## 1mltea2019005 ## Source details **Canonical URL:** [1mltea2019005](https://www.imf.org/-/media/files/publications/cr/2019/1mltea2019005.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1mltea2019005.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1mltea2019005.pdf.json) --- ### Executive summary — key findings and scope - Scope and focus - Analyzes laws, policies, and procedures for bank failure mitigation and resolution, and for preparation and management of a financial crisis in Malta. - Covers supervision of bank recovery plans, early intervention, resolution planning, resolution funding, and deposit insurance. - Notes two bank failures in the past two years after no bank failures since the 1970’s. - High-level findings - Resolution Authority has a clear mandate, but operational independence could be strengthened. - Recovery planning implementation is a work in progress; guidance on “simplified obligations” for smaller banks is pending. - Insolvency and liquidation frameworks lack clarity, creating legal uncertainty affecting DCS recoveries and resolution execution. - Ensuring availability of sufficient MREL and adequate liquidity in resolution are key impediments. - CBM has a well-developed ELA framework but should document certain legal/procedural aspects and share high-level policies with banks. - DCS funding at current targets is insufficient to cover large payouts; additional funding sources and legal amendments recommended. - Interagency crisis arrangements exist (DSC, Crisis Management Task Force) but MFSA and MFIN lack well-documented internal crisis plans. ### Institutional framework and operational capacities - Governance and roles - MFSA Board designated as Resolution Authority; statutory three-member Resolution Committee (RC) takes resolution decisions; RC currently chaired by MFIN. - SRB and ECB have significant roles under the Single Supervision Mechanism and Single Resolution Mechanism. - RU (Resolution Unit) established early 2016 supports RC; RU Head serves as secretariat to the DCS Management Committee. - Operational capacity issues - RU staffing: currently nine staff and two unfilled positions; workload includes engagement with SRB Internal Resolution Teams and preparation of handbooks and plans. - Recommendation: undertake a review of adequacy of RU staffing levels and increase resources accordingly. - Legal protections - MFSA Act provides legal protections (Art. 29) but does not explicitly indemnify legal expenses for staff or third parties; indemnification exists in staff handbook. - Recommendation: extend legal protections to third parties and make explicit in law the provision to indemnify legal costs and introduce operational arrangements to make legal protection effective. ### Recovery planning and early intervention - Supervision and status - ECB-led Joint Supervisory Teams oversee SIs; BSU supervises HP-LSIs and LSIs. - MFSA issued guidance in September 2015; provisional recovery plans required by end-2015. - Recovery plans for SIs well advanced but require improvements; all HP-LSIs and most LSIs’ second-round plans were deemed as requiring improvement. - Guidance on simplified obligations for smaller banks remains to be issued. - Powers, overlap, and policies - Legal triggers and powers for early intervention exist across Banking Act, MFSA Act, and Recovery and Resolution Regulations; significant overlap. - MFSA lacks written policies/procedures on when/how to apply overlapping powers. - MFSA used Banking Act powers (CP appointments, Directives) in recent failures; has not used Recovery and Resolution Regulations powers for early intervention. - Recommendation: adopt written policies to minimize use of CPs/Temporary Administrators and clarify use of powers; assess recent bank failure experiences to strengthen procedures. ### Insolvency and special resolution framework - Fragmentation and uncertainty - Multiple laws may apply to bank winding-up and insolvency (Companies Act, Banking Act, Controlled Companies Act, Bank Reorganization and Winding-up Regulations, Recovery and Resolution Regulations). - Lack of clarity on applicable regime and creditor hierarchy; uncertainty affects DCS subrogation and RC decision-making under “no-creditor-worse-off”. - Asset and liability transfer powers - Current frameworks appear not to allow transfer of assets and liabilities to a third party at time of license withdrawal; P&A transactions not explicit in insolvency law. - Recommendation: amend law to explicitly set out asset and liability transfer powers (P&A) in insolvency. - Decision-making responsibilities - MFSA Board (supervisory) currently plays roles that could conflict with resolution responsibilities. - Recommendation: shift responsibility for winding up and insolvency decisions from MFSA supervisory function to resolution function; consider an administrative bank insolvency regime. ### Resolution tools, operationalization, and impediments - Available tools - Bridge institution, sale of business, bail-in (write-down/convert), and asset separation (AMC) tools exist and are broadly aligned with international standards. - Specific operational needs - Bridge institution: define ownership, governance, rapid setup, and return-to-private-sector mechanisms. - AMC: draft regulation prepared; define ownership and rapid governance arrangements. - Valuation: RC must obtain professional third-party valuations prior to write-down/convert; procurement constraints suggest contracting at least two firms able to commence valuations on short notice (e.g., within five days). - Handbooks: RU intends to prepare implementation handbooks for each tool; these should be developed urgently. - Legal flexibility and pari passu - Maltese legislation explicitly allows departures from pari passu for bail-in; legal clarity on departing pari passu for sale of business and bridge tools is desirable. - Recommendation: consider making explicit in law the power to depart from pari passu for sale of business and bridge institution tools. - Resolvability impediments - Lack of practically bail-inable liabilities in domestic market (retail purchases of subordinated debt, small issuance sizes). - SRB set indicative/binding MREL targets for SIs; issuing sufficient MREL may be challenging given market structure. - Recommendation: continue collaboration with SRB and banks to ensure MREL can be met with instruments that are bail-inable in practice. ### Resolution funding, ELA, and government backstops - SRF (Single Resolution Fund) - Amount potentially available for Maltese banks as of end-2017: roughly €16.6 billion. - Malta compartment funded amount: €23.3 million. - Bridge-financing arrangement for unfunded Malta compartment: €43 million. - SRF access constraints: - Shareholders and creditors must first absorb losses of at least 8 percent of total liabilities and the bank’s own funds. - SRF contributions are limited to five percent of the bank’s total liabilities and own funds. - These constraints may impede resolution where insufficient bail-in-able liabilities exist. - ELA (Emergency Liquidity Assistance) - CBM may grant ELA at its discretion; CBM bears loss risk and has no government guarantee arrangement in place. - CBM adopted a formal ELA Framework (July 2018); framework addresses collateral eligibility, valuation, haircuts, and coordination with MFSA and ECB. - CBM should document legal/procedural requirements for perfecting liens on non-traditional collateral and make high-level policies on collateral valuation, haircuts, and documentation known to potentially eligible banks. - CBM has no arrangements to provide ELA in FX; CBM should consider discussions with the ECB regarding access to FX as contingency. - Recommendation: consider arrangements for a government guarantee of any unsecured ELA, subject to EU state aid rules. - Government borrowing and backstop - Minister may borrow funds to implement Recovery and Resolution Regulations and government stabilization tools, subject to prior parliamentary approval. - MFIN should clarify whether these provisions permit creation of a borrowing facility to provide funding to DCS and backstop CBM’s ELA, subject to prior approval by the European Commission Directorate‑General for Competition and EU state aid rules. ### Deposit protection (DCS) — capacity, operations, and legal issues - Coverage and fund status - Deposit Guarantee Directive coverage threshold: €100,000; payout requirement: seven days; Directive target level by July 3, 2024: at least 0.8 percent of covered deposits. - Malta DCS covered deposits as of June 30, 2018: €11.6 billion. - Eligible deposits: €18.8 billion. - Total deposits: €21.6 billion. - DCS target fund balance: 1.3 percent of covered deposits; target fund balance for 2017: €141 million. - Deposit payout in 2017: €35 million (reduced fund balance by about 25 percent). - At 1.3 percent target, DCS insufficient to fully fund payouts for SIs and five individual LSIs (smallest of five LSIs ~roughly a 2 percent market share in total deposits). - Funding arrangements and contingencies - DCS financed through ex ante contributions; payment commitment currently represents 63.5 percent of total annual premium and must be reduced to 30 percent by 2024. - Of current fund balance of €111 million, 86 percent comprised of payment commitments. - DCS can require extraordinary contributions up to 0.5 percent of covered deposits each year. - DCS may obtain additional financing from third parties; explored commercial bank loan and used a repo with CBM. - Recommendations: - Continue to pursue additional funding sources, ideally from commercial banks but, as a last resort, from government consistent with state aid rules. - Continue to pursue legal amendment to allow replenishment of fund via additional payment commitments. - Operational payout issues - Current payout period: 20 days; must reduce to seven days by 2024. - DCS implementing an automated system to enable seven-day payouts; envisaged operational by end-2018. - Consider complementary payout methods (portal for depositor-designated accounts, agent bank). - Legal powers and uncertainties - DCS has power to finance transfer of assets/liabilities in insolvency (Regulation 33 (6)), but effective use limited by uncertainty whether insolvency regime permits transfers and by unclear creditor hierarchy. - DCS does not have explicit power to put bank into liquidation; practice where MFSA Board chose not to liquidate after payout (Nemea) exposes DCS to recovery risk. - Recommendation: DCS should clarify in writing its legal interpretations and policies on financing transfers and resolution measures; MFSA should adopt policy to put a bank into liquidation when a deposit payout is made. ### Crisis management, institutions, and contingency planning - Interagency bodies and roles - Joint Financial Stability Board (statutory) — advisory role; chaired by CBM governor. - Domestic Standing Committee (DSC) — includes CBM financial stability, MFSA supervisory and resolution functions, and MFIN Permanent Secretary; enhances crisis preparedness. - Crisis Management Task Force — permanent operational arm of DSC; chaired by MFSA RU Head; updates Interagency Crisis Management Framework, organizes exercises, and makes recommendations. - Exercises and planning gaps - Crisis simulation exercise in 2016 highlighted need to update Interagency Crisis Management Framework, clarify decision rules between insolvency and resolution, and improve ELA collateral valuation processes. - CBM’s ELA Framework shared with MFSA and MFIN but not with banks. - MFSA and MFIN lack well-documented internal crisis management plans; recommendation to develop internal plans that complement