Surely, banks are businesses like any other – they must watch their expenses, keep their profit margins healthy and make sure that their operational policies stimulate efficient ways of growth, sustainability and competitiveness.
However, banks also play a pivotal role in keeping a country’s economy stable. The banking sector must be certain that its actions do not result in hindering the performance of its clients – be it in terms of redundancies, bankruptcies, drying up of reserves or by promoting too much of the wrong investments.
Banks cannot be expected to shoulder all this responsibility alone, seeing that they are ultimately there to make profit and not to govern. Hence the reason why regulators exist.
The banking sector was not put in such a good light when the credit crunch started eating away the money, and with it - the hopes, of those investors who once had a positive outlook on investment. But it was not the banking sector on which most blame was laid. We know that it was largely governments which were held most accountable for the debacle.
The Maltese reality was, and hopefully still is, very different. It has all been said before – we are immune to neither the positive nor the negative effects of international economies, so we cannot expect to be impervious to the current situation. But at least, although we may well have entered into a recession, we have not had to bear the full brunt of the financial crisis, but rather of the economic one.
Whether this is due to rigorous regulation or simply to lack of demand for sub-prime loans does not matter – regulators will still get credit for saving the day, as do the banks.
In no way does this mean that the Maltese government and the MFSA have an easy time ahead. Both will now be tested as expectations for them to keep a tight leash on banks have increased – especially at a time when entrepreneurs who undertook loans worth millions over the past ten years, are already facing the music of a not-so-promising 2009.
So far, government has chosen to use the carrot rather than the stick, and this led to some very interesting developments. The idea of introducing the possibility of moratoria on bank loans for hotels may very well act as an incentive to some of those run-down establishments to shut down and refurbish, and the move is as welcome as it is laudable.
It should not stop there though. What about those hotel investors who already forked out millions of euro in developments which have already contributed to polishing the country’s tourism product, generate employment and stimulate the economy? We know that these hoteliers are now worried about having to bank on their reserves as they face decisions on retaining their full-time staff throughout the forthcoming high season of horrors, and possibly also after. Such decisions are always tough to make, especially when knowing that some loan repayments are larger than life. Tough decisions are then compounded with frustration – once these hoteliers are fully aware that they may very well rank among the best banking customers.
It is for this reason, among others, that the European Central Bank decided to ease up its dues from banks, and as a ripple effect, help banks ease up their own interest charged to angst-ridden investors.
As soon as the ECB embarked on this downward adjustment of interest rates, local banks started responding – and some responded better than others. It was all fine till then, since it was a market force which ultimately regulated the amount by which a bank goes down. This allowed clients who were not satisfied by the amount one bank reduced interest rates against the other, to switch banks.
The situation is now different. The ECB has almost razed its interest rates to the ground – and at a meager 1.5 per cent, most local banks – which are also suffering the plight of a recession, decided that enough is enough. Selfish? Perhaps, but as long as they’re allowed to protect their profits this way, one cannot blame them entirely. At the end of the day, banks should not be the ones expected to save the day, but rather to comply with the industry’s rules and regulations.
This may very well be the time for the Finance Minister and the MFSA to use the stick with banks. Short of that, hoteliers will have no other option but to sack staff, or employ less during summer.