I refer to the article by Peter Cassar Torreggiani entitled ‘National Bank: spirit of truth’, (The Sunday Times of Malta, August 13).
The passionate rhetoric of Mr Cassar Torreggiani as a shareholder with vested pecuniary interests is understandable, albeit inaccurate. The court will soon appoint independent experts who will review the case in consultation with both parties and will then provide an unbiased opinion. Notwithstanding this, it is important to clarify two wholly inaccurate claims made by Mr Cassar Torreggiani.
First, banking laws do not stipulate any form of ‘moral’ obligation to protect shareholders or to provide funding to a failing bank. Doing so would open a Pandora’s box of possible scenarios. For example: Is it ‘moral’ for the government to compensate banks’ shareholders with tax money collected from citizens who took no risks, nor shared in a bank’s profits?
The banking law in Malta – and banking laws generally – do not oblige authorities to ensure the safety of shareholders’ interests. By investing, shareholders are entitled to share in the profits but they also assume the risk of loss of their investment. The rights of the shareholders are basically electing the board of directors and participating in the profits or selling their shares.
Second, the Central Bank of Malta, like central banks worldwide, acts according to the banking law, which sets forth the terms and conditions for banks to receive any type of financing from the Central Bank, including ordinary refinancing as well as temporary liquidity support, i.e. Lender of Last Resort.
The directors and managers of the National Bank of Malta were well aware that the bank could not meet the requirements for liquidity support, and that is the reason they never formally requested Lender of Last Resort financing from the Central Bank of Malta. Indeed, as reported at the December 10, 1973 meeting, “The National representatives indicated that it could be possible for government to take over National without putting up any money (that is, giving the shares at nil value).”
One final point must be made: The government has the legal obligation to safeguard the soundness of the financial sector, and banking supervisors have the primary duty to safeguard the interests of depositors. This is what the government of Malta did when it intervened to protect depositors’ interests and ensure the stability of the Maltese financial sector.
As a result of the government’s timely and appropriate action, no deposits were lost (note that no deposit insurance scheme was in place), the banking system remained stable, and no economic turmoil took place.