Malta, a small island nation in the Mediterranean, has a well-regulated banking system. However, despite the regulatory framework, bank failures can still occur, leading to concerns among international bank creditors. Banking law in Malta is primarily governed by the Banking Act (Chapter 371) and the Financial Institutions Act (Chapter 376). The Malta Financial Services Authority (MFSA) is the main supervisory authority for banks and financial institutions. In the case of bank failure, the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) are the main legal frameworks that apply. These laws outline the processes and tools for dealing with failing banks.
Maltese banks, such as Pilatus Bank, have faced significant fines in recent years for various violations, including money laundering and violating sanctions. The penalties have been substantial, yet these banks have not been shut down due to various factors, including ongoing investigations, legal proceedings, and the potential impact on the local financial system. Regulators have instead opted for financial penalties and ongoing supervision.
Bank Failure in Malta
Bank failure in Malta is defined as a situation where a bank is unable to meet its financial obligations, is insolvent, or faces a serious threat to its viability. A bank is considered failing or likely to fail when it no longer meets the minimum regulatory capital requirements or when it is unable to pay its debts as they fall due.
The MFSA, in collaboration with the European Central Bank (ECB) and the Single Resolution Board (SRB), is responsible for determining bank failure in Malta. These institutions assess the financial health and risk profile of banks, taking into account factors such as capital adequacy, asset quality, management effectiveness, and market conditions.
Legal Mandate of the Bank Supervisor in Malta
The MFSA is the primary bank supervisor in Malta, with a legal mandate to oversee the financial sector, including banks and financial institutions. The MFSA is responsible for ensuring that banks operate in a safe and sound manner and comply with regulatory requirements. In the event of a bank failure, the MFSA collaborates with the ECB and the SRB to determine the appropriate resolution measures.
Once a bank failure is concluded, the resolution process begins, aiming to safeguard financial stability and protect depositors and creditors. Common reasons for bank failure in Malta include poor management, inadequate capitalization, insufficient liquidity, and economic downturns.
Bank supervision and resolution planning in Malta are designed to preserve the critical functions of banks and ensure their continuity in times of financial distress. The MFSA, in collaboration with the ECB and SRB, actively monitors banks’ risk profiles and requires them to develop recovery and resolution plans outlining the measures they would take to restore financial stability in the event of a crisis.
The SRB is the resolution authority in Malta, responsible for taking action when a bank within its jurisdiction fails. The SRB can employ various tools to reorganize, recapitalize, restructure, or dissolve a failed bank, including the sale of the business, the establishment of a bridge bank, and asset separation. These tools aim to minimize the impact of bank failure on the financial system and on the financial system and protect depositors and creditors, while ensuring an orderly exit of non-viable institutions.
Protection of Account Deposits and Creditor Interests
Malta has a deposit insurance scheme in place, the Depositor Compensation Scheme (DCS), which is designed to protect depositors in the event of bank failure. The DCS covers up to €100,000 per depositor, per bank. This insurance scheme helps maintain confidence in the banking sector and ensures that depositors are protected from loss. Creditors’ interests are protected through the resolution and recovery planning process, which aims to safeguard financial stability and minimize the impact of bank failure on the financial system.
The resolution authority, the SRB, works in tandem with the MFSA and the ECB to ensure that non-viable banks exit the market in an orderly manner. This process involves using resolution tools, such as the sale of the business, bridge bank, and asset separation, to minimize the impact of the bank’s failure on the financial system while preserving critical functions and protecting depositors and creditors.
In cases where the resolution of a failed bank is not deemed feasible or in the public interest, the bank may be subject to liquidation. Bank liquidation in Malta is governed by the Companies Act (Chapter 386) and involves the appointment of a liquidator who is responsible for winding up the bank’s affairs, realizing its assets, and distributing the proceeds to its creditors.