Malta ‘unlikely’ to follow Cyprus, but fast banking growth ‘may become’ problem - Bloomberg

The unlikelihood of Malta following Cyprus in its current banking and bailout crisis, was underlined by Bloomberg's news service in a special analysis by its economist David Powell, who says that "comparisons between the dangers posed by the banking systems of Cyprus and Malta "appear to be misplaced."

Powell warned however, that the rapid expansion of the Maltese banking sector has the "potential" to someday become a problem.

The analysis compares both Malta's and Cyprus' deposit-to-GDP rations, placing Malta (after Luxembourg) to be the next country on the list of nations with the highest ratio.

In fact, Malta's deposit-to-GDP ratio stands at 173%. That is 86 percentage points lower than the figure for Cyprus.

The figure for Malta, Powell explains, is distorted by the presence of foreign banks like the number for Luxembourg.

The two largest banks in Malta: Bank of Valletta and HSBC handle deposits which contribute to 69%  of GDP, while Cyprus banks hold deposits which stand at 86% of GDP.

Cyprus meanwhile, is also more indebted before the bailout than that of Malta.

The gross government debt-to-GDP ratio of Cyprus stood at 84 percent and Malta's measured 73.1 percent at the end of 2012.

A thorough analysis of the asset composition of the banks in Cyprus and those in Malta would provide additional insight in the vulnerabilities of the systems. Press reports have indicated Cypriot banks faced large losses on their holdings of Greek government bonds.

Malta's Central Bank Governor Josef Bonnici wrote in The Times of Malta last week that "Maltese domestic banks have limited exposure to securities issued by the program countries."

But according to Powell, "the most worrying aspect of the Maltese banking system is the recent speed of growth. The ratio of deposits to GDP rose to 172 percent at the end of 2012 from 141 percent at the end of 2005."

The growth of the banking sector has far outpaced that of the real economy.

He says that the deposit base has grown by 66.8% and the real economy has expanded by 37% during that period."

According to Powell, "another 20 years of growth at that speed would leave Malta with the same deposit-to-GDP ratio as that of Cyprus today, though Malta would still benefit from the presence of international banks."

The growth of the Maltese banking system could pose systematic risks as large as those in Cyprus decades down the road, if the current pace is maintained, though that appears like a long horizon for a monetary union plagued by many clear and present dangers.