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03/06/2015

The Central Bank of Malta’s Categorisation of Banks According to Systemic Relevance

In the 2011 edition of the Financial Stability Report (FSR), the Central Bank of Malta published the methodology used to categorise banks in terms of systemic relevance.1 The methodology is based on five broad criteria reflecting size, substitutability and connectivity; weights were then assigned to each criterion as follows:

(i) credit to residents [30%]: credit to residents by bank i to total resident loans;
(ii) resident deposits [30%]: resident deposits of bank i to total resident deposits;
(iii) holdings of domestic bonds [13.3%]: domestic bonds held by bank i to total outstanding domestic bonds;
(iv) resident contingent liabilities [13.3%]: resident contingent liabilities of bank i to total resident contingent liabilities of the banking sector;
(v) market capitalisation [13.3%]: market value of equities or bonds of bank i to total market capitalisation of banks in Malta.

On the basis of this methodology, three categories were identified, each with a different level of systemic relevance, namely, core domestic banks, non-core domestic banks and international banks.

The Central Bank of Malta has decided that this exercise shall be conducted every two years to ensure that each bank's standing in its relevant category shall remain valid. If deemed necessary, the exercise may be conducted earlier to ascertain that any developments in the banking sector's landscape and ancillary related systemic implications are captured in a timely manner. The exercise was re-run for the 2013 edition of the FSR, in which FCM Bank Limited was re-classified from international bank to non-core domestic bank.

In January 2015, the Central Bank of Malta carried out the exercise once more, using end-2014 data.  Results reaffirmed that the current five core domestic banks remain the most systemically-relevant credit institutions in Malta. Furthermore, this indicator-based methodology revealed that Mediterranean Bank p.l.c. has further increased its domestic relevance, mainly through targeting resident deposits, higher holdings of domestic securities, and through the takeover of Volksbank Malta Limited re-branded as Mediterranean Corporate Bank, in 2014.  As a result of this latest development, this group has further increased its presence locally through higher lending to residents.2  In this regard, the Central Bank of Malta's Financial Stability Committee agreed that this banking group, at sub-consolidated level, will be considered as a core domestic bank as from the next Financial Stability Report Update 2015, which will cover developments in the financial system during the first half of 2015.

Furthermore, results have also shown that Credit Europe N.V. Malta Branch, which was previously classified as a non-core domestic bank, will now be reclassified as an international bank. This change was underpinned by the declining trend in its resident deposits over the past years, resulting in negligible links with the domestic economy.

These decisions were subsequently endorsed by the Joint Financial Stability Board on 27 February 2015.  As a result of these reclassifications, the banks currently operating in Malta will be classified as shown in Table 1 as from 2015.

 Table 1

1 For a detailed explanation of the methodology adopted refer to the Special Feature in the 2011 FSR, pp 47.
2 For the benefit of this exercise, the word "group" refers to the banking group at sub-consolidated level, which includes Mediterranean Bank p.l.c. and Mediterranean Corporate Bank p.l.c.

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