Strengthening the financial system through comprehensive banking regulations

Christopher P. Buttigieg, chief officer Supervision and Catherine Galea, head of Banking Supervision, Malta Financial Services Authority

In June, the Malta Financial Services Authority (MFSA) issued a Dear CEO letter to all domestically-licensed banks, emphasising the impending updates to the Capital Requirements Regulation and Directive (CRR and CRD) scheduled to take effect in January 2025. The communication aimed to ensure that banks are sufficiently prepared for a seamless implementation.

The central goal of these regulations is to enhance the robustness of the financial sector by strengthening banks’ solvency and liquidity positions, and improving their risk management practices. Grounded in international standards set by the Basel Committee on Banking Supervision, the CRR and CRD are further supported by the Regulatory Technical Standards and Implementing Technical Standards from the European Banking Authority (EBA). Additionally, guidelines from the European Central Bank (ECB), in accordance with the Single Supervisory Mechanism (SSM) Framework, play a crucial role in harmonising supervisory practices across the EU.

The MFSA’s supervisory role over credit institutions is vital for maintaining a secure and resilient banking environment, which safeguards consumers and upholds financial stability. Under the SSM, the European Central Bank directly supervises significant institutions, while the MFSA oversees less significant institutions, facilitating a cohesive and comprehensive supervisory approach across different levels of the banking sector.

The latest regulatory updates, termed the Banking Package, address Environmental, Social and Governance (ESG) implications and enhance the enforcement tools available to competent authorities, thereby promoting sound management of EU banks and bolstering overall financial stability.

Effective from January 2025, the updated Capital Requirements Regulation will affect all EU banks, introducing new and revised provisions for assessing and managing existing and emerging risks, including those related to credit, operations and the market. These regulations aim to reinforce standardised approaches, making them more robust and risk-sensitive while curbing the use of potentially subjective internal models. Additionally, they mandate that banks play a pivotal role in the green transition by rigorously identifying, managing and transparently disclosing sustainability and ESG risks, embedding these priorities within their risk management processes. The regulation also establishes further rules for branches of third-country banks operating within the EU.

In response to these regulatory changes, the MFSA has actively engaged with local banks, outlining the most significant amendments and providing an overview of the updated requirements. As part of this engagement, the Authority launched an industry-wide survey to assess the banks’ readiness for the new and amended requirements. The survey addresses both quantitative and qualitative aspects, aiming to determine the overall impact on capital positions, including detailed effects from various risk calculations, and evaluates qualitative changes, such as modifications to governance frameworks, strategy, risk management and IT infrastructure. Moreover, it serves as a tool for the MFSA to gauge the reporting and disclosure capabilities of institutions.

Given the tight implementation timelines, it is crucial for all banks to familiarise themselves with these upcoming changes and assess their impact on capital, liquidity and business models. Early preparation is essential to allow sufficient time for necessary adjustments. Accordingly, the MFSA has requested survey responses to be submitted by early August and remains available to provide further feedback throughout the implementation process.

Banks’ adherence to these evolving regulations is fundamental for ensuring the sector’s resilience and stability, ultimately protecting consumers and maintaining robust financial systems.