Following the 2008 financial crisis, the EU decided to make a branch and root reform of banking regulation. This reform was embodied in the Banking Union, which has a much stricter regulatory regime based on an increase in banks’ capital, reduction of non-performing loans and the de-risking of business models.
No Maltese bank was rescued by taxpayers’ money during the last crisis. The major local banks are in different stages of their restructuring processes that are affecting their shareholders acutely.
Local banks’ shares have declined dramatically in the last few years and even more so in the last few weeks.
How can banks support their clients in these difficult times when regulatory obligations are tightening?
The European Central Bank is now the supervisor of the major banks in Malta. All banks are still profitable even if they had to take drastic measures to consolidate their capital base by reducing, or not paying, a dividend and by sourcing new capital at a high cost.
It is time for the ECB to temporarily relax its demand on banks to reduce their non-performing loans and to increase their equity. Otherwise, banks may be reluctant to support their clients in these difficult times.
One of the government’s first measures to support struggling but viable businesses was to guarantee loans granted by banks for emergency working capital.
However, the risk assessment of every loan will still have to be made by banks as the government will not be covering the full exposure of such loans.
Some banks may decide that they will not want to take on even a minority share in the risk of such lending as it may not fit their risk appetite. Others, who are more committed to supporting the local economy, will be willing to share the risk of lending in this crisis with the government.
Personal clients with mortgagees must be supported just as much as businesses are. Strict enforcement of repayment programmes is one sure way to put fuel on the fire that this crisis has lit up. It is encouraging that many banks have agreed to grant interest or capital moratoria to their personal borrowing clients.
There have been suggestions that the government should impose a windfall profits tax on local banks. Doing this would be counterproductive and should, therefore, be avoided.
Banks, like most businesses, pay a third of their profits in tax. They now pay a small percentage of profits in dividends to shareholders who have seen the value of their shares drop dramatically even before the pandemic crisis. The rest of the profits are held as reserves to strengthen banks’ capital base to safeguard depositors’ money.
It is fallacious to equate banks’ profits with abusive or even unethical practices.
Banking is one of the most leveraged industries, which means that they use their depositors’ money to oil the wheels of the economy that, in turn, supports employment.
There is no silver bullet that can resolve the collateral damage of this crisis without pain. Banks, like everyone else, need to do their part to support their distressed clients. Regulators need to put the brakes on banking reforms that discourage risk-taking.
Businesses have been promised support from the government and banks. They also need to resort to their wealth to weather this perfect storm.
Correction April 1: The financial crisis referred to occurred in 2008.