Banking plays an essential role in the global economy, allowing individuals and businesses to manage their finances, invest, and secure loans. In Malta, banks support economic growth by facilitating the flow of capital and providing essential financial services. However, banking inherently carries risks, such as credit risk, market risk, operational risk, and liquidity risk, which can impact the stability of individual banks and the overall financial system.

To mitigate these risks, banks must follow a set of rules and regulations aimed at maintaining transparency, safeguarding customer interests, and ensuring the stability of the financial system. This is where banking law comes into play.

Malta Banking Law

Banking law in Malta is crucial to ensure the stability and efficiency of the country’s financial system. It provides a legal framework for regulating the activities of banks and other financial institutions, protecting depositors and creditors, and promoting a safe and sound financial system. The primary objectives of Maltese banking law are to maintain the stability of the financial sector, safeguard depositors’ interests, and promote consumer confidence.

In Malta, the term “banking business” encompasses the acceptance of deposits, the granting of credit facilities, payment services, foreign exchange transactions, and the issuance and management of electronic money. The legal definition of a bank is an institution that carries out these banking activities and has a license granted by the Malta Financial Services Authority (MFSA).

Depositors in Malta’s banking system can be considered vulnerable due to the contractual relationship between a bank and its customer. When an individual or entity deposits money in a bank, the ownership of those funds is transferred to the bank. The depositor no longer owns the funds but has a contractual claim against the bank. This means that if the bank were to face financial difficulties or insolvency, the depositor’s claims could be at risk.

This arrangement highlights the importance of robust banking laws and regulations that seek to protect depositors and ensure that banks maintain a stable and secure financial environment. Adequate capitalization, prudential regulation, and adherence to international standards are some of the measures that Malta has implemented to safeguard depositor interests.

Laws and Provisions Governing the Banking Sector in Malta

Malta’s banking sector is governed by a comprehensive set of laws and provisions that are constantly updated to reflect the evolving nature of the financial services industry. Key legislation and regulations include:

The Banking Act: This is the primary legislation that governs the banking sector in Malta. It sets out the requirements for licensing, capital adequacy, and supervision of banks, as well as the roles and responsibilities of the MFSA and other regulatory bodies.

The Financial Institutions Act: This act covers non-bank financial institutions, such as payment institutions, electronic money institutions, and financial leasing companies. It provides a framework for the licensing and regulation of these entities.

The Prevention of Money Laundering Act: This act establishes the legal framework for combating money laundering and terrorist financing in Malta. It obliges banks and other financial institutions to implement risk-based customer due diligence measures, maintain records, and report suspicious transactions to the Financial Intelligence Analysis Unit (FIAU).

The Central Bank of Malta Act: This act establishes the Central Bank of Malta as the country’s monetary authority and outlines its functions, including the formulation and implementation of monetary policy and the supervision of payment systems.

EU Directives and Regulations: Malta, as an EU member state, is subject to various EU Directives and Regulations that govern the banking sector. These include the Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR), which set out the prudential rules for banks and other financial institutions, the Bank Recovery and Resolution Directive (BRRD) that establishes a framework for the recovery and resolution of failing banks, the Single Resolution Mechanism Regulation (SRMR), which creates a centralized resolution authority for EU banks, and the Deposit Guarantee Schemes Directive (DGSD), which mandates the establishment of deposit guarantee schemes to protect depositors in case of a bank failure.

These laws and regulations work together to create a comprehensive and robust framework for the regulation of Malta’s banking sector, ensuring the stability and security of the financial system, and safeguarding the interests of depositors.

Priority of Claims and Creditor Hierarchy

In the event of a bank failure or insolvency, Malta’s banking law establishes a hierarchy for the priority of claims and distribution of assets. This hierarchy is crucial to ensure that the bank’s liabilities are addressed in an orderly and transparent manner, protecting the interests of all stakeholders. The creditor hierarchy in Malta follows the following order:

Secured Creditors: Creditors with a valid security interest over the bank’s assets have the highest priority. They have the right to enforce their security and recover their debt from the proceeds of the sale of the secured assets.

