Businesses might have to start paying banks to deposit money there, as banks face having to pay to park that money somewhere themselves, the Malta Bankers’ Association has warned.

Banks often place their excess cash with the European Central Bank, which charges them 0.4 per cent in interest for the privilege.

“The situation where banks will continue to pay interest on deposits and also pay interest on the money that they receive as deposits is not sustainable,” MBA chairman Mario Mallia told The Sunday Times of Malta.

“I do not exclude the possibility that negative interest rates will start to be charged on corporate deposits but I see no possibility at all of negative rates being charged on people’s deposits.”

The problem in Malta is that banks have very high liquidity since the vibrant economy is generating huge amounts of cash – not matched by demand for loans.

Apart from replacing those which left, we are still trying to attract new ones

“There are many expatriates bringing their wealth and income with them. Obviously this generates cash, most of which goes into the banking sector,” he explained.

Banks are facing numerous challenges at the moment, from disruptive technology to the withdrawal of correspondent banking services, which facilitate transactions in different currencies  – with dollar transactions being the most badly hit.

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“Correspondent banks have their own anti-financial crime concerns and the controls that they have to put in may mean it is not worth their while for small jurisdictions like Malta, with small volumes. Why take a reputational risk and face all that expense if it is not justified?” he explained.

The situation had grown so worrying that Prime Minister Joseph Muscat went to the US at the end of last year to personally intervene. However, Mr Mallia reassured the public that alternative arrangements were being found, and that not being able to pay or receive dollars was quite a remote scenario.

“I cannot see any risk of Malta being cut off from the international financial ‘plumbing’. We lost correspondent banks but we also replaced some of those which terminated their relationship with Malta.

“Obviously the universe of banks providing correspondent banking services in dollars is much smaller than it was four or five years ago. Nevertheless, we do have a pool of banks and the association is continuously working to ensure that the correspondent banking pool grows.

“Apart from replacing those which left, we are still trying to attract new ones to Malta. It is not easy but I can confirm that some interest is being shown,” he said.

Part of the reason for the withdrawal of correspondent banking services to various jurisdictions is their fear of liability, and the growing compliance burden as they started to insist not only on a bank knowing its customers, but also its “customers’ customers”. Since the overreaction, international regulators like the Basel committee, the IMF and the Bank for International Settlements have clarified just what they expect correspondent banks’ defences to look like.

“Up to a year ago, there was a lack of clarity about what level of due diligence correspondent banks were expected to carry out, especially with regards to knowing your customers’ customers. They are now actually telling them that they do not need to go beyond a reasonable limit. This clarity should help to ease the situation. Having said that, it remains challenging and the top concern for Maltese banks.”

The association is looking at other challenges, including disruptive technology like Bitcoin and digital payments – but Mr Mallia said the trick was to look at these as an opportunity and not a threat.

“Fintech and start-ups, which are very agile, offer not only an element of competition but also of collaboration. I always say that unless we as banks disrupt ourselves, we will get disrupted. The banking sector is very conscious of that.

“Fintechs appeal to the younger segments, and to persons and businesses which may not be bankable at this stage because they are still in start-up phase. Those segments offer opportunities for banks. We, in the meantime, can offer fintechs access to market segments where they would not normally venture,” he said.

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