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National Monday 21 May 2012 - 11:45

National Bank of Malta | When the Central Bank played a central role
In the second part of MaltaTodays revisiting of the National Bank of Malta saga, MaltaToday expands on the financial regulators role in the National Bank takeover of December 1973

Apart from effectively hijacking control of the countrys financial sector, Dom Mintoffs annexation of the role of Central Bank Governor also directly conflicted with his other role as Maltas prime minister Raphael Vassallo

In the first part, MaltaToday expanded on the wider implications of an injustice upon which the foundation stone of the Republic was originally laid

The recent resuscitation of the National Bank of Malta saga - first by the documentary Dear Dom, later by the umpteenth postponement of a court case now in its 35th year - has coaxed out of the

woodwork a number of protagonists who were involved in the takeover of that bank in the early 1970s.

Among the lone voices raised in defence of the takeover were those of former finance minister Lino Spiteri -at the time the Central Bank's assistant governor - who wrote an article in The Times to rebut a number of allegations made in the film Dear Dom: including shareholders' claims to have been intimidated by "Mintoff's bully boys" to sign away their shares (more of this in future installments).

Separately, another former Central Bank employee - economist Alfred Mifsud, also a former Labour Party candidate - wrote a blog in response to the first article in this series, in which he justified the involvement of the Central Bank at virtually every stage of the take-over.

Expressing full confidence in the findings of an 'administrative council', set up through the National and Tagliaferro Banks (Temporary Provision) bill of 1973, which suggested at the time that the bank had been severely mismanaged, Mifsud dismisses what he described as a "shitty opinion by RV".

"Whether NBM was simply illiquid or insolvent at the time will always remain a subjective judgment, but this judgement had to be made by the authorities tasked to do so, i.e., The Central Bank of Malta," he observes... separately echoing Spiteri's earlier observation that: "(Mintoff) did not feel that the Central Bank should risk its own funds by acting as lender of the last resort, unless there was adequate security..."

Central Bank's responsibilities

In a sense it is just as well that a few of the protagonists have chosen to break their 38-year silence on this issue. Perhaps they can now shed light on a few of the many unanswered questions that still haunt the role of the Central Bank in the crisis.

One simple question concerns whether the 'liquidity' of any bank really is a matter of 'subjective judgment', as Mifsud now insists. Surely such value judgements should be based on a proper

valuation of the bank's capital, as determined by an independent audit... ideally, before any decision is taken regarding its 'insolvency' or otherwise.

Not in the NBM's case, however. Here, the traditional chronology was oddly inverted: the bank was declared 'insolvent' first, and the exercise to quantify its actual worth came afterwards.

Even then, how can an exercise carried out by a purpose-built 'administrative council' set up by government - at a time when the Prime Minister had already expressed an interest in acquiring the same bank (as independently confirmed by several witnesses in the ongoing court case) possibly be considered 'independent'?

Moreover: in their defence of its operations, both Spiteri and Mifsud seem to imply that the Central Bank enjoyed some degree of 'discretion' to unilaterally decide whether or not to act as 'lender of last resort' in any given circumstance.

But a cursory glance at the Central Bank Act of 1967, and also the statute of the Central Bank itself, strongly suggests that this is not true at all.

The responsibilities laid down by this law are best explained by an excerpt from the Central Bank's own website, which in turn quotes the Central Bank Act (see box below).

As regulator, it had the legal obligation to monitor and supervise the banking system as a whole. As lender of last resort, it was (still is) legally obliged to intervene in cases where a bank, having abided by all its own directives, seeks assistance in times of financial crisis.

The Central Bank however chose to ignore this latter obligation. According to a report by Curmi and Scicluna Stockbrokers, NBM had indeed applied for help from the Central Bank to withstand the run of December 1973 through a temporary advance facility: and it offered the Bank's property and part of its loan portfolio (with leading Maltese enterprises at the time) as collateral.

Both Alfred Mifsud and Lino Spiteri now suggest that the Central Bank was disinclined to 'risk' taxpayers' money, and that it was dissatisfied with the loan security. They however overlook the

fact that, on paper, it didn't really have a choice. The only scenario which would justify abdication of this duty would be that the NBM somehow failed to abide by the terms of any of its directives.

If Mifsud or Spiteri are aware of any specific directives, issued by the Central Bank prior to December 1973, with which the NBM failed to comply, perhaps they may wish to inform the public about them.

