Implementing the CRD IV for banks : challenges for Malta

Abstract

The CRD IV package can be deemed as one of the most wide-ranging changes currently taking place within European financial services regulation and impacting the banking industry, as a result of the tumult brought about by the financial crisis in the late 2000s. This study seeks to address the question of what is to be the impact of CRD IV on Maltese banks’ profitability and performance, and what challenges it is likely to pose. The CRD IV was introduced as one legislative package containing the Capital Requirements Directive and the Capital Requirements Regulation, entering into force on the 17th July 2013 and 28th June 2013 respectively. Amongst changes which CRD IV will bring about, the most notable include additional capital of higher quality to be held by banks, as well as new liquidity and leverage standards. These changes might lead to possible adjustments to the business model, operating model and strategic objectives of the typical bank. The closing of any gaps in capital and liquidity, in addition to a surge in compliance and operating costs means that CRD IV will affect the bank’s performance and profitability, with ultimate repercussions on the Maltese economy. Should it be determined however that Maltese banks’ will not be negatively affected, then higher costs and challenges to banks will be outweighed by an increase in investor confidence, which will in time lead to higher profitability. This would suggest that CRD IV might prove to be net beneficial to the Maltese financial system. The results of the research carried out on a sample of Maltese banks show that CRD IV will impact the typical Maltese bank, with the biggest impact being felt on the operating model. Nevertheless, it may be too premature to establish whether CRD IV will have a positive or negative impact on Maltese banks; this may be more evident after the end of the 2014 reporting period, seeing as the implementation date for certain provisions of CRD IV was set to 1st January 2014. Although Maltese banks perceive CRD IV to be burdensome on their organisation given their size relative to European banks, it appears that they are nonetheless adequately prepared for the challenge ahead.