Author: Lina Klesper - Legal Assistant PKF Malta
Published on Malta Business Weekly: 20th April 2023

Fears of a wider contagious banking crisis are currently highly discussed with bank debacles and collapsing banks making news globally. Malta has had its fair share of bank scandals in the past with Nemea Bank and most recently Pilatus Bank. Another debacle was revealed in Bank of Valletta which shows how a loan facility was approved towards Steward Healthcare.  The latter entered into a long-term deal with Castille to run and upgrade three main hospitals in a Malta.  No such upgrades were rendered yet regardless, the State continued honouring Stewards annual demand for funds.  Following a five-year court case instituted by the Opposition, the judge decided the deal was fraudulent and BOV was faced with a bad debt. 

Since the beginning of March three banks collapsed in the U.S.: Silicon Valley Bank, Signature Bank and Silvergate, whereby the former two can be regarded as the two most monumental bank failures since 2008. The biggest bank failure in U.S. history was the downfall of Washington Mutual Bank during the 2008 banking crisis.

In early March it was official that Silicon Valley Bank (SVB) failed after a bank run. The tech-friendly regional bank was once trusted by startups, tech companies and venture capital investors who funded those businesses.  The failure of tech banks can be seen as resulting from sector-specific characteristics since fast-growing tech companies need to borrow huge sums of money to keep growing and survive. The big tech´s bank had increased interest rates, which ultimately gave companies less room for error. Risky investments and a lack of regulatory oversight eventually forced SVB to its knees. The question arises whether SVB is the canary in the coal mine in Silicon Valley.  Around the same time in March, crypto-focused bank Silvergate also shut down its operations and proceeded to liquidate its bank after a market meltdown. The bank has reportedly struggled for months with loans to cover the increasing amount of customer withdrawals. Recent industry and regulatory developments were eventually decisive for the company´s decision. Signature Bank, the second main crypto bank was closed by regulators on March 12 citing systemic risk after the failure of SVB in fear of continued contagion.  First Republic Bank was almost taken down with the collapse of SVB having a near-death experience from losing a huge amount of deposits within two weeks of SVB´s downfall. The U.S. banking crisis surely raises policy questions as well as issues of bank and cryptocurrency oversight.  Nevertheless, President Joe Biden publicly stated on March 13 that “Americans can have confidence that the banking system is safe”.

Having a look across the Atlantic, SVB´s collapse has visibly pummelled European bank stocks even though Europe had no direct exposure to SVB.  The Credit Suisse debacle is said to be triggered by the U.S. banking collapses, which initiated a share price plunge. The crisis eventually could fully unfold since internal material weaknesses were found in the bank’s financial reporting procedures. Moreover, the bank struggled with gradually losing trust of its high-net-worth clients over the years due to new regulations abandoning client secrecy enacted in the aftermath of 9/11 and other issues like the Greensill Capital collapse in 2021. With the confirmation that top investor the Saudi National Bank is not providing any more funding to the crippled bank and the failure of the loan intervention by the Swiss National Bank to restore investor confidence, Credit Suisse was offered the final blow. Swiss authorities eventually brokered a deal to sell the bank to rival UBS for 3 billion Swiss francs under emergency law. The Credit Suisse debacle for sure stained Switzerland´s reputation for financial stability.

End of March, after the Credit Suisse debacle unfolded, shares of Germany´s biggest lender Deutsche Bank fell heavily, raising fears of a wider banking crisis.  With market turmoil triggered by the collapses of US lenders and the Credit Suisse takeover by UBS, worries about the general banking sector´s health were expressed by investors and specifically towards Deutsche Bank, which is regarded as long-troubled.  In Germany also Commerzbank´s shares lost in value while across Europe Societe Generale and BNP Paribas as well as banks in London recorded falls.  However, German Chancellor Olaf Scholz stated there is no need to be concerned about Deutsche Bank or the European banking system expressing confidence in the institution’s organizational and regulatory structure.

With all the bank debacles, collapses, and failures, it is easy to see why one might jump to the conclusion that a wider banking crisis is daunting. Tumbling bank stocks and ongoing rate hikes triggered by monetary tightening by central banks in the fight against inflation make fears of serious troubles in the banking sector stick. However, at a closer look, the banks in question had serious problems with their business model and signs were there all along the road that the respective bank would eventually not survive the ultimate stress test.

Luckily, Maltese banks are predicted to not face immediate risks from recent international turmoil. Credit rating agency Fitch released a report on 24 March 2023 confirming Malta´s A+ credit score with a stable outlook of liquidity levels in Malta´s banking being “exceptionally strong”.

Author: Lina Klesper - Legal Assistant PKF Malta
Published on Malta Business Weekly: 20th April 2023
Get in touch: info@pkfmalta.com