interagency framework and RU handbooks. - Cross-border/system-wide issues - Institutional architecture mainly designed for individual bank resolution; system-wide crisis would require more comprehensive strategy and coordination with European authorities. - DSC and Crisis Management Task Force should consider domestic interaction with European authorities in potential multi-jurisdictional crises. ### Key statistics (as stated in the text) - SRF funding potentially available for Maltese banks as of end-2017: roughly €16.6 billion. - Malta compartment funded amount: €23.3 million. - Bridge-financing arrangement for unfunded Malta compartment: €43 million. - SRF prerequisite loss absorption by shareholders and creditors: 8 percent of total liabilities and the bank’s own funds. - SRF limit on amount provided: five percent of the bank’s total liabilities and own funds. - Covered deposits as of June 30, 2018: €11.6 billion. - Eligible deposits: €18.8 billion. - Total deposits: €21.6 billion. - DCS target fund balance: 1.3 percent of covered deposits. - DCS target fund balance for 2017: €141 million. - Deposit payout in 2017: €35 million (reduced fund balance by about 25 percent). - Deposit Guarantee Directive coverage threshold: €100,000. - Directive payout requirement: seven days. - Directive target level by July 3, 2024: at least 0.8 percent of covered deposits. - Valuation procurement target commencement: e.g., within five days. - Smallest of five individual LSIs market share referenced: roughly a 2 percent market share in total deposits. - RU staffing: nine staff and two additional unfilled positions (current as described). ### Selected recommendations (consolidated) - Institutional and legal reforms - Strengthen RC independence: change composition to all independent members and prescribe terms longer than the national election cycle. - Amend law to limit requirement for Minister’s prior written approval to decisions with potential fiscal implications. - Undertake a project to update and streamline the bank insolvency framework, adopting an administrative regime and explicitly providing asset/liability transfer powers. - Shift responsibility for bank insolvency and liquidation decisions from MFSA supervisory function to resolution function (RC). - Operational capacity and protections - Review RU staffing adequacy and increase resources accordingly. - Extend legal protections to third parties and make explicit in law the provision to indemnify legal costs; introduce operational arrangements for legal protection and legal aid insurance. - Prepare handbooks and implementation procedures for each resolution tool; contract with at least two valuation firms able to start within five days. - Recovery, early intervention, and resolution planning - Issue guidance on simplified obligations for recovery plans and formalize RU review procedures for LSI recovery plans. - Adopt written policies and procedures on when/how to use early intervention powers to minimize use of CPs and Temporary Administrators. - Accelerate resolution planning for weak small banks and assign responsibility for formal resolution plans for significant insurers, integrating with bank plans. - Consider making explicit in law the power to depart from pari passu treatment when using sale of business and bridge tools. - Funding, ELA, and DCS - Continue pursuit of additional DCS funding sources (ideally commercial banks; government as last resort subject to EU state aid rules). - Clarify whether minister’s borrowing powers permit a borrowing facility for the DCS and a backstop for CBM ELA, subject to prior approval by the European Commission Directorate‑General for Competition and EU state aid rules. - Document legal/procedural requirements for perfecting liens on non-traditional collateral; make CBM high-level ELA policies public to banks (without prejudice to CBM discretion). - Consider arrangements for a government guarantee of any unsecured ELA by CBM, subject to EU state aid rules. - DCS to clarify in writing its legal interpretations and policies on financing transfers and resolution measures; adopt policy to place a bank into liquidation when a deposit payout is made. - Crisis management and contingency planning - Develop formal internal crisis management plans at MFSA and MFIN to complement Interagency Crisis Management Framework. - Update interagency arrangements to address system-wide crises and interactions with European authorities. _This summary is based on the IMF Technical Note prepared by David H. Scott for the FSAP mission conducted during September 10–26, 2018 (published November 6, 2019)._ ### 2018. Further information on the FSAP program is ### 2018. Further information on the FSAP program is available at http://www.imf.org/external/np/fsa p/fssa. aspx. ### Glossary - AMC — Asset Management Company - BRRD — European Union Bank Recovery and Resolution Directive (2014/59/EU) - BSU — Bank Supervision Unit - CBM — Central Bank of Malta - CP — Competent Person - DCS — Depositor Compensation Scheme - DSC — Domestic Standing Committee - EC — European Commission - ECB — European Central Bank - ELA — Emergency Liquidity Assistance - EU — European Union - FSAP — Financial Sector Assessment Program - HP-LSIs — High-Priority Less Significant Institution - LSI — Less Significant Institution - MFIN — Ministry for Finance - MFSA — Malta Financial Services Authority - MREL — Minimum Requirement for Own Funds and Eligible Liabilities - PRS — Preferred Resolution Strategy - P&A — Purchase and Assumption - RC — Resolution Committee - RU — Resolution Unit - SC — Supervisory Council (of the MFSA) - SI — Significant Institution - SRB — Single Resolution Board - SRF — Single Resolution Fund ### Executive Summary — Key findings and assessments - Scope and focus - The Note analyzes laws, policies, and procedures for bank failure mitigation and resolution, and for preparation and management of a financial crisis in Malta. - Covers supervision of bank recovery plans, early intervention, resolution planning, resolution funding, and deposit insurance. - Notes two bank failures in the past two years after no bank failures since the 1970’s. - Institutional framework and operational independence - The Resolution Authority has a clear mandate, but operational independence could be strengthened. - The MFSA Board is designated as the Resolution Authority; resolution decisions are taken by a statutory three-member Resolution Committee (RC), currently chaired by the Ministry of Finance (MINFIN). - Composition of the RC should be strengthened to avoid perception of conflict of interest. - Resolution functions supported by a Resolution Unit (RU) established early 2016; RU has made good progress but staffing appears inadequate. - The RC and RU functions are sufficiently separated from MFSA supervisory functions, vested ultimately with the Supervisory Council (SC). - RU Head serves as secretariat to the DCS Management Committee and manages DCS functions. - A Domestic Standing Committee (DSC) comprises CBM financial stability function, MFSA supervisory and resolution functions, and a Permanent Secretary of MFIN to enhance crisis preparedness. - Recovery planning and early intervention - Implementation of recovery planning requirements remains a work in progress. - Review of most recent plans for LSIs remains to be completed. - Issuance of guidance on simplified requirements recommended to integrate recovery planning into LSI risk management and reduce regulatory burden. - Legal triggers and powers for early intervention are adequate but powers overlap substantially; MFSA should adopt written policies and procedures on when and how to use the powers. - Written policies should aim to minimize use of CPs and Temporary Administrators. - Insolvency and liquidation framework - Lack of clarity on legal regime applicable to bank winding-up and insolvency, including creditor hierarchy in liquidation. - Uncertainties affect potential DCS recoveries in insolvency and use of DCS funds to finance resolution tools and application of shareholder and creditor safeguards under BRRD. - MFIN should initiate reform to adopt an administrative regime for bank insolvency allowing the resolution authority to implement orderly closure and liquidation. - Meanwhile, DCS should clarify in writing its legal interpretation and policies under current framework. - Recent failures and supervisory/legal risk - MFSA should assess recent bank failure cases to strengthen supervisory and early intervention procedures and mitigate legal risk. - A recent license withdrawal has been challenged at the Court of Justice of the European Union and Malta Financial Services Tribunal. - Although covered deposits were paid, MFSA Board (as supervisory authority) elected not to put the bank into liquidation pending court decision. - Decisions on winding up an insolvent bank should be taken by the RC, the DCS, and other bank creditors to minimize overall costs. - Resolution planning and insurers - Resolution planning by the SRB and the RU is a work in progress and reasonably well advanced. - Explicit planning for resolution of two significant life insurers associated with two banks under SRB remit should be initiated. - RU responsible for other banks’ resolution plans; prioritized HP-LSIs with initial plans for two HP-LSIs near completion and a third to be completed in early 2019. - Intent to complete plans for all banks by end-2020; recommendation to consider accelerating planning for weaker, smaller banks. - Impediments to resolution tool implementation - Ensuring availability of sufficient MREL is critical because regime mandates bail-in of creditors. - Issuing sufficient MREL may be challenging due to limited domestic professional investor market and small issuance sizes. - Ensuring adequate liquidity during and after resolution is another challenge. - Preparations needed for bridge institution tool: specify ownership, organization of ownership function, rapid governance setup, and return to private sector. - Emergency Liquidity Assistance (ELA) - CBM has well-developed ELA framework; shared with MFSA and MFIN but not with banks. - CBM should document legal/procedural requirements for perfecting liens on collateral not used in regular monetary operations. - CBM should make high-level policies and information and documentation requirements for collateral valuation, haircuts, and lien perfection known to potentially eligible banks (without prejudice to CBM discretion on granting ELA). - Government borrowing and DCS backstop - Minister of Finance has power to borrow funds in context of using resolution tools, including to finance financial stabilization tools, subject to prior parliamentary approval. - MFIN should clarify whether provisions permit creation of a borrowing facility that, as last resort, can provide funding to DCS and a backstop for CBM’s ELA, subject to prior approval by the European Commission Directorate-General for Competition and compliant with EU state aid rules. - Crisis management planning - MFSA and MFIN should develop formal internal crisis management plans to complement and support the Interagency Crisis Management Framework. - A Crisis Management Task Force serves as DSC’s permanent operational arm and is updating the Interagency Crisis Management Framework. - CBM’s ELA Framework largely serves crisis purpose, but MFSA and MFIN lack well-documented internal plans. ### Table 1 — Summary of Key Recommendations (selected highlights) - Operational Capacities and Legal Protections - 1. Undertake a review of adequacy of RU staffing levels and increase resources accordingly. (¶16, 20) — Authority: MFSA — Timing: I - 2. Extend legal protections to