Systemic Risk: The Maltese Banking Industry’s Perception

The events leading to the onset of the financial crisis more than a decade ago have led the international community to devote significant resources towards the analysis of systemic risk. Since then, research and analysis has been geared towards the prompt identification of this risk, together with mitigating techniques in the form of macro-prudential policy to complement micro-prudential measures. The authorities overseeing Malta’s financial stability have been extensively collaborating to ensure that systemic risk is being adequately addressed and to take prompt corrective action should pockets of vulnerabilities be identified.

An online survey carried out in the last quarter of 2019 by the MFSA was one of the recent initiatives aimed at gauging the banking sector’s views of risks and their confidence in the stability of Malta’s financial system. The survey was circulated across all active credit institutions which were licensed in Malta at the time and was typically completed by executives responsible for risk management and compliance.

All the banks submitted replies to the questionnaire, and for confidentiality reasons, the replies and findings from the survey were aggregated, with partial distinction being made between those banks which are predominantly connected with the domestic economy and the entire banking sector. The feedback from credit institutions formed the basis of the report outlining the most prevalent risks as identified by the banking industry, both in terms of perceived probability of risk materialisation, as well as their possible consequences on the financial system and the institutions’ capacity to cope with the outcomes should a systemic risk occur.

The Findings

Findings from the report identify a certain level of heterogeneity in risk gradings in view of differences in banks’ sizes and business models, diverse linkages to local and foreign economies, and adaptability to changing economic circumstances. This notwithstanding, banks have recognised a number of common concerns about certain categories of risk sources:

• In particular, banks identify cybercrime and IT deficiencies as being a major risk source that could potentially influence the local financial system.
• The banking industry also indicated geopolitical uncertainty as a prominent risk, raising concerns regarding the possible impact on euro area economies, should a disorderly Brexit materialise, and the subdued global economic outlook.
• The banks having the strongest ties with the domestic economy drew prominence to risks related to real estate developments, drawing attention to possible risk intensification over the foreseeable future.
• The banks that adopt a less traditional business model indicated increased competition from non-bank financial intermediaries that provide bank-like activities as a possible vulnerability arising in the future.
• Concerns were also raised with respect to the presence of regulatory complexities and jurisdictional challenges, which may give rise to potential vulnerabilities on to the entire financial system.

Risk Preparedness

Notwithstanding the above, banks consider themselves as being adequately prepared to deal with vulnerabilities and risks which have the potential to spill-over across the financial sector. Moreover, survey responses have shown that banks consider the state of the Maltese financial sector as being relatively stable, outlining the healthy state of the local economy and ongoing developments within the sector.

Read the full report here.