The Malta Independent 23 September 2019, Monday

National Bank fictions exposed

Sunday, 25 August 2019, 09:53 Last update: about 29 days ago

By Piero Ugolini, Richard Nun, independent experts, with input from Alfred Mifsud, former senior banker and former Deputy Governor, CBM

This replies to articles written by Anthony Curmi in The Malta Independent on Sunday from April to July 2019 in respect of the failure of the National Bank of Malta

Mr Anthony Curmi continues to offer creative theories and elaborate calculations to support his unfounded claims. Again, Mr Curmi’s articles are inaccurate and misleading.

His assertions show a clear pattern: whenever Court hearings are in the offing, he resorts to the media in an attempt to influence the legal process.  It seems that he is frustrated by the fact that the Court has not accepted – at face value – his many questionable claims from January 2015. Instead, after considering our testimony, the Court has appointed a panel to review the NBM case. Although we believe arguments should be made in Court, in the circumstances we feel it appropriate to respond for the sake of par condicio.  

Mr Curmi took the opportunity of a possible updating of the real estate price index published by the Central Bank of Malta (CBM) to claim that the index used in 1973 for determining loan loss provisions of the National Bank of Malta (NBM) was an “arbitrary” decision by the Council of Administration (COA). Apparently he chooses to disregard the fact that national agencies worldwide periodically adjust their indices to reflect changes in socio and economic factors. This does not mean an index was wrong, only that an update was needed.

Regarding the “boom and bust” in real estate prices in Malta between 1968 and 1973, the CBM wrote in its 1970 Annual Report: “The private property boom which lasted from 1966 to mid-1969 has clearly passed” and by December 1971 the average price of detached villas and flats were down 33 per cent and 42 per cent respectively. Again, in its Annual Report for 1972, the CBM wrote: “The sharp drop in prices continued at a higher rate in 1972.”

It is important to recognise that these reports were written years before the NBM deposit run and failure.  Perhaps Mr Curmi believes that the CBM was writing these reports years before, anticipating in advance that they would be used in 1973 to justify the level of loan provisions at NBM?

Given Mr Curmi’s latest attempt to prove in the press that NBM shareholders deserve to be compensated for failure, we believe the public deserves to hear the facts. His latest series of articles is simply a re-hash of the unfounded claims and opinions he offered before. It is not necessary to re-discuss each of them here because they have all have been shown to be questionable or irrelevant. (See our affidavit of June 2015). The bottom line is this: none of Mr Curmi’s faulty claims can dispel the fact that in December 1973 the NBM was a failed institution and only intervention by the Government prevented a total collapse, with great adverse impacts on the wealth of the Maltese population.

It is important to recall that deposits in the National Bank were not covered by deposit insurance in 1973, so any loss in deposits would have been suffered entirely by the depositors.  The managers and shareholders of NBM would have had no liability. This was recognised by senior executives of NBM. As reported in Court the Minutes of a meeting on 10 December 10 1973 between the Prime Minister and the National Bank representatives – President (Mr Vella), General Manager (Mr Micallef) and Manager (Mr Tagliaferro): “The National Representatives indicated that it could be possible for Government to take over National Bank without putting up any money that is giving the shares at nil value. The important thing was to safeguard the depositors.”

It is important to reiterate and emphasise three fundamental facts:

1: In December 1973 the National Bank of Malta was illiquid. NBM was having difficulty meeting its obligations and honouring deposit withdrawals. This liquidity problem had been recognised by the NBM’s Executive Committee and Board of Directors a year earlier and is explicitly documented in material presented to the Court.

2: In December 1973 the National Bank of Malta was insolvent. The realistic value of assets was less than the sum of liabilities. This also is clearly documented in a report prepared by the accounting firm Deloitte, a very reputable international accounting firm. The findings of this report were endorsed by the CBM Supervisors who, in fact, had criticised the NBM much earlier in 1973 for not making sufficient provisions for its large book of non-paying loans, most of which were owed by the controlling shareholders.

3: In December 1973 the Government of Malta was the only entity willing and able to rescue the failed National Bank of Malta. In so doing, the government preserved the stability of the Maltese banking system, saved depositors from severe losses and prevented chaos in the broader Maltese economy.   

In cases of bank failures, the financial situation at the time of intervention is all that is relevant; whatever happens afterwards is irrelevant. In the failure of the NBM, the Government recapitalised the bank by tripling the original capital of the shareholders, changed the management and name of the bank to BOV and provided full coverage of deposits –100 per cent deposit insurance. This was the critical action that NBM could not – and did not – take and which makes an ex-post comparison absurd.

Arguments that the NBM was profitable before the intervention of the Government in December 1973 carry no weight.  It is not unusual for failed banks to show strong performance in the years leading up to failure (eg LTCM, Northern Rock, Bear Stearns, and Lehman Bros). This ‘false performance’ results from artificially good returns from high-risk lending with little or no provision for downside losses. Ultimately, however, a point is reached where the accumulation of risk triggers a sudden downfall. That is what happened to the NBM.

Finally, it is worth noting that in recent bank failures in the Euro-zone, shareholders have always been wiped out. In some cases, shareholders have even sued the managers of the failed banks for misconduct and incompetence. In the case of NBM, the managers of the bank were also the controlling shareholders, so it is unlikely they will sue themselves.

We continue to firmly believe that the Government’s intervention was timely and appropriate. The actions of the Government saved the deposits of the Maltese population and safeguarded credibility and stability in the economy. It would now be grossly unfair to require Maltese taxpayers to reward the NBM managers and shareholders for their failures.

                                                                                                   

 

 

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