third parties and make explicit in law the provision to indemnify legal costs of MFSA staff and third parties. (¶17, 20-1) — Authority: MFSA — Timing: I - Recovery Planning and Early Intervention - 3. Issue guidance on simplified obligations for recovery plans. (¶22, 32) — Authority: MFSA — Timing: NT - 4. Adopt written policies and procedures on when and how to use early intervention powers, including to minimize use of CPs and Temporary Administrators. (¶27-29, 32) — Authority: MFSA — Timing: I - 5. Assess recent bank failure experiences for lessons to strengthen supervisory and early intervention procedures, including to mitigate legal risk. (¶29, 32) — Authority: MFSA — Timing: NT - Insolvency and Special Resolution - 6. Update and streamline legal framework for bank insolvency by developing an administrative bank insolvency regime. (¶34-38, 48, 84) — Authority: MFIN — Timing: I - 7. Amend law to set out explicitly the availability of asset/liability transfer powers in insolvency. (¶38, 48) — Authority: MFIN — Timing: I - 8. Shift responsibility for decisions on bank insolvency and liquidation from MFSA’s supervisory function to its resolution function. (¶37, 48) — Authority: MFSA — Timing: I - Resolution Planning, Strategies, Impediments, and Funding - 9. Accelerate resolution planning for any weak banks. (¶50, 52-61) — Authority: MFSA — Timing: I - 10. Assign responsibility for development of formal resolution plans for significant insurers and initiate the work, ensuring integration with plans for relevant banks. (¶51, 61) — Authority: MFSA — Timing: I - 11. Develop plans to establish a bridge institution. (¶56, 57, 61) — Authority: MFSA — Timing: I - 12. Undertake further work to document legal and procedural requirements for perfecting liens on non-traditional forms of collateral. (¶67, 73) — Authority: CBM — Timing: I - 13. Without prejudice to CBM discretion on ELA, make high-level ELA policies for collateral valuation, haircuts, and information and documentation known to banks. (¶54, 69, 73) — Authority: CBM — Timing: I - 14. Put in place arrangements for a government guarantee of any unsecured ELA by CBM subject to prior approval by the European Commission Directorate-General for Competition and in compliance with EU state aid rules. (¶71-73) — Authority: MFIN — Timing: I - Deposit Protection and Payout - 15. Ensure additional funding sources, ideally from commercial banks but, as last resort, a borrowing facility from government subject to possible EU state aid rules and obligations. (¶76, 86) — Authority: DCS — Timing: NT - 16. Adopt a policy to put a bank into liquidation when a deposit payout is made. (¶84, 86) — Authority: MFSA — Timing: I - Contingency Planning and Crisis Management - 17. Develop formal internal crisis management plans as complement and input to the Interagency Crisis Management Framework. (¶92, 94) — Authority: MFSA, MFIN — Timing: NT Timing legend: I = Immediate (within 1 year); NT = near term (1–2 years); MT = medium term (3–5 years). ### Background — Scope of the Note (mission and approach) - The Technical Note analyzes the bank failure mitigation and resolution regime in Malta and arrangements for preparing for and managing a financial crisis. - Summarizes findings of the FSAP mission undertaken during September 10–26, 2018. - Assesses supervision of recovery planning, early intervention, resolution planning, institutional and legal framework for bank resolution and financial safety nets, and authorities’ preparedness for system-wide crisis. - Considers recovery and resolution planning for significant insurers with links to banks. - Assessment based on analysis of legal framework and documentation, and discussions with authorities and private sector. - The Note does not represent an assessment of adherence to international standards, though Key Attributes and Core Principles serve as reference. ### Background — Financial Sector Landscape (key institutions and market shares) - Significant Institutions (SIs) designated by the ECB: three banks. - Bank of Valletta - 44 percent of total deposits. - 25 percent owned by the government. - Sole shareholder of an asset management subsidiary and investment management subsidiary. - Minority shareholder in a local insurer. - 50 percent owner of one of the two dominant life insurers in Malta. - HSBC Bank Malta - 21 percent share of total deposits. - Indirect subsidiary of HSBC Bank Plc (United Kingdom). - Sole shareholder of the other major life insurance subsidiary and of an asset management subsidiary. - MeDirect Bank - 8 percent market share of total deposits in Malta. - Owned by a Malta registered holding company ultimately owned by a hedge fund based in the United Kingdom. - Largely internet-based; owns another internet-based bank in Belgium of comparable size. - Other domestic banks - Six banks classified as core banks by CBM include BNF Bank, Lombard Bank, and APS Bank. - BNF Bank owned by Qatari investors. - Lombard Bank 49 percent owned by the National Development and Social Fund. - APS Bank majority-owned by the Archdiocese of Malta and Gozo. - Five other banks servicing domestic market classified as noncore; about 80 percent of their assets concentrated in FIM Bank and Sparkasse Bank. - FIM Bank (fourth largest) owned by investors in Kuwait and Bahrain. - Sparkasse Bank part of Austrian group. - Three of the banks are designated as HP-LSIs. - International banks - 14 other banks operating largely with non-residents classified as international banks by CBM. - Include two branches of Turkish banks with balance sheets comparable to Bank of Valletta. - MFSA intervened in two international banks: Nemea Bank and Pilatus Bank; in both cases MFSA requested ECB to withdraw the banks’ license. - Deposits of these banks are eligible for Malta DCS coverage; deposits of the two Turkish branches are not. - Life insurers - Two large life insurers potentially systemic: HSBC Life and MSV Life (Bank of Valletta) together have a 95 percent share of the life insurance market in Malta. - Both fully dependent on associated banks for distribution of their products. _This summary is based on the IMF Technical Note prepared by David H. Scott for the FSAP mission conducted during September 10–26, 2018 (published November 6, 2019)._ ### 6. Multiple laws and regulations govern the management of problem and failing banks in ### 6. Multiple laws and regulations govern the management of problem and failing banks in ### Legal framework - The legal framework was amended and enhanced with the transposition of the EU Bank Recovery and Resolution Directive (BRRD) and Deposit Guarantee Scheme Directive in 2015. - The BRRD was transposed by means of the issuance of the Recovery and Resolution Regulations under the MFSA Act, along with relevant amendments to the MFSA Act itself. - The Deposit Guarantee Scheme Directive was transposed by means of the DCS Regulations under the MFSA Act. - Other relevant legislation includes the Banking Act, the Central Bank of Malta Act, the Companies Act, the Controlled Companies Act, and the Bank Reorganization and Winding-up Regulations issued under the Banking Act. - The Insurance Business Act provides the legal framework for managing failing insurers and addresses early intervention measures for problem insurers. ### Recent crisis experience — Nemea Bank (2016–2017) - April 20, 2016: RC decided normal insolvency proceedings were the best course of action after assessing public interest; MFSA as competent authority informed. - April 27, 2016: MFSA appointed a CP to take charge of the bank’s assets and assume control of its business; issued a Directive regarding accepting new deposits and deposit withdrawals; MFSA restricted depositor withdrawals to €250 per day and prohibited acceptance of new deposits. - July 18, 2016: MFSA increased the daily withdrawal limit to €2,500 per day and maintained the prohibition on accepting new deposits; easing subject to conditions on term deposits and maturities. - January 20, 2017: MFSA asked the ECB to initiate the process to withdraw the bank’s license on grounds of lack of tangible progress; issued a Directive to block further deposit withdrawals. - March 23, 2017: ECB withdrew the license after following internal procedures. - March 30, 2017: MFSA triggered a deposit payout by the DCS. - As of October 2018: CP remained in place and the bank had not been placed in liquidation pending an appeal of the ECB’s decision to the Court of Justice of the European Union by bank shareholders. ### Recent crisis experience — Pilatus Bank (2018) - March 20, 2018: Bank’s ultimate beneficial owner, chairman, and CEO was indicted in the United States. - March 21, 2018: MFSA issued public notices that it had issued a Directive to the bank to cease all transactions, removed the bank’s CEO, and suspended his voting rights. - March 22, 2018: MFSA appointed a CP to take charge of the bank’s assets and assume control of its business. - May 3, 2018: RC, following discussions with the MFSA, made a Public Interest Assessment and decided normal insolvency proceedings were the best strategy; decision communicated to MFSA as competent authority. - June 30, 2018: MFSA submitted a draft decision to the ECB requesting withdrawal of the bank’s license on grounds of unsuitability of the ultimate beneficial owner and breach of regulatory liquidity coverage. - As of October 2018: ECB had not yet decided on the request. - Arrangement detail: The bank’s covered deposits are fully matched by a contingency contribution in favor of the DCS by Pilatus Bank, held in cash at the CBM; this arrangement was a condition of the bank’s license (granted in January 2014). - Footnote: ECB’s Governing Council decided to withdraw the authorization of Pilatus Bank with effect from November 5, 2018. ### Institutional framework, operational capabilities, and legal protections - EU-level roles: - ECB and SRB play significant roles under the Single Supervision Mechanism and Single Resolution Mechanism. - SRB is resolution authority for (i) SIs and banks where ECB exercises direct supervisory powers; and (ii) other cross-border groups with parent and at least one subsidiary in different Banking Union states. - Domestic authorities: - MFSA, CBM, and MFIN are the primary domestic authorities. - MFSA is both Malta’s National Competent Authority and National Resolution Authority; responsible for resolution planning arrangements including the Malta component of the Single Resolution Fund (SRF). - DCS is responsible for its funding arrangements. - Governance and decision-making: - MFSA Board of Governors serves as the Resolution Authority (RA) but does not take resolution decisions; under the MFSA Act those are taken by the RC. - RC has powers assigned to a Resolution Authority under the BRRD and is supported by the RU. - RC composition: three persons — one appointed by MFSA, one by CBM, one by MFIN (the latter is currently the chair); members appointed for three-year terms and can be reappointed once. - Concerns noted: presence of MFIN and relatively short term of RC members’ mandate does not support the perception of operational independence from political influence. - Suggested change: RC composition should be all independent members and terms longer than the national election cycle; RC should consult MFIN only for decisions entailing use of public funds. - Resolution Unit (RU): - RU functions: resolution planning, resolvability assessments, executing resolution actions as determined by SRB or RC, may assess failing-or-likely-to-fail and recommend to RC. - RU staffing: led by RU Head; currently has nine staff and two additional as yet unfilled positions. - RU budget: proposed by RU