The banking environment is expected to get even tougher in the coming years, as environmentally conscious lending standards and a likely increase in non-performing loans squeeze banks from above and below, according to the Malta Financial Services Authority’s head of banking supervision David Eacott.

In a recent release by the authority, based on a speech given by Mr Eacott in May, it acknowledges that “there is still a significant degree of dissatisfaction, justifiably or not, with the service banks are providing to local customers”.

However, more change is on the way “which will continue to make the challenge for banks even harder” – a bitter pill to swallow for business and individual clients.

These changes include the drive towards more environmentally conscious lending standards, meaning banks will need much more information from their clients before being able to make a decision on lending, which is likely to mean further changes for customers of banks.

This comes after a period that has seen banks’ costs increase significantly.

“Regulators have required banks to invest in more capital to improve their financial resilience; to spend more on digital services and cyber resilience to improve customer experiences; and to spend more on stronger compliance standards so they comply with an increasingly complex set of rules such as those for anti-money laundering.

david eacott mfsa
David Eacott – Head of Banking Supervision, MFSA

“At the same time, the MFSA has upgraded its supervisory approach – which means they need to be more responsive to our demands –while they also faced operational challenges as a result of COVID-19.”

Despite grumblings about what many view as an overly zealous approach to regulation, Mr Eacott argues that quality regulation is “a prerequisite to a stable and prosperous banking sector and economy on the islands”.

“International bodies, correspondent banking service providers, and international talent all look to the regulator to have set clear standards and to hold banks to them when they assess Malta, whether that’s as a place to live, work, do business, or rating it for others to do business with.”

He noted that the MFSA has identified over 160 areas for improvement, around half of which have been satisfactorily resolved. “Each represents an incremental improvement in the safety and soundness of our banking system”.

Looking to the future, Mr Eacott believes that improvements in the quality of stress testing should be a priority for banks’ boards and management, as lower-than-forecast growth and the resultant impact on credit quality may weigh heavily on banks’ balance sheets, with non-performing loans likely to increase

Earlier this year, the European Central Bank found that much of the increase in credit demand by firms is for working capital, which Mr Eacott says “reflects risks associated with supply chain disruption and the increased cost of maintaining inventories”.

He said the MFSA has also noted that banks are largely planning to improve their cost to income ratios by generating more income rather than cutting costs.

“It is, however, possible that economic circumstances may impact planning assumptions,” he said. “The supply chain issues, war in Ukraine, and consequent second order impacts may affect how much banks are able to deliver on their plans.”

On top of all this, the policy environment is likely to shift rapidly, with climate change requirements and digital currency rules on the way.

“There is a lot for boards to think about coming up, on top of the work already done,” closed Mr Eacott. “Improving customer outcomes while managing the increased regulatory demands will require continued dedication and the commitment of all involved.”

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