Fabian Demicoli

Malta: Small Country with a large bank system

Ratings 2013 says that Andorra, Luxembourg and Malta are all small European
countries with large banking systems but that is where their similarity to
Cyprus ends. These
countries not only have healthier banks and stronger sovereigns than Cyprus but
the structure of their banking sector means they are less vulnerable to a
destabilising withdrawal of non-resident deposits and losses from foreign

Malta and Luxembourg also have smaller
domesticbanking systems. The domestic banking sectors in Luxembourg (1.6x GDP)
and Malta (1.6x GDP) are modest relative to Cyprus (4.6x GDP) based on the
latest available ECB data. The size of the domestic banks is the most relevant
measure as they would be most likely considered important enough to the country
to receive support from the sovereign, if required. The total banking sectors
of Luxembourg and Malta are very large (24x GDP and 8x GDP respectively) as
this includes subsidiaries and branches of foreign banks, which have negligible
links with the domestic economy as their business is predominantly with
non-residents. Luxembourg is a hub for investment  funds and private banking, while Malta's
foreign banks deal mainly with business flows from Europe to North Africa and
the Middle East. We believe that if these banks were to be supported, it would
more likely come from the parent bank and ultimately its home government.

domestic and total banking sectors at over 5x GDP are too big for sovereign
support to be relied upon given the authorities' limited resources. However,
the large size of the domestic banks stems from their international private
banking franchises rather than credit expansion and has been supported by
comfortable liquidity and strong capital levels. Therefore we do not anticipate
sovereign support being called upon.

domestic banks in Andorra, Luxembourg and Malta are currently stronger than
those of Cyprus before the bail-out. Their Viability Ratings are almost all
investment grade, whereas in Cyprus the bank systemic indicator has been
speculative grade since 2011.

domestic banks in these countries have lower reliance on non-resident deposit
funding compared to the Cypriot banking sector where foreign deposits fuelled
rapid asset growth. Where there are foreign deposits, these are usually linked
to the banks' investment funds or private banking operations. Asset quality
indicators for these banks also appear adequate despite some deterioration and
their more limited exposure to foreign securities and loans reduces the risk of
losses arising from the eurozone sovereign crisis.

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