Head, discussed with Chief Operations Officer, approved by MFSA Board. - RU engages with SRB governing bodies, may draw on other MFSA staff and external consultants. - No specific framework governing resolution of insurers; RU plays no direct role in insurer resolution work but engages with Insurance and Pensions Supervision Unit (IPSU). - RU activity reporting: prepares a quarterly report endorsed by the RC and provided to the Board (acting as RA); RU Director and staff meet periodically with RC — five such meetings in 2017 and six in 2016. - Adequacy and gaps: - Approved RU staffing levels appear inadequate given workload: engagement with SRB Internal Resolution Teams, formulating resolution strategies and implementation plans for SIs, HP-LSIs, and weak LSIs; contributing to SRB policy and Crisis Management Task Force; preparing Handbooks of policies and procedures; accelerating resolution planning; starting resolution plans for significant insurers will require additional qualified staff. - Recommendation: commission a review of RU staffing adequacy and increase resources accordingly. - Legal protections: - MFSA Act provides Board, management, and staff with legal protections (Art. 29). - MFSA Act does not provide for indemnification of legal expenses incurred by staff when defending themselves and does not cover third parties (e.g., contracted CPs). - Indemnification of staff legal expenses is outlined in the staff handbook (part of contractual relationship). - Recommendations: extend legal protections to third parties such as CPs, make explicit the provision to indemnify legal costs, and introduce operational arrangements to make legal protection effective (choice and timing of payment of legal representation and liability, and legal aid insurance covering realistic monetary amounts). ### DCS and operational arrangements - DCS is a “paybox” within the MFSA and administered by a Management Committee comprised of seven members (who also make up the Investor Compensation Scheme). - DCS secretariat within the MFSA includes a senior manager, lawyer, statistician, and two analysts; RU Head serves as secretary to the Management Committee. - Management Committee members are legally protected in the same manner as RC members and RU staff by virtue of provisions of the Investor Compensation Scheme Regulations (Regulation 31). - While operationally independent, DCS is exposed to potential inaction by the MFSA Board in its supervisory capacity. ### Participation in resolution colleges and outreach - RU staff participate with SRB in the Bank of England Crisis Management Group (resolution college) for the HSBC group; RU communicates views through SRB. - RU has limited involvement in the resolution college for a euro area bank with a small Malta subsidiary classified as an LSI and deemed not to have critical functions in Malta. - Participation mainly involves collecting certain data forwarded to the college and providing comments on draft resolution plan. ### Summary of recommendations - Strengthen the RC’s independence by changing its composition to all independent members and prescribing terms for its members that are longer than the national election cycle. - Amend law such that the requirement for the Minister’s prior written approval for decisions that have systemic impact is limited to those which have potential fiscal implications. - Undertake a review of the adequacy of RU staffing levels and increase its resources accordingly. - Extend legal protections to third parties and make explicit in law the provision to indemnify legal costs. - Introduce operational arrangements to make legal protection effective, covering such issues as the choice and (timing of) payment of legal representation and liability, and legal aid insurance covering realistic monetary amounts. *International Monetary Fund* ### 21. As noted, the supervision of Malta banks, including recovery planning and early ### 1mltea2019005 - 21. As noted, the supervision of Malta banks, including recovery planning and early ### Recovery Planning - Supervision is a joint exercise between the ECB and the MFSA: - ECB-led Joint Supervisory Teams are responsible for supervision of SIs, with BSU staff supervising HP-LSIs and LSIs. - Joint Supervisory Teams are led by ECB coordinators, with a sub-coordinator and staff from MFSA; ECB experts from different departments support SI recovery plan assessment. - MFSA implementation and guidance: - MFSA began to implement recovery planning requirements in 2015 and provided guidance to banks in September 2015, requiring banks to follow European Banking Authority guidance then available. - Provisional recovery plans were required from all banks by end-2015. - Guidance on “simplified obligations” (streamlined plans for simpler/smaller banks) has yet to be issued; MFSA continues to identify banks that would qualify based on European Banking Authority guidance. - Recommendation: MFSA should issue guidance on the application of simplified obligations to facilitate integration of bank risk management and reduce regulatory burden on smaller banks. - Status of recovery plans: - Recovery plans for SIs are well advanced but remain a work in progress; joint teams’ feedback letters identify specific matters requiring improvement. - Recovery plans for SIs are shared with the SRB and the RU; concerns mainly relate to selling or encumbering securities portfolios in recovery that may impair liquidity in resolution. - All HP-LSIs and LSIs have submitted second round recovery plans to the BSU; plans of all HP-LSIs and most LSIs were deemed as requiring improvement against ECB assessment criteria (completeness, quality, credibility). - Special attention is given to HP-LSIs and problem banks; plans of other banks are still to be reviewed. - The RU reviews recovery plans to comment on issues that may impact the resolution scheme of the LSI; so far no major issues identified, in part because resolution planning is not advanced for many banks. - BSU and RU are discussing more formal procedures for RU review of LSI recovery plans; this should be concluded. Eventually detailed cooperative arrangements between BSU and RU should be put in place to facilitate a well-staged transition to potential failure resolution. - Insurer recovery planning: - Recovery planning by significant insurers is addressed as part of the normal supervisory process; Insurance and Pensions Supervision Unit feedback on two significant insurers’ internal Own Risk and Solvency Assessment addresses recovery (and resolution) planning. - Recommendation: further collaboration between BSU and Insurance and Pensions Supervision Unit to form an integrated view of recovery planning by insurers and associated banks. ### Early Intervention - Legislative and institutional framework: - Amendments to the Banking Act and adoption of the Recovery and Resolution Regulations strengthened Malta’s early intervention framework; CRD IV measures were incorporated into the Banking Act and BRRD measures transposed via the Recovery and Resolution Regulations. - ECB and MFSA are responsible for application of early intervention measures to SIs and LSIs respectively. ECB can exercise direct supervision of an LSI if necessary for consistent high supervisory standards (has not done so in Malta). Any MFSA use of intervention powers must be communicated promptly to the ECB. - Powers and triggers: - Legal triggers and measures are adequate. Banking Act allows MFSA to restrict or withdraw a bank’s license under a wide range of circumstances. Recovery and Resolution Regulations allow MFSA to act on infringements of prudential requirements or deteriorating financial condition. - Under the Recovery and Resolution Regulations, MFSA can require a bank to implement recovery options set out in its recovery plan. - Under the Banking Act, MFSA can issue a Directive to a bank for any reason it deems appropriate and can appoint a Competent Person (CP) with powers to advise, take charge of assets, or assume control of the bank’s business (including general meeting functions). - Under the Recovery and Resolution Regulations, MFSA can appoint a Temporary Administrator with power, inter alia, to assume Board responsibilities and convene shareholders’ meetings; this may include managing a bank to preserve or restore its financial position and taking measures to restore sound and prudent management. - Overlap, use, and policy gaps: - Powers in the Banking Act, MFSA Act, and Recovery and Resolution Regulations overlap substantially and are complementary, but MFSA lacks a written policy on circumstances and procedures for applying these powers. - MFSA used Banking Act powers to appoint CPs to Nemea Bank and Pilatus Bank and to issue Directives restricting business; it has not used Recovery and Resolution Regulations powers for early intervention or to appoint a Temporary Administrator. - Recommendation: MFSA should adopt written policies on when and how to use its powers to provide clarity to BSU and RU staff and to assist in potential legal challenges. - Timeliness and consequences of actions: - There have been lengthy periods between MFSA announcement of regulatory concerns, MFSA request to ECB to withdraw a license, and ECB license-withdrawal decision (example: Nemea Bank — serious concerns announced April 27, 2016; request to withdraw announced January 27, 2017; license withdrawn March 23, 2017). - To mitigate runs during such periods, MFSA imposes deposit withdrawal restrictions or freezes and may appoint a CP; MFSA decisions are subject to ECB approval/direction. - Lengthy processes attributed to allowing managers/directors/shareholders time to remedy concerns and to document actions to guard against legal challenge; CP appointment itself creates legal exposure and potential liability to MFSA. - Recommendation: MFSA should adopt policies and procedures to minimize use of a CP and assess recent experiences (perhaps with ECB support) to strengthen supervisory and early intervention procedures, aiming to limit CP use to the time of MFSA request to withdraw a license and, where possible, rely on Art. 29 (1) (b) powers which may involve less legal risk. - Insurers: - Early intervention for insurers set out in Insurance Business Act: MFSA can require an insurer to take steps to rectify a situation where sufficiently serious circumstances exist (Art. 28(1)(a)) and can give directives in writing (Banking Act Art. 31A). - Appeals: - Early intervention powers are subject to challenge: aggrieved persons may appeal to the Financial Services Tribunal within 30 days (Banking Act Art. 10 and MFSA Act Art. 21); appeals may argue misapplication of law/regulation or abuse of discretion; right to appeal a question of law within 20 days to the Court of Appeal (Civil, Inferior Jurisdiction). An appeal does not suspend operation of a decision or action. ### Summary of recommendations (as listed) - Issue guidance on the application of “simplified obligations” for recovery plans; - The BSU and the RU should adopt more formal procedures providing for RU review of the recovery plans of LSIs; - Pursue further collaboration between the BSU and the Insurance and Pensions Supervision Unit in forming an integrated view of recovery planning by significant insurers and their tied banks; - Adopt written policies and procedures on when and how to use early intervention powers, including to minimize use of a CP by the competent authority or a Temporary Administrator by the RC; - Assess recent experiences for lessons to strengthen supervisory and early intervention procedures, including to reduce the period of time a CP needs to be utilized. ### Insolvency and Special Resolution — Insolvency