Assessment published last year, the IMF remarked that the banks had navigated through the 2008 crisis by being prudent lenders, operating relatively simple business models and relying mainly on domestic funding.
The resilience with which the Maltese economy weathered that storm was in large part thanks to a robust banking sector, characterised by strong capital adequacy, high liquidity and discipline in keeping non-performing loans under check. But despite this certificate, criticism is still frequently directed at the banks for being conservative lenders and always demanding information.
The COVID-19 pandemic has brought home the worst of all worst-case scenarios for any bank’s stress test. It has had an unprecedented impact, not only on the economies around the world but also on the way we all live and work.
Banks reacted swiftly to the new situation, adopting new and innovative ways of working while continuing to support communities and businesses, at the same time ensuring the health and safety of staff and clients.
There has also been cooperation between banking sectors and both European and national authorities, contributing to the successful implementation of national state-guaranteed loan schemes. Programmes of loan moratoria and other responses providing relief and financial assistance are benefitting SMEs, corporates and homeowners.
Banks will be channelling more than €2 trillion in state-guaranteed credit alone to businesses and households across Europe. One should expect the Maltese banks to be mobilising €1 billion or more of credit, including just under €800 million that can be leveraged under the Guarantee Scheme operated by the Malta Development Bank.
In times of unprecedented crisis like these, it is reassuring to see the Maltese banks well-capitalised, liquid and focused on asset quality. But beyond supporting the economy, the banks will have their own challenges to overcome, as they continue to transform their operations to serve their customers in new ways.
Where are the ‘savings for a rainy day’?
The agendas for sustainability, digitalisation and cyber-security will be accelerated and, inevitably, the current flexible regulatory climate will tighten as the economic slowdown weighs down on bank performance, profitability and access to capital.
So how will the banks help Malta out of the crisis? As intermediaries between depositors and borrowers, banks play a vital role in the road to recovery. The last financial crisis led to much emphasis on the systemic risks posed by banks; the current one, which has entirely originated from outside the banking system, provides the opportunity for banks to prove their role as systemic stabilisers.
They are a key component of the solution, ensuring that cash reaches the business efficiently and on time. But even in these circumstances, access to credit is not an automatic right and should first be available to those who most need it, with a sound business model and are indeed bruised by COVID-19.
This is also a time to reflect on why certain businesses, big and small, were on their knees almost immediately after the government announced the first restrictive measures in March. Where are the ‘savings for a rainy day’?
Without generalising, the pandemic has accentuated serious weaknesses in certain Maltese business undertakings.
To mention a few: liquidity that is syphoned away into immovable property instead of being reinvested to support the business cycle, lack of proper financial information to guide decisions, inadequate corporate governance, management and discipline, speculative projects by inexperienced entrepreneurs and ill-thought-out business ventures.
There is also that chronic issue of borrowers resorting to bank loans instead of what should be tangible owners’ capital, a particularly serious problem during these times as unnecessary debt overhang should be avoided.
For the banks especially, which my friend cordially saluted as the “doctors of the economy”, the coming months will also present reputational challenges. The economic slowdown will leave certain businesses and consumers struggling to survive, requiring bankers to exercise discipline with empathy.
The COVID-19 crisis will be a wasted opportunity if both banks and the business community do not seize the moment to plan for the ‘new next’ and ‘beyond’ while dealing with the ‘now’.
Marcel Cassar, CEO of APS Bank and outgoing chairman of Malta Bankers’
Association