IMF Report Concludes Maltese Financial System Is Healthy

by Robert Lee, Tax-News.com, London

08 September 2003

The International Monetary Fund has published the findings of its Financial System Stability Assessment undertaken in Malta in October 2002 and January 2003 in conjunction with the World Bank. Whilst the institution has determined the island's financial system to be in a healthy state, it has warned that its concentrated banking system and narrow economic base could expose the jurisdiction to external economic shocks in the future.

Below are some of the details of the IMF/World Banks's findings:

"Malta's financial system appears to be healthy and well supervised, but very concentrated and exposed to the country's narrow economic base. Financial soundness indicators and stress tests show that the domestic banks are profitable, liquid, and well capitalised. Two domestic banks account for about 90 per cent of total assets and, if either were to fail, it could trigger a systemic crisis,"

"Malta has a comprehensive legal framework and strongly adheres to most of the international standards and codes. A new central bank law providing more autonomy to the central bank and officially establishing price stability as the main objective was introduced in October 2002. Malta's legal framework comprises essential elements for anti-money laundering and combating the financing of terrorism.

"Notwithstanding the healthy status of the financial sector, the mission made several recommendations to further strengthen the resiliency of the system, in particular, (a) an effective cooperation between the single regulator for the financial sector and the monetary authority to ensure the financial stability and the soundness of the financial sector; (b) a close monitoring of the quality of the banks’ assets and a reduction in the level of NPLs; and (c) a need to specifically criminalize financing of terrorism and provide additional resources and expertise in the AMUCFI area.

"Financial soundness indicators and stress tests suggest that the domestic banks are healthy. The financial system has never experienced a system crisis. However, the limited diversification of banks’ loan portfolios, the strong reliance on real estate properties as collateral, some inefficiencies in the judicial system hindering rapid collateral liquidation, and the high concentration of domestic banking activities in two banks weaken the resiliency of the banking system to large economic shocks. The insurance and securities segments are small and not systemically important.

"A new central bank law providing more autonomy to the central bank and officially establishing price stability as the main objective was introduced in October 2002. In addition, the supervisory framework has been further strengthened over the past several years to bring it in line with EU standards, and the authorities’ capacity to manage the vulnerabilities in the financial system is improving rapidly.

"In the banking supervision area, two of the main recommendations were to encourage the close cooperation and exchange of information between the central bank and the supervisory authority (MFSA) in order to fulfill their statutory responsibilities, and a reduction of the nonperforming loans (NPLs), which are higher than normal EU average.

"In the area of financial markets, the key issue is to introduce a proper legal and regulatory foundation for the securities settlement system. With regard to AML/CFT, while progress in phasing out the offshore sector is at an advanced stage, recommendations were made to address reputational risk issues, including those related to nominee companies, and Malta’s plans for new trust legislation.

"All remaining business (bank and nonbank) operated under the specific offshore legislation will be phased out by September 2004. Going forward, all business with nonresidents will be regulated on the same basis as for domestic banks and nonbanks. In addition, the complete elimination of regulated nominee company structures is being considered by the authorities under draft legislative proposals, which would also update trust law and provide for regulated trustees, in part with a view to attracting “regulated” international business.

"The regulation of the Maltese securities market is presently undergoing a significant transition, which is expected to be completed in 2003. Recent legislative amendments aim to create a single regulatory authority for the capital market in the MFSA, with the MSE retaining a status of Recognized Investment Exchange (RIE). All regulatory powers have accordingly been placed in the MFSA, and, with the exception of listing requirements, appropriate legislation has been issued.

"All of the institutional elements of an anti-money laundering regime are now in place in Malta following the recent establishment of the Financial Intelligence Analysis Unit (FIAU). Malta’s legal framework includes the essential components for AML and CFT. However, some points are not covered explicitly in legislation, with reliance placed on interpretations of common law."

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