Like most jurisdictions, the Republic of Malta distinguish systemically important financial institutions from other (shadow) banks, liquidity providers and financial advisers. As such, bank liquidation in Malta follows the pan-European Bank Recovery and Resolution Directive (BBRD) for failing systemic banks, and triggers local company, bankruptcy and insolvency law for the remaining and non-systemic financial institutions. Deposit protection and investor compensation in Malta is organized by the MFSA, the Malta Financial Services Authority.
When a bank fails or is likely to fail, the supervisory authority and regulator seek to mitigate risk for society. Only under exceptional circumstances, that is to protect the public interest, financial institutions may be bailed-out with tax payer input. Yet, in the wake of the global financial crisis, the general public falsely assumed that rescue missions were common and universally applicable. This misconception is inconsistent with economies theories, market discipline and moral hazard. In reality, creditors bear the risk of banking failure above the level of depositor protection and are treated equally as in matters of traditional corporate liquidation and insolvency.
The status and risk profile of a financial institution determines whether local Maltese company and insolvency laws apply to the dismantling of the respective failing financial institution. The Republic of Malta identifies four ‘Other Systemically Important Institutions’ whose failure potentially disrupts the domestic financial system and the real economy of Malta. These corporations currently are APS Bank plc, MDB Group Ltd, HSBC Group Malta plc, and the Bank of Valletta Group. All other local banks and financial institutions require the European Central Bank to withdraw its license after which the Maltese legal framework decides on the procedural winding up.
Recent years saw the forced and external closure of for example the Maltese credit institutions Pilatus Bank and Satabank plc. Both credit institutions with a license granted by the Maltese regulator, the MFSA. Pilatus tried to regain control over its license via the European Court of Justice and sued for the compensation of damages in the US courts. Although the MFSA resumed control over Satabank plc, its Bulgarian shareholder initiated legal action against the ECB in September 2020 (Case T-563/20) to annul the ECB decision to revoke the license of Satabank plc as a credit institution. Pending this lawsuit creditors of the bank remain in a difficult, uncertain and unpredictable position.
Once the license of a Maltese credit institution is annulled, a resolution plan determines the procedures and timeframe to liquidate the bank. This resolution plan includes the repayment to creditors and winding up procedure of the company. Where applicable, the deposit guarantee scheme, in Malta referred to as the Deposit Compensation Scheme, can be activated by the MFSA or the applicable courts. This exclusively applies to credit institutions who participate in the Deposit Compensation Scheme. Activation is justified when the respective credit institution is unable to repay its deposits for reasons which are directly related to its financial circumstances and has no current prospect of being able to do so.
Prior to the withdrawal of the license to operate as a credit institution, qualifying bank depositors are often provided with limited access to their account balance. Deposit protection is later on activated and meant to secure account balances up to the maximum limit of 100.000 Euro. The remaining account balance is considered risk capital and thus subordinated in the applicable insolvency and creditor hierarchy. As such, creditors should focus on multiple ways of recovery to ensure its maximum effectiveness.