Edward Scicluna has shunned suggestions that Deutsche Bank’s withdrawal of correspondent banking services is a result of recent controversies involving Pilatus Bank and Panama Papers.

While admitting that reputational damage caused by these controversies was “not helpful”, the Finance Minister said Deutsche Bank's decision represented the Malta dimension of a global problem.

Last week, the German bank withdrew its relationship with Bank of Valletta that enabled the Maltese institution to process international money transactions, particularly US dollar transfers.

“Deutsche Bank’s action is an inconvenience at this stage but this is a matter that has to be addressed internationally because it risks impacting global trade, particularly that involving small countries,” Prof. Scicluna said, adding this was a global issue that even made it to the G20 summit.

He expressed hope the International Monetary Fund working group appointed to look into the problem would come up with recommendations by September.

BOV (the respondent bank) has said Deutsche Bank’s decision did not impact its customers since it had similar correspondent arrangements with other financial institutions.

Prof. Scicluna attributed the problem to higher compliance costs caused by stricter anti-money laundering regulations and onerous commitments on banks to ensure adequate liquidity buffers.

Correspondent banking services have very limited profit margins and within a scenario of rising compliance costs it does not make it worth the while for big banks to deal with small countries

“Correspondent banking services have very limited profit margins and within a scenario of rising compliance costs it does not make it worth the while for big banks to deal with small countries,” he said.

Central Bank of Malta governor Mario Vella would not enter into the merits of the case involving Deutsche Bank and BOV but noted that maintaining such relationships was becoming less profitable for correspondent banks where volumes were low.

He said the IMF had highlighted this problem in its paper, ‘Recent Trends in Correspondent Banking Relationships – Further Considerations’, released last March.

The paper argued that with the withdrawal of such services by US banks, many countries maintained access to the US dollar payment network through intermediary banks such as Deutsche Bank.

However, the IMF said these alternative arrangements were “fragile” and may be unavailable for all banks.

It noted that the withdrawal of correspondent banking relationships by German banks appeared to have been driven mainly by business and risk-return considerations, lower risk appetite, and the implementation of a risk-based approach under international standards.

The IMF argued that within the context of low profitability, the absence of sufficient business volume had also contributed to decisions by correspondent banks to withdraw from relationships in small countries and with small banks.

But correspondent banks also took into account the level of risk in a specific country or region, including aspects related to corruption, tax evasion, fraud, money laundering and terrorism financing.

The International Monetary Fund noted that great importance was attached to the effectiveness of the respondent bank’s compliance system and its ability to conduct customer due diligence in line with international standards.

“[If] a respondent bank is a small indigenous bank with a business model involving high-risk activities such as online gaming, the correspondent bank would unlikely have confidence in the ability of such a bank to manage risks and may choose to terminate the correspondent banking relationship,” the IMF noted.

Questions sent to Deutsche Bank on Thursday seeking an explanation for its decision to end the correspondent banking relationship with Bank of Valletta remained unanswered.


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