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25th Jun 2017

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Deutsche Bank: Luxembourg and Malta should learn from Cyprus

  • Luxembourg says its banks are better supervised than those in Cyprus (Photo: Cesar Poyatos)

Luxembourg and Malta on Wednesday (27 March) rejected comparisons between their banking sectors and Cyprus. But Deutsche Bank, for one, says they also have reason to worry.

The Luxembourg government said in a communique it is "concerned by recent statements … on the size of the financial sector relative to the GDP of the country and the alleged risks this poses for fiscal and economic stability."

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It noted that, unlike Cyprus, Luxembourg banks' "diverse clientele, sophisticated products, effective supervision and strict application of international standards make [them] special."

It added that the "quality and stability" of banks is more important than relative size.

The head of Malta's central bank, Josef Bonnici, told Reuters that foreign banks with branches in Malta have little to do with its day-to-day economy and that Malta's own banks are sound.

"The problems facing Cypriot banks include losses made on their holdings of Greek bonds … Maltese domestic banks have limited exposure to securities issued by the [bailout] programme countries," he said.

A Luxembourg spokesman told EUobserver it put out its statement because "some German politicians" have been saying its banking sector should be scaled down to prevent a Cyprus-type scenario.

When Cypriot banks got into trouble, its government could not rescue them because they are worth more than seven times the size of its economy.

Malta-based banks are worth close to eight times its GDP.

Luxembourg-based banks are worth 22 times as much.

But for his part, Thomas Meyer, the chief economist at the Frankfurt-based Deutsche Bank, told EUobserver in an interview also on Wednesday that "effective supervision" is not enough.

"Even under the best supervision, banks can get into trouble … and if the state is too small with respect to the banking sector, the state will go bankrupt," he said.

He noted that Switzerland, which also has a bank-GDP imbalance, dealt with it by devising the "Swiss finish" - obliging its banks to hold almost twice as much capital in reserve as normal countries' banks in case of a rainy day.

"The smaller the state, the more capital buffers the bank has to have to protect the state," he said.

"To my knowledge, they [Luxembourg and Malta] have not introduced anything like the Swiss model, so they are implicitly relying on the eurozone to back them up if there is a problem in their banking system. Based on the Cyprus scenario, they should reconsider this and look to the Swiss model," he noted.

Meyer added that small countries should beware of thinking that major banks which are based elsewhere will protect their subsidiaries if things go wrong.

He noted that in 2009 the European Bank for Reconstruction and Development had to craft the "Vienna Initiative" - an agreement to stop Western banks cutting off their subsidiaries in former communist Europe - in response to the bank crisis.

"If I was Luxembourg, I would seek some kind of assurance, preferably a binding one, that the parent would not cut off its subsidiary if it got into trouble," he said.

Turning to Cyprus, Meyer said it is "quite logical" that some bank depositors and bondholders took a hit instead of making all Cypriot taxpayers carry the burden of a bigger EU loan.

But he noted the Cyprus model could not be repeated in Italy or Spain because if you wound down one of their top lenders, it would create "systemic" problems for the eurozone.

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