Regulators “stress-testing” banks has become one of Europe’s newer traditions. This is concerned with ensuring that banks would not fail, or require a taxpayer-funded bailout if the economy were to sour quickly. In effect, the goal of the exercise is to aid in preventing further burdens on taxpayers by strengthening the financial sector in case of further crises.

Three banks in Malta, namely Bank of Valletta, HSBC and Deutche Bank, have been analysed by the ECB and results showed that neither of them had any capital shortfalls in both a baseline and adverse scenarios. A review by the European Central Bank has revealed that BOV and HSBC (two of Malta’s largest banks) have passed the Eurozone-wide stress test.

BOV and HSBC are significant credit institutions in Malta because together they account for more than 50% of the national banking sector as required by the ECB test. On the other end of the spectrum, Deutsche Bank has no retail sector in Malta and consequently has little economic impact despite the high volumes of money it manages.

Bank of Valletta’s results showed that the bank had adequate capital reserves to cover loan provisions. HSBC was also analysed by the ECB while taking into consideration that it is part of the holding company based in the UK. BOV’s CET1 ratio stood at 13.2% on a baseline scenario while HSBC’s was that of 9.26%, both exceeding the threshold set by the ECB of 8% and their adverse scenario was at a ratio of 8.9% and 8.1% respectively, way above the ECB threshold of 5.5%.

The MFSA and the Central Bank of Malta commented that the overall results confirmed the “soundness and resilience” of each of the three banks analysed. Another positive comment came from the BOV chairman, John Cassar White, saying that the results would serve to boost market confidence in the “strength and stability not only of BOV, but of the entire Maltese financial system.” He continued by saying that “BOV will continue to be vigilant in the management of risks and will strengthen its corporate governance to ensure that it continues to perform its role in a sustainable and effective way,” Mr Cassar White said.

Twenty-five European banks failed the checks at the end of last year but most have since repaired their finances. Most critical problems are found to be in Italy, Cyprus and Greece but the ECB concluded that banks’ capital holes had since chiefly been plugged and that only $10 billion remained to be raised.

The comprehensive assessment provided a consisent and objective assessment of the health of banks’ balance sheets and their solvency which started in November 2013 and was finalised in October 2014. The ECB shall now assume responsibility for the direct supervision of these banks on November 4.