IMF calls on MFSA to take urgent action on shortcomings in bank supervision

The International Monetary Fund (IMF) has called on the Malta Financial Services Authority (MFSA) to take urgent action on shortcomings in bank supervision.

The MFSA should take timelier supervisory actions, increase the frequency of onsite inspections, make more use of monetary fines as part of the sanctioning regime, and ensure supervisory action is not delayed through judicial appeal, the IMF said in a new report.

Supervision should focus on main risks (credit, liquidity, and compliance) and the adequacy of risk classification and provisioning. Further actions are needed to align the related-parties framework with the Basel Core Principles (BCP). Improving oversight of non-European Union (EU) branches is also important, it said.

The report says Malta's financial sector is strongly connected with the rest of the world. While Malta has benefited from considerable financial inflows, the associated risks, especially related to money laundering and terrorism financing (ML/TF), need to be closely monitored and addressed.

"Banks are well capitalized, liquidity is ample, and profitability is healthy. However, core domestic banks' high exposure to property-related loans, together with the rapid house price appreciation, poses a risk. The significant share of nonresident deposits in international and noncore domestic banks makes them vulnerable, but their exposure to the domestic economy is limited. While nonperforming loans remain below the euro area average, there are pockets of distressed corporate loans that continue to impact banks' balance sheets."

The system is sufficiently capitalized to absorb losses in the event of a severe macroeconomic shock, but risky exposures would lead to potential losses at a few small banks, the IMF warned.

"Under a stress event, large withdrawals of wholesale and nonresident deposits can put some banks under pressure. Contagion risk is estimated to be limited, but distress could impact smaller banks due to cross-border and cross-sectoral linkages. There is a need to closely monitor banks' evolving business models to detect potential shifts in systemic risks, strengthen the stress test approaches, and enhance data quality and management."

The IMF also warned that the MFSA is substantially understaffed, which undermines its effectiveness and operational independence.

"The authorities should upgrade the MFSA's operational capacity and grant it full autonomy over its recruitment. The authorities should develop a five-year plan to ensure sustained budgetary resources for the MFSA. Further steps should be taken to enhance checks and balances in the MFSA's decision-making process."

"Policies and procedures should be developed for the MFSA's early intervention and resolution powers, including to mitigate legal risks. An administrative bank insolvency framework should be adopted, and the creditor hierarchy clarified. Responsibility for decisions on bank liquidation and insolvency post-license withdrawal should be shifted from the MFSA's supervisory function to its resolution function. The MFSA and the Ministry for Finance (MFIN) should develop their internal crisis management plans," the report says.

"The cross-border linkages of the large financial sector pose significant ML/TF risks, notably from foreign proceeds of crimes, which create challenges through growing reputational risks, pressure on correspondent banking relationships (CBR) and compliance costs. The fast-growing remote gaming activity, virtual-assets intermediation, and high demand for real estate and the Individual Investment Program (IIP) call for effective measures to contain financial integrity risks."

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