We have heard that Spanish banks are suffering from capital shortage and the latest privatisation of Bankia, the fourth largest Spanish bank, has sent cautious signs to the banking system. Observers say it has started a credit crunch, making credit difficult for small and medium sized enterprises. This may seem improbable to us here on our local turf where we are told all banks have passed successive stress tests with flying colours and were found fully capitalised. Of course we know that local banks have a sizeable exposure to mega developers who, because of the slow real estate resale market, are finding the going tough. Simply put, there over 25,000 finished luxury units with too few buyers around. Not to mention that in the boom years 2003 to 2007, Mepa had happily approved building permits on virgin land, which, coupled with easy credit, created a property bubble that now yearns for a much delayed correction. What contributed to the glut of unsold properties? The general economic slump did not help. Furthermore, the delay in issuing a revised high net worth scheme (this took almost a year) to replace the ageing permanent resident rules has not helped market sentiment, but then of course the new scheme has been heavily criticised by developers as being tough on non EU applicants who have to post a bond if they plan to buy residential property and stay beyond the four-year initial period.

No doubt, the economic instability in Europe has not helped the real estate market to face its inventory of unsold properties and there are signs that developers are showing symptoms of uneasiness about the cost of bank interest to continue financing speculative adventures in land acquisitions on prime sites. There is no indication that prices have been reduced to bargain levels and one can only see modest reductions (around six per cent) in prices of finished apartments for first time buyers. It may take time for a correction to be felt across the board and this has not helped the nervousness of local banks, which in the past had financed luxury mega developments secured on projected future sales of what can be judged as being relatively highly priced compared to other Mediterranean resorts. One can say that there seems to be a trend in building bubbles that have already hit the economies of Ireland, Portugal and Spain where banks have been over extended to the construction sector and financed speculative mega deals in luxury developments. Now, sadly, in a property slump, speculators and investors are sitting on negative equity.

It goes without saying that political support for the construction industry has always been generous since the industry directly and indirectly contributes to a multiplier effect and is a major employer in any country. Therefore it is not unusual for banks to give the green light to lending sprees to speculative property ventures when the property boom is at its acme, knowing that a bull market itself guarantees a good collateral and they can charge premium rates of interest on such lending. It is a win-win position, that is the property bubble will sustain higher profits for all and creates that much desired feel-good factor politicians clamour for. But the party cannot last forever and like in a game of musical chairs, when the music stops banks will face unpaid loans and have to search for more capital injections to cover their losses on inevitable “haircuts”. Gone are the days when bankers expected generous annual bonuses as these have been heavily criticised by shareholders who, deprived of dividends, started badgering directors to come up with a fast and reliable recovery plan.

But how relevant is this tale of boom and bust to our economy? The answer is given in a Commission communication to the EU Council, which urged the government to take measures “to ensure the robustness of the financial sector”. This is not a reprimand as our banks have strong reserves and had reported annual increases in profits even at a time when the economy in general was facing a recession. So why is Brussels urging us to take remedial measures in particular to the correct the banking meteoric growth pattern and what is termed as a “ noticeable increase in problematic loans”. Our banks are regularly monitored by regulators and present clean audit reports as a testament to their strength in facing the economic storms that have been making the headlines abroad. The Commission described the need to strengthen the financial sector as “a new challenge” for Malta’s long-term economic sustainability. Surely any non-performing loans are regularly reviewed both by directors and auditors and any impairment is promptly recorded and set aside from distributable profits .So does the warning from Central Bank governor Josef Bonnici (himself an ex-minister for economic affairs) come too late when he pointed out the concentration of property-related lending and the use of property as loan collateral. Does this warning bring back a feeling of dejá vu − 40 years ago a similar property slump had seen a banking sector seeking fresh capital to buttress its reserves.

This brings us to the saga of the National Bank of Malta (NBM), which was responsible for the financing of the island’s massive property and industrial development in the glory days of the mid sixties.

This period was a golden age for all types of budding entrepreneurs who, aided by a friendly banking service, boosted Malta’s economic progress to previously unattained heights. This was seen particularly in the unprecedented property boom that attracted foreign investors to buy in areas, such as St Maria valley in Mellieha, in previously undeveloped and other idyllic spots around the island. All this was thanks to the foresight of managers at National Bank of Malta who had faith in the future growth and industrialisation of the island which only a few years before was seen as a fortress economy heavily reliant on dwindling British military spending budgets. NBM flourished and generated directly and indirectly a visible feel good factor under the leadership of conservative prime minister Dr Borg Olivier (the architect of Malta’s successful bid for independence in 1964) .The property bubble burst in the early seventies and, with the election of the Socialist government in 1971, saw the unfolding story of how the National Bank of Malta was rescued following an alleged run by depositors.

Regrettably, it is a long-running court case. The bank was nationalised without compensation on the pretext that the assets were matched with liabilities and had no value. The National Bank of Malta was then transformed into Bank of Valletta (BOV) in 1974 and Deloitte (the present auditors) issued a clean audit report. Reading the first accounts of 31 December 1974, one finds inter alia no reference to the fact that the provision for bad debts was increasing astronomically, implying that NBM’s capital had run out. Subsequent audited accounts reveal that such impairment provisions were over generous since more than 78 per cent were recovered and were in line with what the NBM had forecast in its 1973 interim accounts. Strangely, the Central Bank refused to act as a lender of last resort and is reputed to have blocked Barclays and other banks from lending to NBM to avert a short-term lack of liquidity. It is pathetic to reflect that shareholders are still fighting for compensation on the savings and investments they lost in 1973. However, what baffles the mind more is the fact that successive Nationalist governments failed the NBM shareholders badly. In a plea filed in 2010 by the Attorney General’s office, on behalf of the Prime Minister and the Finance Minister, it was argued that the main court case was time-barred as it had been filed in 1977.The government quoted articles in the Civil Code stating that to rescind a contract on grounds such as violence, error or fraud, a case must be filed within two years. In instances of violence, this period ends two years after the violence ceases. The main civil case was filed four years after the National Bank of Malta was taken over by the government. The National Bank saga has long been synonymous with court delays – several judges have presided over it and heard the plea of representatives of 300 shareholders who allegedly were coerced into handing over their shares for free after depositors began withdrawing savings due to rumours about the bank’s liquidity. Now with so much water under the bridge and an election looming on the horizon, there are rumours that an out of court settlement talks with government are in course. Observers say that justice delayed is justice denied.

Dom Mintoff could have saved the National Bank from the trouble it faced in the early 1970s but instead thought it best to restructure it and start afresh with a new management team. This tale of two banks (NBM as replaced by BOV) only goes to show that with the passage of time one ought to learn from past experiences. As cautioned by the Central Bank governor, the time is ripe for local banks to take stock of the incidence of under performing loans linked to the property sector in order to secure a soft landing should a property correction ever hit the island. In conclusion, if adequate precautions are taken in hand to reverse the trend of non-performing bank loans, then perhaps the sad story of the tale of the two banks will not be repeated.

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The writer is a partner in PKF, an audit and business advisory firm.