A study of the implications of de-risking : the case of Malta

Abstract

PURPOSE: In this study, the researcher explores the emerging de-risking phenomenon by identifying and analysing the main factors which are affected by, and the implications of, the de-risking process. This research project primarily focuses on the key drivers and implications of de-risking specific to Malta. DESIGN: A mixed methods research approach was applied in order to achieve the objective of the study and answer the two accompanying research questions. Twentytwo semi-structured interviews were conducted with professionals employed with local banks, financial institutions, regulatory authorities, Big 4 accounting firms and other accounting and risk management firms. The primary data collected from the interviews was qualitatively and quantitively analysed using thematic analysis and through the application of a statistical test (the Friedman Test) respectively. FINDINGS: Mounting regulatory pressures from the ECB and Maltese authorities, coupled with rising compliance costs, higher fines and penalties for non-compliance and ever-increasing developments in AML/CFT regulations are all driving de-risking within Malta. The undertaking of de-risking leads to certain customer bases being financially excluded and results in the loss of correspondent banking relationships. However, given the current political climate in Malta characterised by scandals and allegations of corruption, Maltese institutions are exercising heightened prudence and caution by lowering their risk appetite and de-risking higher risk customer bases as this enables them to focus on their core clients. This adjustment in risk appetite allows these institutions to better manage their risks, including reputational risks, and have sustainable customer bases. CONCLUSIONS: The de-risking practice is increasing in prevalence and is expected to continue being adopted in the coming years, both in Malta and internationally. Local regulatory authorities are not only responsible for the provision of oversight and supervision, but also of ensuring that meaningful de-risking is conducted, and that legitimate business is not lost. This helps to safeguard the interests of all stakeholders and to rebuild Malta’s presently tarnished reputation. To maximise the effectiveness of de-risking, the right balance between adequately managing risks and not extinguishing business needs to be struck, implying the need for regulation to be balanced and proportionate. VALUE: Taking into account the fact that very limited research about the drivers and implications of de-risking with regards to the Maltese scenario has been carried out, this study is a relevant contributor to future de-risking to be conducted in Malta and serves as a benchmark for future further studies. Moreover, this research project accentuates the need for there to be increased awareness, knowledge and expertise of de-risking in Malta. Consequently, the provision of education to professionals is important so that such professionals are able to keep abreast with all the latest developments regarding derisking and AML/CFT.