Subordinated debt as a market-based disciplinary supplement to formal bank regulation in Malta

Abstract

The aim of this study is to explore the potential benefits that market information would have if supervisory authorities, like the MFSA, were to incorporate it into every aspect of their supervisory modus operandi. The suitability of encouraging market discipline in Malta by means of a Mandatory Subordinated Debt Requirement is analyzed through interviews held with the Head of the MFSA's Banking Unit and through a questionnaire made to the general public. The results reveal the existence of implicit guarantees that would inhibit any sort of market discipline. The study recommends that the contribution rate used for the Maltese Deposit Compensation Scheme be revised, breaking its linkage to the arbitrary variable of eligible deposits, and instead linking it to a bank's risk profile. The study particularly illustrates how the introduction of an MSDR in Malta, could aid capital management, the introduction of prompt corrective action and an early warning system. Finally the study also calls on the MFSA, as regulator of the financial system and protector of :financial services' customers, to dispel any explicit and implicit guarantees prior to introducing a MSDR. While acknowledging that an EU-wide MSDR would be ideal, the study recommends that Malta should take a more proactive stance and initiate the process, not only because it's high concentration and accompanying risk compels it to, but also to be taken seriously as an aspiring Mediterranean financial centre.