Moody's changes Malta's rating to stable, highlights strength of banking system
Following an extensive review of Malta's economic and financial position, credit rating Agency Moody's changed the outlook on Malta's A3 government bond rating to stable.
The key drivers underpinning Moody's decision included the expectation that debt metrics will stabilize in 2014 given an economic recovery and the country's commitment to fiscal consolidation; Malta's lack of funding stress and limited contagion risk from the euro area; the resilience of the Maltese banking system, with banks following a very conservative and traditional banking model that has not presented problems for the sovereign even through the worst of the financial crisis.
In its in-depth analysis of Malta's financial system, Moody's noted that "the banking system features a relatively clear delineation between international and domestic banking activity.
Although the system registers assets of 789% of GDP, core domestic banks (providers of credit and deposit services of the local population) represented 218% of GDP.
The report adds that this separation results in almost no spill-over from international activities into Malta's domestic economy.
Moreover, the strength of Malta's banking system is evident in its solid external asset position, which stands in stark contrast to that of other international banking centres that have been hit by volatility.
Moody's presents a generally positive outlook for the immediate future of the local banking sector, which continues to report favourable indicators: "Although its size and concentration risk are vulnerabilities, the system is very well capitalized and has a very limited reliance on wholesale funding due to its ample liquidity.
High deposit levels (at about 185% of GDP) highlight the amount of domestic wealth available to cover the sovereign's financing needs and anchor systemic liquidity."
Turning on government's funding markets, Moody's notes that the funding difficulties evident in the international financial markets over the last few years have been absent from Maltese financial markets, where all primary and secondary-market trade in government securities takes place: "although the secondary market is very much underdeveloped, this is a reflection of the primary purchasers' propensity to buy and hold these securities.
The initial purchasers are the domestic banks which then sell a portion of these securities to resident individuals as part of their retail financial products suite and as an attractive complement to deposit accounts."
The report concludes that the retail base gives the market its characteristic stability, given that non-residents hold a very minimal portion of government debt securities.
Appointment of Director General (Designate)
The Board of Governors of the Malta Financial Services Authority [MFSA] has appointed Ms Marianne Scicluna as Director General (Designate). She will take this new role with effect from 1st November 2013, from which date she will be working closely with the current Director General, Dr Andre Camilleri, who will be retiring in August 2014.
Ms Marianne Scicluna has eighteen years of experience in the regulation and supervision of financial services. She joined MFSA in 1995 and held several senior positions within the Securities Unit.
She later served as Deputy Director in the newly formed Pensions Unit and was a member of the Pensions Working Group set up by the Government. As Deputy Director of the Pensions Unit, she established and developed a new regulatory framework for retirement pension schemes.
Following a reorganisation of the MFSA in 2010, Ms Scicluna was entrusted with the creation of a new Authorisation Unit. Following Malta's accession to the European Union, she has also been involved with various working groups related to the financial sector.
Ms Scicluna is professionally qualified in finance and regulation of financial services holding an Honours Degree in Banking and Finance and Management from the University of Malta and a Master degree in Financial Regulation.
Malta constantly on lookout for opportunities to broaden financial services sector - Finance Minister Prof. Edward Scicluna
"Malta is constantly on the lookout for new opportunities to increase the breadth and depth of its financial services infrastructure, not least its securities markets," said Finance Minister Prof. Edward Scicluna, noting that Malta has been consistently featured in the top 20 tier of the World Economic Forum Competitiveness Index with respect to the regulation of securities exchanges.
Prof. Scicluna was speaking during an ESAFON international conference hosted by the Malta Stock Exchange titled 'Sustaining Economic Growth through new Financial Centres and Boutique Exchanges' on Thursday 3rd October, 2013.
Prof. Scicluna noted that at the same time, Malta has constantly kept its legislation under review in order to create new space for more specialised markets to develop and to bring more companies and instruments to the market, the more recent of which include the European Wholesale Securities Market (EWSM).
Prof. Scicluna said that the Malta Financial Services has also recently reviewed its Listing Rules to allow the admission of alternative company listings with the objective of bringing smaller companies to the attention of wholesale investors.
This market caters for companies with initial paid up share capital which may be as low as €50,000, including companies with a young track record, provided the regulator is satisfied that investors have the necessary details to arrive at an informed decision. Admissibility to listing granted on the ACL would be considered as admissibility to listing on a regulated market within the meaning of the Markets in Financial Instruments Directive.
In yet another initiative the Malta Stock Exchange, together with the Listing Authority, are working on the setting up of a Second Tier Market which would qualify as a Multilateral Trading Facility and that a proposal to this effect will be issued for consultation in due course. It is envisaged that the Multilateral Trading Facility would be operated by the Malta Stock Exchange as a separate market.
