Issue link: https://maltatoday.uberflip.com/i/1280162
20.08.2020 6 OPINION A s if by stealth, last week in the advent of St Ma- ria national feast, a new law was born which may have es- caped the attention of many cor- porate managers, some trying to catch up with much needed rest. For the lucky few, they in- dulged in the hedonistic pleas- ure of high heeled parties in- cluding swimming in Comino's crystal waters, while their part- ners imbibed chilled cocktails on board foreign flagged, pow- er boats. What is the prognosis of ex- perts about this law? It is sim- ply an act to provide for the establishment of a Residual Balances Fund and a frame- work for action that shall be taken in respect of the residual balances of a credit institution which meets the criteria set out in this Act. What is the motto for this mechanism? e easy answer is that it shall facilitate the dissolu- tion and winding-up process of such a credit institution (mean- ing banks among others) whilst allowing for a controlled release of residual balances transferred from that credit institution. Its motive includes the prevention of money laundering and the funding of terrorism. Such lia- bilities shall be transferred to a Fund: itself a body corporate. It shall be directed and managed by a Committee established un- der Article 7. Powers include, inter alia, a novel approach to effect the closure and orderly winding-up of a deposit liability portfolio. It is empowered to override rights of shareholders and, or the officers of the transfer- ring institution, including the requirement for approval by shareholders and, or the board of directors (or other similar governing body) of particular transactions in order to permit a disposal of the transferring institution's deposit liabilities and deposit assets. Why do we need such a maverick law (Indiana Jones type) when we hear regular announcements assuring us that all our banks have passed rigorous stress tests by ECB? Perhaps, the naughty pandem- ic has opened a Pandora's box and now after a severe lock- down, we need to separate the wheat from the chaff. At this juncture, we note how both BOV and HSBC in Malta reported poor results over the first six months of this year. Not to worry, say the pundits as there is nothing fundamentally wrong in the prowess of man- agement. All is well, they reply in unison, since one can really and truly conveniently blame COVID-19, for the shameful results. Sadly, for the first six months of 2020, the Bank of Valletta Group is reporting a profit be- fore tax of €13.8 million, a se- vere drop from previous year when it posted a respectable €54.3 million. BOV humbly re- ports that its annualised return on equity (pre-tax) is just 2.6%. Apart from the COVID-in- duced business shrinkage, BOV has woken to a number of skeletons in its cupboard. One salubrious case is the trust it holds on behalf of the Deiulemar group - a de- funct Italian shipping com- pany, claiming €363 million from BOV to which recently it pledged an out-of-court settle- ment of €50 million. is was rejected. Last November, the ECB re- ported that the number of high-risk foreign customers had actually risen and, in many cases BOV had no informa- tion about the origins of their wealth. ECB remarked that the bank had no unit to identify bribery and corruption among international clients and did not keep a record of those who had payments blocked due to money laundering risks. e report said ECB investigators also identified a lack of checks over accounts held by Pilatus Bank, which was shut last year after its Iranian owner Ali Sadr Hashemi Nejad was arrested in the United States (recently ac- quitted) on money-laundering and sanctions violation charges. Following the issue of this ECB report, BOV's de-risking exer- cise has taken on a much wider dimension. e bank this year is engaged in a priority process - to deal with the legacy issues highlighted by the report. e bank claims it has made strong progress in addressing the spe- cific issues within the relevant timelines. HSBC has also re- ported a difficult trading result for mid-2020. Profit before tax was down from €19.1m to €1.8m due to higher expected credit losses and lower revenue reflecting the impact of the COVID-19 outbreak. Revenue was down 16% largely driven by revalua- tion losses within the Life In- surance subsidiary ('HSBC Life Assurance (Malta) Limited') as a result of adverse market movements. Ideally, we take a leaf from the Irish solution to their problem of a collapsed property sector which in 2007 saw the collapse of the prop- erty bubble . en, it risked sending its main banks to the bankruptcy register. A brilliant Irish solution is to set up an SPV – special pur- pose fund – to buy and manage the debts. is took the form of a bad asset agency called NAMA. is mechanism served as an international ex- ample of successful manage- ment of bad assets. e Fund facilitated the assessment of capital shortfalls emphasizing that they should be compre- hensive and bottom-up. e empirical Irish success story in its recovery fable saw taxpayers acting in unity to shoulder the full costs of recap- italising the Irish banking sys- tem. Naturally, as part of the resulting stability in Ireland, benefits accrued to the wider European banking system. e banks in Malta are challenged by the pandemic which has slowed down drastically the hospitality and food services sectors. It also took the wind from the sails of a galloping prop- erty market. All banks have tightened lending conditions (the irony is that lately Malta Development Bank has offered a 100% guarantee to selected banks for fanning post-COVID lending). With the hindsight of three small foreign banks (Pila- tus, Satabank and Nemea) that had their license removed after extensive FIAU investigations, one may be tempted to point fingers to a soft- touch banking supervision. However, during a post-COV- ID induced slowdown, one must at all costs resist the imposition of arbitrary new lending restric- tions, for example aimed at re- ducing banks' loan-to-deposit ratios. e domestic economy needs all the help it can get not to be starved of essential cash flow support and to sustain high employment levels. In conclusion, one observes that these are difficult times for all credit institutions caused by the onset of the pandemic yet the government has borrowed extensively to create a recovery fund. One hopes it takes the advice of the Chamber of Commerce to lower VAT rates in the em- battled sectors. Studies in UK and Germany proved that lowering fiscal drag will revive subdued domestic demand. A mechanism for sanitising toxic assets of credit institutions George Mangion George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island