Issue link: https://maltatoday.uberflip.com/i/274219
5 Investigation into interest rates But even finance minister Edward Scicluna agrees that the high interest rates are something the government must learn more about, which is why back in November he announced an investigation by the Malta Financial Services Authority and the Malta Competition and Consumer Affairs Authority. "The fact that there are two major banks operating on the island makes the local market somewhat duopo- listic. This does not however prove that there is collusive behaviour tak- ing place," Scicluna says about the EC's in-depth review report. But Scicluna doesn't rule out the conclusions of the IDR. "Based on indicators produced by the Central Bank, which could be in- terpreted as signs of anti-competitive behaviour, the government asked the MFSA and the MCCAA to investi- gate. Both institutions are currently undertaking this evaluation." Not only about profits Although Maltese banks have gone to lengths to deny that their lending rates are unnecessarily high, pres- sure is now mounting from all sides with comments from the governor of the Central Bank of Malta Prof. Josef Bonnici, and the chairman of the economic and financial affairs committee in parliament, Labour MP Silvio Schembri, signalling a determined attitude on addressing the spread. "The IDR indicates that there is anti-competitive behaviour, and while I do not agree with all the conclusions of the Commission, I find some of these conclusions are what I have been saying for the past months," Schembri told MaltaToday. "Personally I do not think there is collusive behaviour between banks on interest rates, but in my opinion bank charges and fees are so high that these are serving as a barrier to change from one bank to another, and therefore leading to less competition. "One cannot say that there is no competition at all because otherwise, the relatively new banks could not have survived so long. On the other hand I still believe there is room for improvement." Schembri says that the fact that core banks have now reported rela- tively high profits even during the last recession, shows that the market remains dominated by the oligopoly of Bank of Valletta and HSBSC Mal- ta. "One must also keep in mind that our banking system was vital in avoiding a financial crisis, implying that their conservative model has worked. But although banks are not charitable institutions, they have to think long-term and cannot make super-normal profits at the cost of economic growth." Even MEP candidate for Labour, Charlon Gouder, is joining the band- wagon of outrage, saying the IDR findings on interest rates are "worry- ing" considering they are 3% higher than the eurozone average. Big savers: a double-edged sword Marie Donnay, a head of unit who led the in-depth report (IDR), told MaltaToday that Malta has higher interest rates on loans for new busi- nesses that the euro area on average. Moreover, the difference between the interest rates that banks charge on new business loans and pay on household deposits, is higher in Malta than in the euro area. "The reasons for this phenomenon are complex and very likely a com- bination of elements," Donnay says, saying the IDR gives some pointers to the investigators from the MFSA and the MCCAA who are undertaking an examination of the banks' interest rates. Donnay's report offers four clear in- dicators as to why banks are keeping interest rates high. Firstly, there is the high risk banks are facing from the corporate sector, especially in construction which is still struggling to shift property units. "The corporate sector in Malta ap- pears to be more indebted and more highly-leveraged than most other EU states. This suggests that Maltese companies could be more vulnerable to shocks, which could translate into losses for the banking sector. In order to protect themselves against these credit risks, banks could request higher interest rates in order to sup- port profitability and preserve their capacity to build capital buffers." However, while the European Cen- tral Bank has been pulling down the loan rates – and in most eurozone states interest rates for loans have been falling faster than for deposits – in Malta the margin has remained remarkably stable. Donnay says this reflects banks' "stable funding base" – people in Malta save a lot in deposits, so banks have a low reliance on funding from international financial markets, limit- ing the need to compete for retail de- posits by increasing interest rates on deposit accounts. "An investigation into this area might improve the efficiency of finan- cial intermediation in Malta, which could be beneficial for growth," Don- nay says. mvella@mediatoday.com.mt maltatoday, SUNDAY, 9 MARCH 2014 Banks' high interest rat es under investigation CORRECTION In last week's article entitled 'Wayne Marshall complains of 'lack of structure' within V18', it was erroneously stated that Wayne Marshall was, "Speaking at a parliamentary committee" when his report on V18 was pre- sented. In actual fact, the report was tabled at a parliamentary committee by Parliamentary Sec- retary for Culture Jose Herrera on 18 February, 2014. Wayne Marshall was also mis- takenly described as 'composer', as opposed to 'conductor'. The errors are regretted. Finance Minister Edward Scicluna