Anthony R. Curmi

In response to the Prime Minister’s recent statement implying that this government saved banks from failure, the comments made by both the Central Bank of Malta and by the Malta Financial Services Authority’s chairman, Professor J Bannister, on the financial stability of local banks make interesting reading (‘Joseph Muscat’s gaffe exposed’, TMIS, 20 March).

The scope of this article is not to challenge the comments made by Prof. Bannister and the CBM as I agree that, on the whole, Malta can boast of having a very sound and well-regulated banking system. Moreover, I have full confidence in Bannister who for many years has spearheaded so successfully Malta’s rapid development as an international financial centre of repute.

It is not clear which banks Joseph Muscat had in mind when he made his statement. Possibly, he was referring to concerns about the Bank of Valletta’s abnormally high exposure to Enemalta (which was reduced substantially through the investment from China) or to the repayment of the Café Premier’s temporary leaseholders’ indebtedness to Banif Bank: a potential unrecoverable debt that was repaid through government purchasing the remaining lease period for €4.2 million at the taxpayers’ expense.

Independent of the inference given to the claim that this government had saved banks from failure, what prompted me to write, putting the clock back to December 1973, is to say that I think that the CBM would probably have handled differently the situation created by the orchestrated run on the National Bank of Malta (NBM) group, had an apolitical and forward-looking banking regulator such the MFSA’s chairman been at the helm.

Space does not permit me to go into detail but suffice it to say that the fate suffered by the NBM (i.e. the decision by the government to take over that banking group and, in December 1973, to appoint a Council of Administration which evolved in the creation of the Bank of Valletta in March 1974) was based on the alleged pretext that the bank was insolvent. I am on record as having maintained, in my articles published by this newspaper in past years, that the bank had a temporary liquidity problem and certainly was not a failed (insolvent) bank.

In 2012 my advice was sought by the NBM Shareholders’ Association whose representatives, many years earlier, had instituted three court cases for compensation. Initially, I was involved in attempts to reach an amicable out-of-court settlement with the government but these efforts did not have a positive outcome.

In the event, the Constitutional Court of Appeal confirmed on 14 October 2014 a previous judgment in favour of the appellants delivered by Mr Justice J.R. Micallef. The Court of Appeal Court even decreed that, based on the evidence seen and opinions of experts in banking and finance, the Court considered that, “notwithstanding the auditors’ negative opinion and the Bank’s temporary liquidity problem, value had passed from the NBM shareholders to the COA and BOV and that such shareholders had not been given any compensation”. The case then reverted to Mr Justice Micallef for determination of the amount of compensation, as the argument with regard to the NBM’s solvency or otherwise had been put to bed.

After carrying out considerable research, I compiled a sworn affidavit which was presented in court in January 2015 detailing, with supporting figures and documentation, what in my considered opinion constituted fair compensation to the NBM shareholders, taking into account the total value the government had derived since 1973 from its shareholding in BOV. Including the current market value of government’s shareholding, I calculate the net amount of government’s gain at present to be in excess of €428 million.

Since January 2015, four court sittings have been held at the request of the Attorney General, who cross-examined me on my submissions at three of these sittings. The AG also requested time to cross-examine again a foreign banking expert who, with others, had presented a report in court in June 2015 counteracting mine and who previously had been brought in as a witness by the government in April 2007 (nine years earlier!).

In his 2007 testimony, this expert held the view that the NBM was insolvent but he admitted that there are different quotations of solvency. He went on to say that in the USA, certain bench marks are used and he quoted as a ‘trigger point’ what he termed to be a bank’s ‘equity leverage ratio’. This was explained by him as basically a bank’s equity, divided by total assets.

Using the above-mentioned yardstick, it is interesting to note the comparative equity leverage ratios (see table below) as per the NBM’s 1972 audited accounts (the last published figures before the COA took control of the bank) and the latest audited figures of Malta’s six ‘core’ retail banks:-

 

Equity leverage ratios (equity divided by total assets) of six core retail banks  in Malta
APS Bank group (31.12.14)				0.108
Banif Bank (31.12.14)				0.037
Bank of Valetta group (30.09.15)				0.072
HSBC Bank Malta group (31.12.15)				0.064
Lombard Bank group (31.12.14)				0.128
Mediterranean Bank group (30.09.15)				0.075
National Bank of Malta group (31.12.72)				0.063

It will be noted that the NBM’s 1972 equity leverage ratio was virtually at the same level as that of HSBC Bank Malta at present and certainly much better than that of Banif Bank: so much for the assertion that the NBM did not suffer from a temporary liquidity crisis but was a failed (insolvent) bank when the government moved in to take control in December 1973 without the NBM’s shareholders being given any compensation.

With regard to the question of temporary illiquidity, my view remains that it is odd that the CBM did not consider it fit to seek the then Finance Minister’s authority, as contemplated by Sec. 15(k) of the Central Bank of Malta Act 1967, to advance funds to the NBM, secured by its holding of sovereign investments, in order to tide the bank over its liquidity problem, especially at a time when great strides were being made by the bank to reduce its advances to customers and thus improve the liquidity situation. Yet both the COA, on assuming control of NBM’s banking business, and subsequently BOV for some time thereafter, were exempted from the liquidity requirements stipulated by the Central Bank of Malta Act.

Regrettably, in 1973 the ‘lender of last concept’ was pushed under the carpet without any valid reason having been given.