The most recent Financial Stability Review issued by the Central Bank of Malta featured some very welcome news. It indicated that when the loan moratoria, introduced after the start of the pandemic, expired, there was no noticeable rise in the non-performing loans of banks. In simple words, nearly all those who had been given the chance not to make loan repayments as their income had been hit by the pandemic are now able to resume these payments.
When COVID-19 hit the Maltese economy, many businesses and households were faced by an abrupt disappearance of income. This meant that they would not be able to service their loans, and this would in a few months lead to foreclosure and their guarantee being called in. Many households with a mortgage would have ended with their home being repossessed by their bank. Firms would see their premises being taken over and would have had to start bankruptcy procedures.
The banks were aware of this great risk, which would have brought their customers and subsequently themselves too to their knees. Thus, they started to offer voluntary moratoria, which meant that they gave customers a break from repayments if they so needed. However, this was a short-term possibility as banking regulations would have eventually forced them to make provisions against these voluntary moratoria. This requirement would have drained the banks of capital and would have ended the moratoria.
Nearly all those who benefitted from the moratoria are now able to resume their loan payments.
Luckily, European regulators showed a great degree of flexibility and allowed these emergency moratoria to not trigger provision and capital requirements. Thus, banks were free to extend these moratoria if they had the liquidity to withstand this drop in their income.
Maltese banks were very liquid and were able to forgo income for as long as was required. However, if regulation would not have been flexible, they could have faced significant issues. With all European banks facing the same conundrum, for once regulators proved responsive – very different to what had happened in preceding financial crises that had hit just some countries.
1 in 10 resorted to loan moratoria
At their peak, in August 2020, moratoria covered more than €1.75 billion loans. One in ten households with a bank loan had to resort to this aid. In the accommodation and food services sectors four in ten firms were in this situation. The property market was severely hit, with a third of all real estate loans not in a position to be serviced.
Given the extent of the amount of loans involved, many feared what would happen when the moratoria expired. Would it be a situation of just postponing Armageddon? Would house foreclosures and firm bankruptcies just happen in 2021 rather than in 2020?
The latest Financial Stability Review shows that the expiry of the moratoria passed by with no noticeable impact. Out of all loans granted a moratorium only 4.9% are non-performing, i.e. not being serviced. To get an idea of how low this proportion is, consider that the proportion of overall non-performing loans is 3.5%, just marginally higher than the proportion of non-performing loans emerging from the expiry of the moratoria.
Also consider that in early 2013 the proportion of non-performing loans was close to 8%. This means that after a Conservative Government, the proportion of borrowers unable to service their loans was more than twice the current one.
Firms, and banks, are in a much better position during a pandemic than they were years after a financial crisis that on paper was much less dramatic than the pandemic.
This is because the current administration stood by households and firms and provided all the support possible, unlike what had happened in the aftermath of the 2008 financial crisis.