"Initiatives such as these can be instrumental in allowing a move away from full reliance on bank financing and providing for a more dynamic market. They also provide an exit route for earlier stage investors, allowing them to redeploy their capital, while setting new objectives entrepreneurs can aspire to," said Prof. Scicluna.
Turning to international developments and opportunities, Prof. Scicluna noted that beyond EU borders, market operators around the globe are involved in numerous initiatives to bring the benefits of transparent markets to areas and market sectors that have not traditionally benefited from the capital markets.
"While SMEs continue to provide fertile ground for new business, there is indeed more that boutique exchanges can aspire to than the size and scalability of business. One only has to look at what is happening in various parts of the world to get a feel of the amount and variety of new projects showing up in this space," Prof. Scicluna said.
"The trend for sustainable investing is indeed making progress on a number of fronts through regulatory and business measures designed to improve disclosure and the quality of information on the environmental, social and governance features of listed companies."
Prof. Scicluna underlined that as a relatively new financial centre in the EU, Malta has a lot to offer to financial operators seeking to make headway in a world that is still struggling to come out of crisis.
"Malta is a country that has demonstrated extraordinary resilience throughout. That it has managed to do so is mainly due to its diversified, services-oriented economy which is underpinned by a reliable and transparent regulatory environment and a competitive and skilled labour force."
"It is home to over 50 credit and financial institutions, including a good number of payment and electronic money institutions which operate in the new economy. Over 600 investment funds and around 200 investment managers and other investment service providers also operate in Malta. Insurance activities, pensions administration and trust services are also well established on the island."
"This, together with the new capital market structures coming on stream should provide the ideal conditions for boutique exchanges and technology-based market platforms to succeed. Malta is indeed a market opportunity that should be carefully considered," Prof. Scicluna concluded.
EIOPA Pilot Workshop on Proportionality in Regulation held in Malta
In October, around 60 delegates from different European financial services regulators gathered in Malta to participate in the EIOPA Pilot Workshop on Proportionality in Regulation. The main objective of this Seminar was to provide a forum for discussion among representatives of national competent authorities regarding the application of the principle of proportionality in regulation and supervision. At the same time, EIOPA sought to achieve a blue print for an upcoming seminar on proportionality in 2014.
Participants were welcomed by Dr André Camilleri, Director General of the Malta Financial Services Authority, who briefed the participants about the MFSA's efforts to strike a balance between the primary objectives of fulfilling its legislative tasks, including being responsive to consumer expectations, without however imposing unnecessary burdens on the service providers. Proportionality is an important feature in regulation and supervision, aiming to be fit for purpose rather than imposing a one-size-fits-all approach.
Putting the Seminar in a European context, Ms Pamela Schuermans, Insurance and Pensions Coordinator at EIOPA, stated that similarly to the principle of subsidiarity, the principle of proportionality regulates the exercise of powers by the European Union. It seeks to set actions taken by the institutions of the Union within specified bounds.
Under this rule, the involvement of the institutions must be limited to what is necessary to achieve the objectives of the Treaties. In other words, the content and form of the action must be in keeping with the aim pursued. The principle of proportionality is laid down in Article 5 of the Treaty on European Union. The criteria for applying it is set out in the Protocol (No 2) on the application of the principles of subsidiarity and proportionality annexed to the Treaties.
Declan O'Keeffe from EIOPA's Centre of Excellence in Internal Models went through the two aspects of proportionality pertinent to Solvency II: within the jurisprudence of the ECJ and within the text of the Solvency II directive. With regards to the former, the exercise of an administrative power is adjudged to conform to the principle of proportionality if it is "appropriate, necessary and reasonable" to achieving the objective sought.
This ECJ principle of proportionality is a legal principle which applies to all EU law, including the interpretation of the Solvency II directive, and aims to ensure that legislative objectives are attained in a manner which does not unduly restrict the freedoms of natural or legal persons ((re)insurance undertakings) and administrative powers are exercised in a manner which is not unduly burdensome on natural or legal persons (undertakings).
With regards to the latter, The Solvency II directive (Recitals 18, 19 and Article 29(3)) requires that all actions taken by supervisory authorities should be proportionate to the nature, scale and complexity of the risks inherent in the undertaking (regardless of the importance of the undertaking concerned for the overall financial stability of the market).
Case studies and other experiences from Member States and EIOPA were shared by Dora Iltcheva, EIOPA, Pauline De Chatillon, ACPR (FR), Sybille Schultz, BaFin (DE), Tracey Martin, PRA (UK), Carina Andersson, FI (SE) while Pamela Schuermans also gave an Overview of the Principle of Proportionality in Regulation in insurance and consumer protection.
The training also provided an opportunity for networking between high level delegates from the different authorities, providing for the exchange of best practice.
Industry Updates
Implementation of the common reporting framework (COREP) under the Capital Requirements Regulation
The Malta Financial Services Authority has issued a circular addressed to Investment Services Licence Holders which qualify as investment firms under MiFID, dealing on the Implementation of the common reporting framework (COREP) under the Capital Requirements Regulation.
