Malta’s banks to enjoy ‘more level playing field’ after Basel III reforms, says Central Bank governor

Malta’s banks can expect to enjoy a more level playing field and a low cost of transition to the new rules following the implementation of the remaining provisions of the Basel III global banking framework, which relate to capital ratio requirements, says Central Bank of Malta (CBM) governor Edward Scicluna.

On Tuesday, the CBM, together with 24 other central banks and financial supervisory institutions from 20 European Union member states, sounded a warning to the European Commission to stick to the agreed framework.

“Implementation should adhere to both the letter and the spirit of the Basel III agreement,” they said.

In response to questions sent by BusinessNow.mt, Prof. Scicluna explains that Basel III is essentially an effort to standardise methodology among banks internationally.

He says that the remaining, and most hotly contested, provisions relate to the ‘output floor’, which is a threshold between the capital allocation of a bank using its own models to compute its risk weighted assets and that of a bank using a standardised approach.

The agreement states that this discrepancy between the capital requirements of banks using these different models cannot be more than 50 per cent initially, reducing to 28.5 per cent by 2028.

The former Minister for Finance says that Maltese banks would actually benefit from these changes since all use the standardised approach for the quantification of capital, leading to a low cost of transition.

“This also means,” he continues, “that local banks will enjoy a more level playing field in relation to those foreign credit institutions which use their own internal models to allocate capital using what is known as the ‘internal ratings based approach’.”

“In practice,” Prof. Scicluna says, “in case of a bank using the internal rating approach, its capital allocation could not be lower than 72.5% from the resulting allocation had it used the standardised approach.”

Turning to the rest of the Basel III framework, Prof. Scicluna notes that, “The Basel package comprises a number of features, some of which having already come into force, to make the banking sector even more resilient, hence the CBM’s drive for its full implementation. “

He further points out that the views of the bank are also reinforced by the ECB’s findings that the permanent long-run economic benefits of the package outweigh its moderate transitory economic costs.

“In fact,” he says, “the full implementation of the package is also fully supported by the ECB and the EBA.”

Additionally, the new Basel Standard is more risk-sensitive and in practice entails a better balance among the risks in different exposure types, says Prof. Scicluna. 

“This also means that some risk weights under the standardised approach, such as those for investment grade assets, are lower, whilst the weight of other assets would increase according to their respective risk profile.”

He closes by stressing that the pandemic has shown that the more resilient the banking sector is, the stronger the support it can give to the real economy in times of crisis.

“It is for this reason that the Central Bank is supporting the full implementation of the Basel III framework, since this will result in the best outcomes in terms of resilience of the banking sector.”

As the governor of a central bank within the Eurosystem, Prof. Scicluna is currently taking part in a meeting of the Governing Council of the European Central Bank, which is later on Thursday expected to announce an update to its bond buying stimulus programme.

In March, the ECB announced it would speed up its purchases of Eurozone debt and left its key interest rates unchanged, in a deviation of policy from the USA’s Federal Reserve.

However, it is now expected to announce a tapering down of support as the economic rebound picks up steam.