Proceedings - Multiple laws/regulations may govern bank failure: Companies Act, Banking Act, Controlled Companies (Procedure for Liquidation) Act, Credit Institutions (Bank) Reorganization and Winding Up Regulations, and Recovery and Resolution Regulations. - Lack of clarity and inconsistency: - There is a lack of clarity regarding the legal regime for winding-up and insolvency proceedings for non-systemic banks; interplay among potentially applicable laws/regulations is subject to varying interpretation and no consensus exists on best application. - Uncertainty extends to creditor hierarchy, as provisions of different acts vary, potentially creating uncertainty as to ranking of the DCS in subrogation of covered depositor claims. - Recommendation: MFIN should, as a high priority, initiate a project to update and streamline the legal framework for insolvency proceedings for banks to eliminate inconsistencies, clarify uncertainties, and introduce an administrative regime for orderly closure and liquidation. - Specific observations: - Companies Act contains three insolvency/liquidation regimes that could be applied to banks: (i) a court-overseen regime for a solvent bank; (ii) a court-overseen regime for an insolvent bank; (iii) a court-led regime usable for either a solvent or insolvent bank. - Bank Reorganization and Winding-Up Regulations (1970s) modify certain Companies Act provisions but their use appears dependent on obtaining additional capital. - Banking Act provides MFSA power to appoint a liquidator but sets out no procedures for liquidation. - Controlled Companies Act (1970s) was tailored to a particular failing bank, apparently applies only to insolvent banks and is deemed by some as not usable. - Withdrawal of license and appeals: - ECB’s decision to withdraw a license is subject to challenge and potential reversal. For HP-LSIs and LSIs, MFSA makes a formal written request to ECB to withdraw the license with justification; ECB decisions pass through the Supervisory Board and, if unchanged, are sent to the ECB Governing Council for no objection. Shareholders can challenge to the ECB’s Administrative Board of Review within one month; the board must decide no later than two months from receipt; shareholders may then challenge to the Court of Justice of the European Union with no time limit for its verdict. - These appeal rights have had adverse implications for efficient resolution (example: Nemea Bank shareholders appealed to the Court of Justice of the European Union). No legal requirement ties license withdrawal to liquidation; after license withdrawal and payout of covered deposits, MFSA Board (as supervisory authority) decided not to place Nemea into liquidation pending court decision. Consequently, the bank remains under CP control, MFSA has not required winding up or appointed CP as liquidator, loan assets are being repaid and the former bank is accumulating liquid assets that could otherwise satisfy creditors including the DCS, and CP costs continue to accrue — potentially adversely affecting recoveries of the DCS and other creditors. - Recommendation on insolvency framework: - Government should develop an administrative rather than court-led bank insolvency framework, consistent with international standards recommending resolution authorities have power to affect closure and orderly liquidation of failing banks. - Under such a framework, the RC would decide on application of the insolvency regime rather than the MFSA Board in its supervisory capacity, mitigating conflicts of interest arising from MFSA’s dual supervisory and resolution roles. - In the interim, MFSA Board should seek a suitable means to shift decisions on winding up and insolvency of a bank whose license has been withdrawn from its supervisory function to its resolution function. *Source: 1mltea2019005 - 21. As noted, the supervision of Malta banks, including recovery planning and early* ### 38. The various current legal frameworks for bank insolvency proceedings appear not to ### 1mltea2019005 - 38. The various current legal frameworks for bank insolvency proceedings appear not to ### Asset and liability transfer powers; purchase and assumption (P&A) - Current legal frameworks for bank insolvency proceedings appear not to allow the transfer of assets and liabilities to a third party at the time of license withdrawal. - Having this power would enable a “purchase and assumption” (P&A) transaction, whereby at least insured deposits are assumed, and certain assets are purchased, by an acquirer. - Potential advantages of P&A transactions: - More orderly and efficient winding down of a bank. - Less disruptive to clients. - May allow retention of some franchise value associated with the bank's business. - Can potentially reduce the costs for the DCS relative to a deposit payout. - Could increase authorities' capacity to handle multiple non-systemic bank failures via an improved bank insolvency regime. - Recommendation (explicit in text): The availability of asset and liability transfer powers under the bank insolvency regime should be set out explicitly in law, ideally in advance of a full revision of the regime. ### Special Resolution Regime — available tools - The RC has the tools and underlying special resolution powers set out in the international standard; these are available to the SRB in Malta and can be implemented directly by the RU without need for a separate decision by the RC (minister’s approval may be required). - The specified tools: - The bridge institution tool: Based on the power to establish an institution temporarily owned by a public entity to acquire assets and liabilities from a bank in resolution to ensure continuity of critical functions until a buyer can be found. (Footnote: Or, alternatively, an equity position.) - The sale of business tool: The power to transfer assets and liabilities from a bank in resolution without shareholder or creditor consent to third parties or to a bridge institution. - The bail-in tool: The power to write-down (including to zero value (i.e., write-off)) and/or convert into equity eligible liabilities to absorb losses and recapitalize a bank in resolution. (Footnote: And potentially to help capitalize a bridge institution.) - The asset separation tool: The power to transfer assets that were not transferred when using the sale of business tool or not retained when undertaking a whole bank bail-in transaction, without shareholder or creditor consent, to an asset management company (AMC) for the purpose of managing and maximizing the value of the assets. ### Legal framework for use of resolution powers - General availability: powers are available whenever RC considers that insolvency proceedings would give rise to unacceptable financial or economic consequences. - More specifically, resolution powers may be used when: - The bank is deemed to be ”failing or likely to fail”, a judgement that can be rendered by the SC/ECB or the RC/SRB; - The RC/SRB, in consultation with the SC/ECB, determines that there are no reasonable prospects that adequate and timely private sector measures will be taken; and - The use of the resolution powers is deemed by the RC/SRB to be in the public interest. The public interest determination is based on a judgment that insolvency proceedings would not ensure that the objectives of resolution — ensuring continuity of the bank’s critical functions, maintaining financial stability, safeguarding public funds, and protecting client assets and depositors — will be met. - For banks under the sole remit of the RC, the basis for the determination by the RC is recorded in its meeting minutes. ### Powers to write down and convert capital instruments - The MFSA has the power to write down and convert capital instruments of a bank: as a stand-alone tool or in conjunction with taking resolution action. - Under the Recovery and Resolution Regulations: - A bank’s equity can be written down or off. - Additional Tier 1 and Tier 2 capital instruments can be converted into equity or written down or off by either the SC or the RC. - Use cases: - The SC can do so to ensure the viability of a bank. - The RC can do so prior to or simultaneously with taking resolution action and must do so where extraordinary public support is required. - Valuation requirement: - Prior to exercising the power to write down and/or convert capital instruments, the RC (but not the SC) must obtain a professional third-party valuation to determine the extent of losses on assets, with a view to ensure they are fully absorbed by existing capital instruments. - If not expedient, the RC can perform its own provisional valuation subject to adjustment based on an ex post third-party definitive valuation. - Current gap: No written policies or procedures adopted by the RC and SC for coordinating the use of these respective powers; consideration should be given to putting them in place. ### Ministerial approval and government stabilization tools - In certain circumstances, the Finance Minister must grant permission prior to the RC exercising its resolution powers and can invoke the use of additional powers and tools (government stabilization tools). - The RC must seek the minister’s written approval prior to taking any actions that may have a direct fiscal impact or which may have systemic implications. - In extraordinary circumstances where resolution tools prove inadequate, the minister may, in consultation with the RC, direct the use of government stabilization tools involving equity support from the state and/or temporary public ownership. (Subject to prior approval by the European Commission Directorate-General for Competition in line with the EU state aid framework.) - Observations/recommendation: - Communications between the RU/RC and the MFIN appear adequate. - Benefit in MFIN clarifying expectations for notifications under these provisions and formulating written policies and procedures as to when and how government stabilization tools might be utilized. ### Legal safeguards and the “no-creditor-worse-off” principle - Legal safeguards for shareholders and creditors set out in the international standard are in place. - Shareholders and creditors are protected from incurring losses in the context of the use of resolution powers that are greater than they would have incurred under insolvency proceedings (the “no-creditor-worse-off” principle). - If left financially worse off, based on a professional third-party valuation, they are entitled to compensation from the SRF. - While resolution powers must respect the hierarchy of claims set out in the Recovery and Resolution Regulations, the power to deviate from pari passu treatment of creditors (such as excluding certain creditors from bail-in) under specifically defined and limited circumstances is in place. ### Legal uncertainties and impediments to effective application - The effective application of the “no-creditor-worse-off” principle is compromised by uncertainties in the bank insolvency framework: - It is unclear what creditor hierarchy would apply in insolvency, so it is unclear against which legal provisions authorities can assess whether creditors would be left worse off in application of resolution measures relative to insolvency. - This introduces legal risk into decisions taken by the RC in applying resolution tools. - RC powers to remove impediments to resolution: - RC has wide-ranging powers to require changes to enhance resolvability, including requiring a bank to limit maximum individual and aggregate exposures, divest specific assets, limit or cease specific activities, and change legal or operational structure. - Appeals: - Parties aggrieved by a decision or actions of the RC can