An overview of banking regulation and supervision in Malta, since its inception until 2021 (today).
This is the first of six expert’s posts on the banking industry in Malta, and it kicks off by the “Banking regulation and supervision in Malta”. Our banking expert, Darren Borg in today’s post will be analysing on how banks in Malta were, are currently, and will be governed in the nearby future. Mr. Borg does this by briefly catching up and returning to the introduction of the Banking Act.
After reading this post, you will be familiar with the concept of who oversees financial institutions in Malta, the MFSA’s attempts to regulate banks, and the banking sector’s regulatory goals for 2021.
Role of the MFSA within Banking Industry:
Back in 1994, The Banking Act was introduced into the Maltese Law in order to make sure that all sectors within the banking industry are regulated and also to ensure that the European Union Directives regulating the industry are also implemented into the Maltese Law.
Role of MFSA
Malta Financial Services Authority (MFSA) through Article 4B of the Banking Act was granted with the power to act as the competent authority responsible for licensing, regulating, and supervising credit institutions, electronic institutions, and financial institutions in Malta. The MFSA forms part of the Single Supervisory Mechanism (SSM) which establishes the European Central Bank (ECB) as the central prudential supervisor of credit institutions in the Euro area under the SSM.
There are instances where the ongoing supervision of the Banks that are considered as significant institutions, is carried out by the European Central Bank (ECB), whereas those Banks/Financial institutions that are considered less significant their supervision is carried out by the MFSA.In general MFSA is still being monitored by the European Central Bank to guarantee the proper implementation of EU Banking Legislation. MFSA is also responsible for the off-site and on-site inspections of Financial institutions in Malta.
Obligations of Banks in Malta
Credit institutions are also required to submit a report clearly highlighting their legal obligations and this report is to be analysed by the competent authority. On-Site visits are to be carried out via planned visits where the Authority will examine the activities of the credit institutions. When an institution is to act in a contradicting way from the provisions of the Banking act, MFSA may interfere and before taking any severe actions against the institution it might decide to grant the institution a time period where the institution would need to rectify its position. Depending on the severity of the breach of obligations, the authority can also decide to impose fines or to suspend or withdraw their respective license.
Outcome from Supervisory Priorities addressed in 2020 within the Banking Sector:
From statistical records throughout the year 2020, MFSA continued with its efforts to assess Credit risk particularly vis-à-vis non-performing loans and the assessment of credit underwriting criteria. Due to some changes within the economic climate and since unrecognised credit risk can threaten balance sheet stability, MFSA is to strengthen its approach throughout 2021.
Actions taken by the MFSA in 2020
Business Model and profitability risk was also tackled during 2020. In fact, MFSA analysed different credit institutions business models both thematically and as part of the Supervisory Review and Evaluation Process (SREP). This has been identified as the first step in assessing the financial soundness of the Maltese credit institutions in view of their sustainability and the risk that they may pose to the financial stability in general.
Capital and liquidity of credit institutions continued to be monitored in 2020. MFSA was particularly giving attention to capital planning and stress testing. MFSA outlined the necessity to continue building on the progress achieved also during the year 2021.
MFSA was also trying to ameliorate Bank’s Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) documents as well as their governance arrangements.
MFSA and Governance
The MFSA was also trying to ensure good governance particularly amongst financial institutions. There was an automated tool that was developed by the banking supervision in order to assess and score financial institutions’ organisational structures. Where there were deficiencies that were identified, remedial actions were taken through supervisory interactions and reviews.
In order to ensure firms’ viability and sustainability business models were also assessed by the authority through deep dives. Financial institutions’ regulatory compliance with Payment Services Directive II (PSD II) was also assessed and non-conformity was addressed immediately.
MFSA and IT-Risk
When it comes to IT risk there were number of reviews that were carried out in collaboration between the Banking Supervision function and the Supervisory ICT Risk and Cybersecurity function.
Supervisory Priorities for 2021 within the Banking Sector:
Following the effort done in 2020 and also in line with cross-sectional priorities for 2021, MFSA will continue to assess the Governance of credit and financial institutions as a sector-specific priority for the banking sector. In fact, the Authority plans to expand and apply a wider communication channel and training strategy to support the development of boards, particularly Non-Executive Directors.
In relation to Less Significant Institutions (LSI), the Authority will be assessing the number of and the remuneration afforded to these directors, their quality and understanding of their role and their effectiveness. Discussions will also be held between Banking Supervision team and authorised entities in order to assess how boards are approaching succession planning.
The MFSA will also continue to follow up on Supervision Review and Evaluation Process (SREP) mitigation actions taken as part of the SREPs on Banks to make sure that there will be constant improvement in compliance cultures for Banks and Financial Institutions. If necessary, the Authority might take enforcement actions.
The impact of COVID-19 on Maltese banks
COVID-19 led to changes in economic climate hence there will be more focus on business model viability in relation to both credit institutions and financial institutions specifically in relation to poos-COVID viability and whether firms have accurately costed their compliance costs in their business plans. The impact of such climate change is to be assessed in 2021.
Analysis and quantification of credit risk in Malta
Analysis and quantification of credit risk together with assessment of asset quality and credit institutions’ preparedness for the balance sheet and operational challenges that are linked with higher credit risk is to be conducted. On-site inspections by the Banking supervision are expected in order to examine the quality of the Banks’ controls that recognise impaired exposures, board reporting on credit risk and operational preparations that leads to an increase in credit risk profiles. In 2021 there will be more focus on Capital and funding trajectories.
The MFSA is planning a Conduct of Business Rules
MFSA plans to release Conduct of Business Rules for the banking sector in the coming months. Conduct Supervision team will be analysing through supervisory interactions on the credit worthiness assessments that are to be conducted when facilities are granted in order to confirm whether such assessments are sufficient or not.
All of the above shows that the priorities of the MFSA are to strengthen the endeavours that were already recognised in order to support its Supervisory and Regulatory capacity as manifested with the development of number of new functions covering financial crimes, conduct, ICT and cybersecurity together with ensuring to strengthen the banking supervision function.
MFSA is to continue expanding and intensifying its supervision in the coming months and this will establish the Banks’ risk and compliance functions, especially for minor institutions that were previously amalgamating the management of different functions such as risk compliance, other legal responsibilities and the role of an MLRO. MFSA emphasises on the importance that Banks should always invest further in risk and compliance infrastructures and additional resources to make sure that they are in line with supervisory reporting expectations.
Disclaimer: The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet up with any of our representatives to seek further information, please contact us for an appointment.