Are banks in Malta missing a bailout?

Bailout is a general term for extending financial support to a bank or a country facing a potential bankruptcy threat. A bailout may or may not require reimbursement and is often accompanied by greater state regulations.

The government or the regulating body places strict requirements such as restructuring of organisation, no dividend payment to shareholders, change of management and in some cases a cap on salaries of executives till a stipulated time period.

Politicians have long sought to provide safety nets or stimulus to banks in bad times.  But over the past 15 years, they have become far more willing to shore up vast swathes of the economy. When industries, companies or people get into trouble, fiscal help is never far away.

Let us talk about events that have shaped the past decades. First is the global financial crisis of 2007-09. In this period, there were many crisis-related bail-outs, including capital infusions for banks and mortgage lenders (remember the Lehman Brothers collapse). The justification for the interventions was that doing nothing would have proved far costlier. If the banking system had collapsed, so would the rest of the economy.

In Malta, banks have escaped the rigours of a bailout as they all successfully passed stress tests. Naturally, other companies suffered under the stress of lockdowns and the government designed new measures funded by Development Bank to assist them. This year started with the surge in energy prices and inflation in double digit reflecting shortages of essential goods such as cooking oil, cereals and grains following Russia’s war in Ukraine.

Locally, there has been no talk of banks needing a bailout however this financial resilience clouds a turbulent banking maelstrom which was partly triggered by revelations of the Panama Papers, the unsolved assassination of a journalist and associated scandals which led to the resignation of a number of top ministers at Castille.  Malta was temporarily placed on the Grey List by FAFT. Both MFSA and FIAU had a busy time waking up to banking investigations.

Starting with Bank of Valletta, during recent years have seen the bank face various reputational hits. The bank also became entangled in the Pilatus Bank scandal – the now-shuttered lender that’s been described as a money laundering machine – which used Bank of Valletta as its correspondent bank. In 2019, this saw the bank fined some €60,000 by the country’s financial watchdog for breaches related to money laundering.

The State owns the largest shareholding and BOV has been a political pawn passed between Malta’s ruling parties for decades – and in 2013 when the Labour Party returned to power, the new Government installed a number of sympathetic figures in the bank’s hierarchy, including the financial auditor of the Labour Party, who served as the bank’s chair for several years.

BOV remains Malta’s largest bank with total assets exceeding €14 billion compared to €7.2 billion of HSBC, and in 2012/3 it faced an embarrassing string of censures over its botched property fund.  he case goes back to 2012, when the property fund - officially known as the La Valette Multi Manager Property Fund - was launched in 2005.  To refresh memories of readers - the La Valette fund was allegedly mis-sold to unsophisticated investors who sadly lost their holdings.

Many did not understand the volatility of their investment yet it was no secret that Bank of Valletta (BOV)¸ acting as custodian of the botched fund¸ issued clean custodian certificates for three years in succession. It all started when promoters of the fund¸ particularly at branches of Bank of Valletta¸ earned cool commissions selling the vehicle as a low risk property fund, which eventually lost €50 million.

Its brochure described it as a multi-manager property fund¸ which as the name implies has all the fortitude of a diversified and well-managed vehicle. It all started to go wrong when Insight as the managers decided to place a sizeable chunk of the invested monies in Belgravia European Property fund - this collapsed.

Bank of Valletta had decided to appeal against the decision taken against them by the financial arbiter, which awarded €3.4 million plus interest to 400 investors.  Regulators pontificated that clients should not suffer a loss due to mismanagement.  Two years later, BOV offered claimants €50 million in an attempt to settle the case.  The offer was turned down and Finco Trust representing a number of investors put up a fight, first at a regulatory level and ultimately judicially in front of the Arbiter for Financial Services.

The arbiter reminded BoV not only of its legal responsibility but also of its social responsibilities to so many hundreds of small investors who had trusted the Bank and relied on its advice and management skills, and this most often when they were of pensionable age investing their life savings to supplement their pension. The wheels of justice grind slowly and MFSA following three long investigations fined BOV €200,000 for selling high-risk property fund shares to inexperienced investors.  Surely, a slap on the wrists compared to the unprecedented collapse of investor confidence shattered with a €50 million loss.

Nobody resigned at the bank and no apologies issued certainly not by politically appointed stewards.

Back to 2022, a court has ordered nearly €97 million held in Bank of Valletta accounts linked to the late son of former Libyan dictator Muammar Gaddafi should be passed on to the Libyan state.

A bigger fly in the ointment was the Deiulemar trust story. Owners of the collapsed Deiulemar shipping giant were found guilty of fraud and seven members of the company’s founders were jailed by an Italian court in 2014. BOV had taken over a trust that held €363 million in the company’s assets in 2009. When the company went bankrupt, bondholders whose savings were wiped out turned to BOV.

The bank said it had filed an appeal in March, and subsequently engaged with Deiulemar curators to explore the possibility of a “mutually satisfactory resolution to the dispute out of court”, and to mitigate the further litigation risk on appeal.  In its 2017 annual report, BOV declares it has “a strong legal position on these claims and, accordingly, no provisions are required”.

The bank’s directors decided not to take note of their liability by labelling the shares worthless following the bankruptcy of Deiulemar Group. The die was cast and an Italian court ordered Bank of Valletta to pay €370 million. In the 2017 judgement, the Italian Court stated that the Deiulemar Group had what is referred to as “un debito occulto”, which is basically a hidden liability, of €753 million, and therefore a liability that was not recorded in the financial statements of the company.

Finally, BOV reached an out of court settlement, without any admission of fault, agreeing to pay a full and final settlement in the sum of €182.5m.

Experts may agree that a bailout is premature but a root and branch reform of top management may shed some light on a lacklustre performance which starved shareholders of dividends for almost four years.