appeal directly to the Court of Appeal within 20 days. (Reference: Art. 9, First Schedule MFSA Act.) - Appeals do not automatically suspend the effects of the resolution measure and the decision is immediately enforceable. - An annulment by the court of a decision by the RC does not affect subsequent administrative acts or transactions based on the annulled decision; the legal remedy is compensation for any loss incurred by the aggrieved party as a result of the decision or consequent actions. ### Operational testing and practice - Use of the special resolution powers has yet to be tested. - Since the effective date of the amended MFSA Act, the MFSA has made two “failing or likely to fail” notifications to the RC. In both cases, the RC determined that use of its resolution powers was not indicated under the public interest test. - This reinforces the view that the RC is operationally independent of the MFSA’s supervisory functions. ### Summary of recommendations (explicit list in text) - As a priority, initiate a project to update and streamline the legal framework for bank insolvency, taking into consideration the guidance in the international standard to adopt an administrative regime. - Amend the law to set out explicitly the availability of asset and liability transfer powers in insolvency. - Find a suitable means to shift responsibility for decisions on the winding up and insolvency of a bank whose license has been withdrawn from the MFSA’s supervisory function to its resolution function. - Consider adopting policies and procedures for coordinating how the RC and SC use their power to write down and convert capital instruments. - Consider clarifying in writing expectations regarding notifications by the RC to the minister when taking actions that may have a direct fiscal impact or which have systemic implications. - Consider adopting written policies and procedures as to when and how government stabilization tools might be utilized, in conformity with EU state aid obligations. ### Resolution planning, strategies, and impediments - Leadership and planning status: - The SRB and RU lead resolution planning. For the four banks under the authority of the SRB, resolution plans are prepared by the SRB Internal Resolution Teams supported by staff from the RU in consultation with BSU staff. - For other banks, plans are prepared by the RU, will be endorsed by the RC and sent for comment to the SRB and the MFSA Board (as the Resolution Authority). - The inter-agency DSC is kept informed of status and significant issues arising in resolution planning. - Progress and gaps: - Resolution plans for two of Malta’s three SIs were prepared starting in 2016 and are now undergoing their third annual iteration. - The resolution plan for the third SI is the responsibility of the Bank of England-led Crisis Management Group; the SRB and RC are working to ensure more explicit and complete treatment of the Malta subsidiary in that plan. - In late 2017, the RU initiated resolution planning for banks designated as HP-LSIs. Initial resolution plans for two HP-LSIs expected to be completed in 2018, and for the third in early 2019. Initial plans for other banks expected to be completed by end-2020. - In general, resolution plans in most cases have not yet achieved the ultimate goal that they be credible and feasible. - Continued effort is necessary and timetable acceleration is recommended for particularly weak small banks. - Insurance sector: - Formal resolution planning by authorities for the two dominant life insurers has not yet been initiated. - MFSA’s Insurance and Pensions Supervision Unit feedback addresses recovery and resolution planning by the firms. - Scope for MFSA, including the RU, to consider possible resolution measures for insurers and consequences of bank-insurer linkages; responsibility for resolution planning for significant insurers should be assigned within the MFSA and work initiated. - Preferred resolution strategy (PRS) and MREL: - PRS for a bank could specify use of one or more resolution tools or insolvency proceedings. - PRS for one SI has been agreed with the SRB; PRS for the other two SIs likely to be agreed soon. - Further analysis required for fallback resolution strategies for the three SIs if PRS is not feasible at time of resolution. - Default PRS for all banks is use of insolvency proceedings; use of resolution tools must meet tests including being in the public interest. - Upon agreement on PRS, an MREL requirement is determined to ensure adequate loss-absorbing capacity and recapitalization funds. - The SRB specified indicative MREL targets for all SIs in 2017; in 2018 set a binding external target for the SI with an agreed PRS. Binding external targets for the two other SIs anticipated soon. - Specific MREL requirements for other banks have not been set by the RU, though adequate progress is being made. - Identified impediments to resolution (key items): - Ensuring ability to provide adequate liquidity for a bank in resolution: - Two last-resort sources of liquidity funding in resolution are emergency liquidity assistance (ELA) from the CBM and use of the SRF. - The SRB precludes consideration of either in formal resolution planning; RU will need to consider other planning approaches. - RU and banks should be cognizant of CBM’s ELA framework to ensure eligibility at time of resolution. (Recommendation: see Part E for CBM’s ELA Framework recommendations.) - Lack of practically “bail-inable” liabilities in Malta: - Potentially bail-inable instruments include total own funds, subordinated debt, senior debt, and, prospectively, senior non-preferred debt. - Market structure: banks’ debt instruments, including subordinated debt, are purchased in significant volume by retail customers even where minimum denomination is relatively high (e.g., €25,000). - A large proportion of Malta’s corporate depositors are qualified as “small and medium enterprises” under the EU definition. - Issuing sufficient MREL may prove challenging given limited domestic professional investor market and small issuance sizes for potential external investors. These realities have been conveyed to the SRB. - Banks, the SRB, and the RU need to work collaboratively to ensure MREL requirements can be met with instruments that can be bailed-in in practice. - Feasibility and credibility constraints from compensation claims when departing from pari passu treatment: - In bail-in, RC can depart from pari passu treatment of creditors in the same class under certain circumstances. - Under the creditor hierarchy, uninsured depositors (except uninsured household and “small and medium enterprise” depositors) and senior unsecured bondholders rank in the same creditor class. - With pari passu treatment, uninsured depositors would incur the same loss as senior unsecured bondholders. - Protecting uninsured depositors but not senior unsecured bondholders could give rise to valid “no-creditor-worse-off” claims by bondholders, who may be left worse off than in insolvency. - “No-creditor-worse-off” claims must be paid by the SRF, and SRF access criteria give rise to additional challenges that must be considered. - Without departure from pari passu treatment, use of bail-in potentially would convert uninsured depositors to shareholders. *Source: Excerpt from the IMF note (1mltea2019005).* ### 56. The lack of flexibility to depart from the pari passu principle may constrain the ### 1mltea2019005 - 56. The lack of flexibility to depart from the pari passu principle may constrain the ### Sale of business and bridge institution tools — legal flexibility and operational issues - Maltese legislation explicitly allows departures from the principle of pari passu when using the bail-in tool. - The ability to depart from the pari passu treatment of creditors within a class should also be explicitly available for the application of the sale of business tool and the bridge institution tool. - This flexibility may be necessary to allow transfer of certain liabilities (e.g., uncovered corporate deposit liabilities) but not other liabilities within the same ranking (e.g., senior unsecured bonds). - While such flexibility might be read into the Recovery and Resolution Regulations, consideration should be given to making explicit in law the power to depart from pari passu treatment of creditors when using the sale of business and bridge institution tools to reduce the potential of legal challenges arising from lack of express authority. - The FSB’s Key Attributes of Effective Resolution Regimes recommend authorities should have flexibility to depart from the pari passu principle when necessary to contain systemic impact or to maximize value for the benefit of all creditors. ### Bridge institution operationalization and governance - A bridge institution can serve as an effective fallback where a private sector acquirer cannot be secured within required timeframes or on acceptable terms. - Under the Recovery and Resolution Regulations, any bridge institution is to be controlled by the RC but can be owned in whole or part by one or more public authorities. - The RU has begun preparing a handbook for operationalizing a bridge institution, following SRB guidance. - Priority tasks for bridge institution preparation: - Define which entity will own a possible bridge institution and how the ownership function will be organized. - Define how the institution’s governance structures will be rapidly put in place in time of need. - Define how the bridge institution will be returned to the private sector in a timely manner. - Collaborate with the MFSA Authorizations Unit in this work. ### Asset Management Company (AMC) and asset transfer tool readiness - Preparations are being made to operationalize an AMC to enable use of the asset transfer tool. - The RU has prepared a first draft of a regulation based on SRB guidance. - As with bridge institutions, the regulation should define ownership of a possible AMC and how its governance structures can be rapidly established in time of need. ### Valuation arrangements for resolution actions - Prior to initiating resolution or writing down/converting capital instruments, the RC must arrange for a third-party valuation; contracting is subject to government procurement rules. - The RU has held initial discussions with MFSA’s Procurement Office and will seek SRB guidance on valuations before proceeding with procurement. - Consideration should be given to contracting with at least two firms that can commence required valuations on short notice (e.g., within five days). - A single firm is impractical because of possible conflicts of interest arising from business relationships with the bank in resolution. ### Implementation handbooks - The RU intends to prepare handbooks to guide implementation of each resolution tool. - Handbooks should contain policies and procedures relevant to each tool and are a key task for the RU. - The SRB is providing guidance for handbook development; handbooks should be developed as soon as possible. ### Summary of recommendations (resolution planning and tools) - Continue efforts in resolution planning and consider means to accelerate resolution planning for any particularly weak small banks. - Assign responsibility for development of formal resolution plans for significant insurers within the MFSA and initiate the work, ensuring integration with the plans of the relevant banks. - Consider approaches to mitigating the potential that lack of access to sufficient liquidity funding proves an impediment to effective implementation of resolution tools. - Continue collaboration with the SRB to ensure MREL requirements are able to be met with instruments that can