The global financial system is overly complex while its market players are often too important, large and interconnected. Financial stability can be disrupted by contagious effects at the expense of local economies while financial institutions have a distinct role in society. In contrast to insolvent companies that exit the market in an institutionalized and orderly manner while creditors absorb their losses, distressed financial institutions may be kept afloat by public support paid by tax payers. Such bail out scenarios are unusual and seen as a last resort for systemically important financial institutions and not for privately owned and smaller banks subject to internal conduct risk
Financial stability became a crucial determinant in the wake of the Global Financial Crisis. It resulted in a strict and robust regulatory regime with a focus on capital requirements, market discipline and advanced supervisory control. The Malta Financial Services Authority (MFSA) is the supervisor and regulator of the local financial system. The MFSA protects consumers of financial services while safeguarding the integrity of the financial system. The authority also strives to promote competitiveness on the local market. An important part of these objectives is the provision of a depositor compensation scheme to reimburse bank account holders for the failure of their bank.
Early Intervention for a Financial Sector in Distress
Not all bank failures have a financial cause. Misconduct and abuse of bank customers is furthered by rogue behavior of individual bankers. This does not always turn the bank itself into a threat to financial stability. However, to limit adverse effects to the domestic financial sector and society, early intervention to minimize risk is justified. Early intervention stages aim to promote and safeguard the integrity of local regulated markets, ensure investor confidence in these local markets, and ensure ownership of risk taking by the participants in local financial markets. Measures include, but are not limited to, statutory administration of the financial institution, deposit insurance and resolution measures such as the sale of business, bridge institutions, asset separation and the novel bail-in.
Malta Depositor Compensation Scheme
The Malta Depositor Compensation Scheme is a rescue fund for depositors of supervised credit institutions licensed by the MFSA. The scheme is headed by a management committee appointed by the MFSA. It is triggered when the applicable financial institution fails. This means that it is unable to meet its obligations towards bank account holders or has otherwise suspended payment and has no current prospect to revert this situation. The authority to determine whether a financial institution fails is the exclusive mandate of the MFSA and the applicable court. It can therefore take quite some time between the initial resolution where the Resolution Committee may have removed and replaced senior management of the bank by appointing a temporary administrator whilst imposing a moratorium with a suspension of payments to unsecured creditors and customers, and the official activation of the depositor compensation scheme. More information on Deposit Protection in Malta is available on this website.
The Malta Depositor Compensation Scheme intents to promote confidence in licensed credit institutions and the financial system and covers eligible bank account deposits held with licensed credit institutions in Malta for a maximum of 100.000 Euro. Accounts with temporary high balances may receive additional compensation up to 500.000 Euro. The scheme does not regulate the banking industry but merely pays compensation to creditors after the failure of a licensed credit institution.
Several limitations apply to the Malta Depositor Compensation Scheme. The scheme for example does not apply to local branches of credit institutions incorporated outside the EEA. It also restricts coverage on specific activities and sectors. Indistinctness exist over the use of deposit insurance as a surrogate for risk management and thus creating unfair competition. Deposit guarantee schemes therefore disqualify account holders who can protect themselves against loss of money in alternative ways. Want to learn more or inquire about your recovery potential? Then contact us today!
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