The MFSA issued circulars on the CRD IV package on the 10 January 2013 and the 27 June 2013. As a background to the CRD IV package, Investment Services Licence Holders should make reference to these circulars.
The EU's Capital Requirements Regulation (CRR) stipulates the updated set of prudential requirements which are applicable to both credit institutions and investment firms. These prudential requirements, which are directly applicable to institutions as from 1 January 2014, have the purpose of ensuring maximum harmonisation thereby achieving a European Single Rulebook.
The CRR requires the harmonisation of supervisory reporting requirements. In this regard, the European Banking Authority (EBA) has published its final draft Implementing Technical Standards (ITS) on supervisory reporting, which stipulate the detailed applicable reporting requirements in this field. For this purpose the ITS stipulate the detailed Common Reporting Framework return which credit institutions and investment firms are required to prepare and to submit to the MFSA. These ITS were sent to the European Commission for adoption as EU Regulations, which will be directly applicable in all Member States.
Given the size of investment firms in Malta, the Authority has decided to automate the COREP Returns for investment firms in order to ensure an easier implementation of the requirements of the CRR. The COREP Returns are compiled via an Ms Excel file. This file has been optimised for use on Microsoft Excel 2010.
The main purpose of this circular is that of providing investment services licence holders which qualify as investment firms in terms of MiFID with a draft copy of: [a] the new Automated COREP Return for testing; and [b] the Manual which explains how the return should be completed.
This circular is divided into the following five sections:
- Section 1 provides background information on the applicability of the Automated COREP Return to Investment Services Licence Holders.
- Section 2 presents a brief summary of the COREP Templates.
- Section 3 outlines the reporting period of the Automated COREP Return.
- Section 4 deals with the MFSA's implementation of the transitional and grandfathering provisions arising out of the CRR.
- Section 5 provides details about the integration of the Automated COREP Return with the Central Bank of Malta (CBM) Returns.
- Section 6 includes the list of persons within the Securities and Markets Supervision Unit who may be contacted for the purpose of any clarifications on this circular.
The MFSA is inviting comments on the Automated COREP Return, the Manual and the proposed way forward regarding the Grandfathering and Transitional Provisions. Interested parties are to send their comments in writing addressed to Mr Christopher P. Buttigieg, Deputy Director, Securities and Markets Supervision Unit, Tel: 2548 5229 cbuttigieg@mfsa.com.mt by not later than the 28 November 2013.
The full Circular, the Automated COREP Return and Manual are available here: http://bit.ly/Hf6x4z
ECB starts comprehensive assessment in advance of supervisory role
The ECB has announced details of the comprehensive assessment to be conducted in preparation of assuming full responsibility for supervision as part of the single supervisory mechanism. The list of banks subject to the assessment has also being published. The assessment is an important step in the preparation of the single supervisory mechanism and, more generally, towards greater transparency of the banks' balance sheets and consistency of supervisory practices in Europe.
The assessment will commence in November 2013 and will take 12 months to complete. It will be carried out in collaboration with the national competent authorities (NCAs) of the Member States that participate in the single supervisory mechanism, and will be supported by independent third parties at all levels at the ECB and at the national competent authorities. The exercise has three main goals: transparency – to enhance the quality of information available on the condition of banks; repair – to identify and implement necessary corrective actions, if and where needed; and confidence building – to assure all stakeholders that banks are fundamentally sound and trustworthy.
The assessment will consist of three elements: i) a supervisory risk assessment to review, quantitatively and qualitatively, key risks, including liquidity, leverage and funding; ii) an asset quality review (AQR) to enhance the transparency of bank exposures by reviewing the quality of banks' assets, including the adequacy of asset and collateral valuation and related provisions; and iii) a stress test to examine the resilience of banks' balance sheet to stress scenarios. These three elements are closely interlinked. The assessment will be based on a capital benchmark of 8% Common Equity Tier 1, drawing on the definition of the Capital Requirements Directive IV/Capital Requirements Regulation, including transitional arrangements, for both the AQR and the baseline stress test scenario. The details concerning the stress test will be announced at a later stage, in coordination with the European Banking Authority.
The comprehensive assessment will conclude with an aggregate disclosure of the outcomes, at country and bank level, together with any recommendations for supervisory measures. This comprehensive outcome will be published prior to the ECB assuming its supervisory role in November 2014, and will include the findings of the three pillars of the comprehensive assessment.
ECB President Mario Draghi said, "A single comprehensive assessment, uniformly applied to all significant banks, accounting for about 85% of the euro area banking system, is an important step forward for Europe and for the future of the euro area economy. Transparency will be its primary objective. We expect that this assessment will strengthen private sector confidence in the soundness of euro area banks and in the quality of their balance sheets."
Further details of the exercise are available on: http://bit.ly/1f3RG96
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