be bailed-in in practice under Malta’s market circumstances. - Consider making explicit in law the power to depart from pari passu treatment of creditors when using the sale of business and bridge institution tools. - Develop plans to establish a bridge institution and an AMC, including defining which entity will own the legal entities, how the ownership function will be organized, how their governance structures can be rapidly established in time of need, and how the institution or assets will be returned to the private sector in a timely manner. - Contract with at least two firms that can, on short notice, commence valuations required to support use of resolution tools. - Develop handbooks to guide implementation of each of the resolution tools. ### Resolution funding — sources and constraints - Financing needs after write-down and/or conversion of eligible liabilities may include recapitalization of a resolved bank and maintaining adequate liquidity prior to, during, and subsequent to executing resolution measures. - Primary sources of resolution funding: - SRF (Single Resolution Fund) - ELA (Emergency Liquidity Assistance) - Public financing subject to conformity with EU state aid rules #### Single Resolution Fund (SRF) - The Single Resolution Mechanism Regulation establishes the SRF, owned and administered by the SRB. - Subject to certain conditions, the SRF may fund loss absorption, recapitalization, liquidity, and other costs and expenses associated with resolution measures. - Under exceptional circumstances and subject to conditions, the SRF can make contributions to the institution under resolution in lieu of write-down or conversion of certain liabilities and/or creditors. - The SRF is also the source of any compensation to shareholders or creditors under any successful “no-creditor-worse-off” claims. - Amounts potentially available for Maltese banks as of end-2017: - The amount of SRF funding potentially available for resolution measures with respect to Maltese banks was roughly €16.6 billion as of end-2017. - This comprised the funded amount of the Malta compartment of €23.3 million, a €43 million bridge-financing arrangement in the form of a Loan Facility Agreement from the state for the unfunded portion of the Malta compartment, and the remainder from the mutualized compartments. - Constraints on SRF use: - A prerequisite for access to the SRF for loss absorption and recapitalization support (but not liquidity support) is that shareholders and creditors have collectively first absorbed losses of at least 8 percent of total liabilities and the bank’s own funds. - A second constraint is that the amount provided by the SRF is limited to five percent of the bank’s total liabilities and own funds. - These conditions may impede implementation of resolution tools necessitating use of the SRF, particularly where there are insufficient bail-in-able liabilities to meet the 8-percent rule. - The potential inability to access the SRF highlights the importance of improving the insolvency regime and putting in place explicit asset and liability transfer powers in insolvency. #### Emergency Liquidity Assistance (ELA) - Provision of ELA to Maltese banks is at the discretion of the CBM. - In the Banking Union, ELA may be granted by national central banks, subject to potential objection by the ECB. - Under the Central Bank of Malta Act, the CBM may grant a loan to any bank incorporated in Malta (against such forms of security as the CBM Board may consider appropriate) where it deems that doing so is necessary to safeguard financial stability. - ELA is not available to institutions other than banks. - When granting ELA, the CBM bears the risk of any loss; there are no provisions in place for an MFIN guarantee of ELA. - No ELA has been provided to a Maltese bank over the past five years. - The CBM adopted a formal ELA Framework (Framework for the Provision of Emergency Liquidity Assistance by the Central Bank of Malta, July 2018). - The framework addresses authorities, responsibilities, policies, and procedures for considering, deciding upon, implementing, monitoring, adjusting, reporting upon, and exiting possible ELA. - It addresses coordination internally among CBM units and with other parties such as the MFSA and the ECB. - The framework treats ELA collateral eligibility broadly and sets valuation and haircut procedures applicable to various types of financial and physical collateral. - Additional work should document legal and procedural requirements for perfecting liens on “non-traditional” forms of collateral (i.e., those not used in regular monetary operations, such as loans). - The CBM’s ELA eligibility criteria include both a systemic risk and solvency test; the CBM’s Financial Stability Department undertakes systemic impact assessments and solvency assessments (which may consider prospective solvency achievable by resolution actions). - The CBM ELA framework has been shared with other members of the DSC (the MFSA and the MFIN), but not with banks. - The CBM should make its high-level policies on collateral valuation, haircuts, and information and documentation known to banks to aid contingency planning, while retaining sole discretion to decide on granting ELA. - The CBM has no arrangements to provide ELA in foreign exchange (FX); the CBM judges this a remote possibility given only one mid-size bank operates significantly in FX (USD). - The CBM would most likely seek FX from the ECB via swap lines as contingency. - The CBM should consider exploring discussions with the ECB regarding access to FX as a contingency. - There is no government backstop for ELA. - The CBM may face situations where a bank in resolution meets systemic risk and solvency criteria but cannot provide sufficient collateral or necessary documentation to perfect liens; the CBM would then be lending partially unsecured. - The CBM and the MFIN should consider arrangements for a government guarantee of any unsecured lending by the CBM, subject to agreement and to EU state aid rules. #### Government borrowing and backstop - The minister has power to borrow funds for implementing provisions of the Recovery and Resolution Regulations, including implementing government stabilization tools and to fund “public backstop measures” for other resolution funding arrangements. - The minister is authorized to borrow “for such amount not exceeding any amount which the House of Representatives may from time to time by resolution authorize.” This provision is interpreted as requiring prior House approval. - The MFIN notes examples of convening parliament on short notice for urgent matters. - The MFIN should clarify whether these provisions enable the government, as a last resort and subject to prior approval by the European Commission Directorate‑General for Competition and compliance with EU state aid rules, to provide (i) a borrowing facility for the DCS and (ii) a backstop for CBM ELA. ### Summary of recommendations (funding and ELA) - Consider how restrictions on use of the SRF may impede resolution and how to remedy or mitigate those impediments. - Undertake further work to document legal and procedural requirements for perfecting liens on non-traditional forms of collateral. - Without prejudice to the CBM’s sole discretion to decide on granting ELA, make high-level policies for collateral valuation, haircuts, and information and documentation known to banks to aid their contingency funding planning. - Consider discussions with the ECB regarding access to FX for ELA as a contingency. - Put in place arrangements for a government guarantee of any unsecured lending by the CBM, subject to EU state aid rules. - Clarify that the minister’s power to borrow in support of implementation of provisions of the RR Regulation enables provision of a borrowing facility for the DCS and a backstop for CBM ELA, subject to prior approval by the European Commission Directorate‑General for Competition and in compliance with EU state aid rules. ### Deposit protection and payout — DCS status and capacity - The Deposit Guarantee Scheme Directive introduced harmonized coverage of deposits at €100,000, a requirement for faster payout (seven days), and ex ante funding arrangements. - By July 3, 2024, each national scheme shall reach a target level of at least 0.8 percent of covered deposits. - Malta DCS details: - Established in 2003; legal foundations amended in late 2015 to transpose the Directive. - Covers resident and nonresident depositors in banks licensed in Malta and their branches in the EU; does not cover depositors in branches in Malta of banks licensed outside the EU, deposits by other banks or investment firms, deposits by collective investment schemes or other investment funds, and most deposits by pension and retirement funds. - Covered deposits as of June 30, 2018: €11.6 billion, representing 62 percent of the €18.8 billion in eligible deposits and 54 percent of the €21.6 billion in total deposits. - DCS assets are kept in accounts at the CBM, which also serves as investment manager for the fund. - DCS funding targets and capacity: - The DCS targets a fund balance of 1.3 percent of covered deposits; this level was reached in 2016. - The target fund balance for 2017 was €141 million, though a deposit payout of €35 million that year reduced the fund balance by about 25 percent. - At the 1.3 percent target fund size, the DCS has insufficient resources for a full payout of the SIs and five individual LSIs, the smallest of which has roughly a 2 percent market share in total deposits. - The DCS has authority to enter into agreements with third parties to obtain additional financing to increase resources or raise cash. - In one instance the DCS explored a commercial bank loan but entered into a repo transaction with the CBM to raise cash. - No backstop funding arrangements are in place. - The DCS should continue to pursue additional funding sources in times of need, including secured with future premiums, ideally from commercial banks, but, as a last resort, from the government. Key statistics (as stated in the text) - SRF funding potentially available for Maltese banks as of end-2017: roughly €16.6 billion. - Malta compartment funded amount: €23.3 million. - Bridge-financing arrangement for unfunded Malta compartment: €43 million. - SRF prerequisite loss absorption by shareholders and creditors: 8 percent of total liabilities and the bank’s own funds. - SRF limit on amount provided: five percent of the bank’s total liabilities and own funds. - Covered deposits as of June 30, 2018: €11.6 billion. - Eligible deposits: €18.8 billion. - Total deposits: €21.6 billion. - DCS target fund balance: 1.3 percent of covered deposits. - DCS target fund balance for 2017: €141 million. - Deposit payout in 2017: €35 million (reduced fund balance by about 25 percent). - Deposit Guarantee Directive coverage threshold: €100,000. - Directive payout requirement: seven days. - Directive target level by July 3, 2024: at least 0.8 percent of covered deposits. - Valuation procurement target commencement: e.g., within five days. - Smallest of five individual LSIs market share referenced: roughly a 2 percent market share in total deposits. *MALTA INTERNATIONAL MONETARY FUND* ### 77. In 2012 the MFSA adopted a policy with respect to new entrants designed to protect ### 1mltea2019005 - 77. In 2012 the MFSA adopted a policy with respect to new entrants designed to protect ### Deposit Coverage, New Entrants, and Funding of the DCS - In February 2012 the MFSA adopted a policy setting out a general expectation that new entrants should have a bank of established repute in their shareholding and/or management structure. - In May 2012 the