Preferential Creditors: Certain claims are granted preferential status by law, such as employee wages and salaries, social security contributions, and taxes owed to the government. These claims are paid out after the secured creditors but before other unsecured creditors.

Unsecured Creditors: Unsecured creditors do not hold any security interest over the bank’s assets and include depositors, suppliers, and other trade creditors. Their claims are addressed after the secured and preferential creditors.

Subordinated Debt: Claims arising from subordinated debt instruments rank below unsecured creditors. These instruments are typically issued by banks to raise capital, with the understanding that they have a lower priority in the event of insolvency.

Shareholders: Shareholders rank last in the creditor hierarchy, and their claims are addressed only after all other debts and liabilities have been settled. In many cases, shareholders may not receive any distribution if the bank’s assets are insufficient to cover all other claims.

Historic Events: Bank Failure in Malta

While Malta has generally enjoyed a stable and well-regulated banking sector, there have been instances of financial institutions facing difficulties. One notable example is the case of Pilatus Bank, which faced regulatory action and eventual closure. The handling of this situation highlights the effectiveness of Malta’s banking law and bank resolution framework in safeguarding account holders and maintaining financial stability.

Pilatus Bank, a private bank licensed by the Malta Financial Services Authority (MFSA) in 2014, was subject to regulatory scrutiny due to allegations of money laundering and other financial crimes. In March 2018, the bank’s chairman was arrested in the United States on charges of evading sanctions and money laundering. Following this development, the European Central Bank (ECB), in coordination with the MFSA, ordered the bank to halt its operations and freeze its assets.

The MFSA, as the competent authority, took a series of actions to protect the interests of Pilatus Bank’s account holders and ensure the stability of Malta’s financial system:

Asset Freeze and Suspension of Operations: The MFSA, in cooperation with the ECB, imposed an asset freeze and suspension of operations on Pilatus Bank. This measure aimed to protect the bank’s assets and prevent any further deterioration of its financial situation.

Investigation and Regulatory Action: The MFSA conducted a thorough investigation into the bank’s activities and assessed its compliance with anti-money laundering regulations, capital adequacy requirements, and other prudential rules. Based on its findings, the MFSA recommended the withdrawal of the bank’s license.

License Withdrawal and Resolution: In November 2018, the ECB, upon the recommendation of the MFSA, withdrew Pilatus Bank’s license, effectively closing the bank. The MFSA appointed a competent person to oversee the bank’s resolution, ensuring that the bank’s assets were managed and distributed according to Malta’s banking law and creditor hierarchy.

Depositor Protection and Payout: Following the license withdrawal, the Malta Depositor Compensation Scheme (DCS), a deposit guarantee scheme mandated by the EU Deposit Guarantee Schemes Directive, was activated. The DCS protected eligible depositors by compensating them for their deposits up to a maximum of €100,000 per person. The payout process was carried out efficiently, ensuring that account holders’ interests were safeguarded.

The Pilatus Bank case demonstrates the effectiveness of Malta’s banking law and bank resolution framework in addressing the challenges posed by a failing financial institution. By taking swift and decisive action, the MFSA and the ECB were able to minimize the impact on account holders and the wider financial system. The case also underscores the importance of rigorous regulatory oversight and adherence to international standards in maintaining the stability and integrity of Malta’s banking sector.

However, unfounded or reckless action by a bank supervisor is obviously impermissible and only significant reasons justify statutory intervention. The shareholder of Pilatus Bank initiated several lawsuits against the authorities for shutting down the bank and draining its cash reserves. Despite the fact that the courts have yet to make a ruling on most matters, shareholder action indicates that statutory intervention does not come without a potential downside risk for taxpayers.

Malta’s banking law plays a vital role in maintaining the stability and integrity of the country’s financial system. By providing a robust legal framework for the licensing, supervision, and regulation of banks and other financial institutions, Malta’s banking law seeks to minimize risks and protect the interests of depositors and other stakeholders. The comprehensive set of laws and provisions governing the sector, along with the established priority of claims and creditor hierarchy, ensure that Malta’s banking system remains secure and capable of supporting the nation’s economic growth.