Central Bank Governor Josef Bonnici has dismissed as “misleading” any comparison between Malta’s banking system and that of Cyprus.

The problems facing Cypriot banks included losses made on their holdings of Greek bonds

Prof. Bonnici said the size of the Maltese banking sector relative to GDP was strongly influenced by a number of institutions that “virtually had no economic or financial links with the economy”.

He insisted that assets of the all-important banks amounted to “just below 300 per cent” of GDP, which by international standards was “within normal limits”.

Prof. Bonnici said that unlike Malta’s core banks, the large Cypriot banks were also very active internationally with a high dependence on foreign sources of funds and high exposure to losses on foreign assets.

“The problems facing Cypriot banks included losses made on their holdings of Greek bonds, whereas Maltese domestic banks have limited exposure to securities issued by the programme countries,” he said.

Prof. Bonnici was reacting to comments in the international press that questioned whether the banking sectors in Malta and Luxembourg were next in line to face the chop because of their huge size relative to the countries’ economies.

The bad press, particularly a report by the Brussels correspondent of The Guardian, a leading UK newspaper, created ripples in the banking sector.

The comments came in the wake of a bailout deal for Cyprus, which forced the closure of the country’s second largest bank and a downsizing of the country’s banking sector that was flooded by Russian funds of dubious provenance.

Cypriots holding accounts in excess of €100,000 stand to lose as much as 40 per cent of their money after uninsured depositors and shareholders were forced to share the burden of winding down the failed bank and shoring up others.

Speaking to The Times, Prof. Bonnici said the banking system was made up of three distinct categories.

The first group are core domestic banks, which are of systemic importance operating along traditional lines. Using an extensive branch network, these banks attract deposit funds in the domestic market, lend locally and hold securities issued in Malta.

“The provision of loan and deposit facilities is crucial to the economy and the overall asset-to-GDP ratio for this group of banks stood at 218 per cent in December 2012,” Prof. Bonnici said.

He explained that an intermediate group was made up of the non-core domestic banks.

These banks play a more restricted role, as their volume of operations and the banking services offered to residents is limited. The total assets for this group amount to 77 per cent of GDP.

There is also a third category of international banks that are not linked to the domestic economy with activities and transactions almost entirely outside the country, Prof. Bonnici added.

These non-core banks have contributed to inflating the size of the banking sector and their assets account to almost six times the GDP.

Mario Mallia, chief officer risk at Bank of Valletta, Malta’s largest bank, said the resemblance between Malta and Cyprus was “superficial”. Writing in The Times today (see back page) Mr Mallia said that even “a cursory look” at the Financial Stability Report published annually by the Central Bank of Malta would be enough to show that Malta’s situation was “radically different”.

Malta and Cyprus could not be put “in the same bucket”, he insisted, adding the Cypriot domestic banking sector was relatively huge and “financed primarily through offshore (Russian) funds”.

“The Maltese domestic banking sector is relatively much smaller, and is financed primarily by Maltese households and businesses,” Mr Mallia said.

He noted that the size of the core banking sector was around two times GDP and around 50 per cent the EU average.

“It is therefore clear that the size of the core Maltese sector is very manageable, and can in no way be seen as being too big to fail,” Mr Mallia said.

It was a sentiment shared by HSBC Bank Malta, the second largest bank.

An HSBC spokesman said Malta’s domestic banking system was approximately two and a half times the GDP, well below the EU average.

“Consequently, the domestic banking system is relatively small and is well capitalised, liquid and profitable,” the spokesman said.

ksansone@timesofmalta.com