MFSA adopted a policy to consider in authorization the means of funding by new entrants that would not be covered by the DCS, particularly for those potential entrants that do not have a bank of established repute in the shareholding or management structure. - Licenses subsequently granted to eight banks were conditioned on maintaining blocked funds in their account at the CBM in favor of the DCS: - Six banks required to maintain blocked funds equivalent to 100 percent of their covered deposits. - Two banks required to maintain blocked funds of 15 percent of their covered deposits. - Banks qualify for the lower 15 percent requirement if they agree to maintain total capital plus debt eligible for bail-in (raised from professional investors) greater than 35 percent of covered deposits. - The DCS is financed through ex ante contributions imposed on banks. Risk-based premiums are determined by the DCS Management Committee. - The payment commitment currently represents 63.5 percent of the total annual premium but must be reduced to 30 percent by 2024. - Of the current fund balance of €111 million, 86 percent is comprised of payment commitments. - The DCS can require banks to make extraordinary contributions in an amount of up to 0.5 percent of covered deposits each year if its resources are deemed insufficient. - Payment commitments are backed by a written agreement binding the bank to pay the DCS the committed amount in cash within two days (and potentially one day) of demand by the DCS; payments are secured by a pledge of high-quality securities. ### Recent Payout, Replenishment, and Legal Amendment - The DCS paid out €35 million in covered deposits in 2017, representing 25 percent of its €141 million fund. - Parliament was expected to consider an amendment to enable the DCS to require banks to issue additional payment commitments of €35 million, equal to the recent payout. - Banks would have to fulfill the commitment in four annual contributions, unless the DCS recoups its outlays during that period. - The Note recommends continuing to pursue this legal amendment to allow replenishment of the fund. ### Payout Timelines and Operational Improvements - At present the DCS is required to make payouts within 20 days. - Under the Deposit Guarantee Scheme Directive this period must be reduced to seven days by 2024. - The DCS is implementing an automated system in which banks would send data files to the DCS to enable payouts within the seven-day period; the system is envisaged to be operational by end-2018. - The system enables payouts to depositors either by means of checks issued by the CBM or by transfer of covered deposit amounts to a pre-specified deposit account at another bank. - Consideration could be given to complementary payout methods: - Creating a portal where covered depositors can designate an account at another bank to which to transfer the paid-out funds (more flexible than the existing pre-designated account approach). - Using an agent bank to make payouts, which might be more convenient for depositors than receiving a CBM check. ### Powers to Finance Transfers, Resolution, and Legal Uncertainties - The DCS has the power to finance the transfer of assets and liabilities in the context of insolvency proceedings (Regulation 33 (6), DCS Regulations), subject to a provision that the costs borne by the DCS in such transfers do not exceed the net amount of paying out covered depositors. - Apparent lack of MFSA or DCS power to transfer assets and liabilities to a third party under bank insolvency proceedings would seem to preclude the use of this financing option. - There are uncertainties regarding the insolvency regime, including a lack of clarity as to the creditor hierarchy in insolvency and thus the status of the DCS’s claim in subrogation of covered depositors. Consequently, it is unclear how to determine the net amount the DCS would incur in paying out covered deposits. - The DCS should clarify in writing its interpretations of current law and its policies on financing transfers of assets and liabilities in insolvency. - The DCS has the power to finance resolution actions in certain cases: - In the context of bail-in, the DCS is liable for the amount by which covered deposits would have been written down to absorb the losses in the bank, had covered deposits been included within the scope of a bail-in and been written down to the same extent as creditors in the same level of the creditor hierarchy (Regulation 109, Recovery and Resolution Regulations). - If resolution tools other than bail-in are employed, the DCS is liable for the amount of losses that covered depositors would have suffered in proportion to the losses suffered by creditors in the same level of the creditor hierarchy, but the DCS's liability cannot exceed the net losses that would result under insolvency proceedings. - The Note suggests that an interpretation allowing the DCS to finance resolution measures up to the amount it otherwise would have paid out to depositors under insolvency—providing that it is reasonably expected to recover those funds to the same degree as in liquidation—would increase resolution funding options. ### Triggering, Liquidation, and Recovery Concerns - The MFSA determines when the DCS is triggered. Should the ECB withdraw a bank’s license (which would occur upon the recommendation of the MFSA Board acting as the supervisory authority), the MFSA notifies the DCS, which triggers a deposit payout (Regulation 8 of the DCS Regulations). - The DCS does not have explicit legal power to put a bank into liquidation. This limits the ability of the DCS to protect its interests. - License withdrawal by the ECB triggers a notification by the MFSA Board to the DCS, triggering a deposit payout; should the MFSA Board not place the bank into liquidation (as in the Nemea Bank case), the DCS may not be able to recoup its paid-out funds because maintaining the former bank in abeyance of liquidation could deplete its available assets. - These concerns should be remedied in amendments to current law or in an update and streamlining of the bank insolvency framework to create an administrative regime for the orderly closure and liquidation of a failing bank. The law should require that license revocation triggers liquidation. - In the meantime, the MFSA should adopt a policy to place a bank into liquidation when a deposit payout is made. - The DCS needs to be prepared to play a lead role in creditor-led insolvency proceedings; in subrogation of paid-out covered depositors, the DCS will likely be the largest claimant on most bank liquidation estates, placing duties upon the DCS in creditor-driven liquidation processes (for example, as provided for in the Companies Act). ### Contingency Planning and Crisis Management — Institutional Arrangements and Exercises - Institutional arrangements for interagency coordination: - Joint Financial Stability Board: statutory body under the Central Bank of Malta Act; chaired by the governor; comprised of the two CBM deputy governors and the MFSA Chairman and CEO; the minister normally attends as a non-voting member; meets quarterly; decisions routinely taken by consensus; serves an advisory role. - DSC: body established by agreement of the members; chaired by the CBM deputy governor responsible for financial stability; membership includes CBM Chief Officer responsible for financial stability, CBM Financial Stability Department Head, the MFIN Budget and Finance Permanent Secretary, the MFSA Director General, and the MFSA RU Head; often invites the Financial Intelligence Analysis Unit and occasionally the Attorney General and the Malta Stock Exchange as observers; mandate to enhance crisis preparedness and facilitate management and resolution of an actual crisis. - Crisis Management Task Force: permanent operational arm of the DSC; chaired by the MFSA RU Head; comprised of technical personnel from the CBM, the MFSA, and the MFIN; primary objectives to maintain and update the Interagency Crisis Management Framework, organize simulation exercises, and make recommendations to enhance regimes for recovery, insolvency, and resolution. - The authorities engaged in a crisis simulation exercise in 2016: - Participants included senior management of the CBM, the BSU, the RU, and the MFIN. - Objectives: assess reporting lines, escalation processes, response prioritization, collaboration, and decision making. - Key outcomes: need to update the Interagency Crisis Management Framework; need to be better prepared to decide on whether to use the insolvency regime or resolution measures in individual banks; and the need to improve the ELA framework (mainly to improve collateral valuation techniques and processes). - The Crisis Management Task Force is focused on updating the Interagency Crisis Management Framework to reflect changes associated with the introduction of the Single Supervision Mechanism and the Single Resolution Mechanism, guidance provided by the ECB and the SRB, and findings of the crisis simulation exercise. ### Internal Plans, European Coordination, and Additional Needs - The CBM’s well-elaborated ELA framework largely serves internal crisis preparedness, but the MFSA and the MFIN do not currently have well-documented crisis management plans. - Internal contingency plans are important complements to a comprehensive interagency plan; efforts to put them in place should begin. - The MFSA’s internal plans would complement the work of the RU to prepare handbooks for using various resolution tools. - Completed internal plans should be shared with other agencies; agency-specific plans should be reviewed and updated periodically, with relevant updates incorporated into the interagency framework. The CBM’s ELA Framework has been shared with the MFSA and the MFIN. - The institutional architecture for the Banking Union was largely designed for resolution of individual banks; a system-wide crisis involving multiple banks would involve additional participants and require a more comprehensive strategy. - The Crisis Management Task Force and the DSC should consider how domestic agencies would interact with European authorities in the event of a system-wide crisis, potentially involving other euro area jurisdictions, and have appropriate contingency plans in place to ensure financial stability in Malta. ### Summary of recommendations - Continue to pursue efforts to obtain additional funding sources, ideally from commercial banks but, as a last resort, from the government, in compliance with state aid rules. - Continue to pursue an amendment to the DCS Regulation to allow a replenishment of the fund. - Consider eventually adopting additional payout mechanisms. - The DCS should clarify in writing its interpretations of current law and its policies on its ability to finance the transfer of assets and liabilities in insolvency, and to finance the use of resolution measures. - The MFSA should adopt a policy to put a bank into liquidation when a deposit payout is made. - The DCS should be prepared to take a leading role in any creditor-led liquidation process. - The MFSA and the MFIN should develop formal internal crisis management plans as a complement and input to the Interagency Crisis Management Framework. - The Interagency Crisis Management Framework should eventually address how the domestic agencies would interact with European authorities in the event of a system-wide crisis, potentially involving other euro area jurisdictions, to ensure financial stability in Malta. *Source: 1mltea2019005 - 77. In 2012 the MFSA adopted a policy with respect to new entrants designed to protect* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1mltea2019005.pdf_