'Governor' Mintoff

Nor is this the only aspect of the Central Bank Act to have been publicly flouted by the government of the day. Section 8 (2) (a) of this law also stipulates that "The Governor has the sole responsibility for the performance of the functions imposed, and the exercise of powers conferred, on the Bank by or under the Treaty and the Statute."

Curiously, however, the governor at the time - R.J.A. Earland - was all but entirely absent from every stage of the proceedings. In fact it the prime minister, and not Earland at all, who dominated meetings with directors, who made demands of shareholders, and who placed conditions on behalf of the Central Bank... thus usurping the 'sole responsibility' for the exercise of the Central Bank's powers, and openly defying the provisions of the same law which the government was citing to dispossess the NBM shareholders.

Apart from effectively hijacking control of the country's financial sector, Mintoff's annexation of the role of Central Bank Governor also directly conflicted with his other role as Malta's prime minister (and de facto prime legislator).

That a clear conflict of interest existed can be seen from the prime minister's own declarations to the NBM's directors (see separate story, below): where with one hand he made an offer as Central Bank 'governor', and with the other supplemented it with a threat to move legislation as prime minister.

In fact, Mintoff proceeded to live up to this threat: passing the National and Tagliaferro Banks (Temporary Provision) bill with surprisingly little resistance from the Nationalist Opposition of the day, then led by George Borg Olivier.

This 'interim law', which was repealed no sooner did it serve its immediate purpose, included a blanket clause enabling the newly set-up administrative council (with the Prime Minister's blessing) to simply override any law at all in the entire code of Malta's legal system.

Here is the clause in full: "The Prime Minister may by order in the Gazette exempt the Council or any member thereof, from complying with any provisions of the law of Malta relating to commercial partnerships with which, in the opinion of the Prime Minister, it would not be possible or appropriate in the circumstances to comply."

This law came into force on Thursday 13 December 1973... by coincidence (or was it?) exactly one year to the day before Malta was declared a Republic.

Crisis: real or engineered?

In the first week of December 1973, Prime Minister Dom Mintoff delivered a televised address to the nation in which he expressed his 'concern' at the apparent precariousness of the banking sector.

One year after a similar crisis had crippled another private bank - BICAL - depositors had already begun to withdraw substantial amounts from a number of NBM branches. Understandably enough, this run on the National Bank of Malta intensified after Mintoff's televised address.

On Thursday 6 December 1973, the management of the NBM - namely general manager Henry Micallef and assistant manager Antoine Tagliaferro - was called in for a meeting with Central Bank assistant governor Lino Spiteri to assess the situation. Micallef told Spiteri the bank had more than enough liquidity to meet a heavy demand.

According to the 1970 Banking Act, it was mandatory for a bank to be in a position to offer banking facilities in excess of 25% of its paid-up share capital and published reserves. By the end of 1972, the NBM held over Lm39 million in client deposits and Lm3 million in deposits from other banks - around Lm13 million of which in the form of liquid and quasi-liquid assets representing 34.7% of the bank's deposits.

This in turn meant that the NBM's liquidity substantially greater than the Central Bank's requested liquidity ratio of 25%. Even after the run on the bank intensified on Monday 10 December - when Lm900,000 were withdrawn in one day - the bank's assets still totalled 30%, 5% more than the legal requirement.

It was on that day that the senior management (namely Louis Vella, Micallef, Tagliaferro, Major Austin Cassar Torreggiani and Baron Patrick Scicluna) were called in to a second meeting: this time to be confronted by prime minister Dom Mintoff, flanked by finance minister Guze Abela, Central Bank governor RJA Earland, Lino Spiteri and Attorney General Edgar Mizzi.

Mintoff's proposed 'solution' to the run on the bank was for the shareholders to simply hand their shares over to government by 5.30pm that same day. Major Austin Cassar Torreggiani would later recall asking Mintoff for the price at which the shares were to be transferred to government.

"Naturally without compensation," Mintoff replied, ordering Dr Edgar Mizzi to draft an Instrument for the transfer of shares which read as follows: "We the undersigned, hereby authorise the Board of Directors of the National Bank of Malta Ltd to transfer to the Government of Malta all the assets of the Bank in consideration of the assumption by the Government of Malta of all the Bank's liabilities and undertake to do all that may be necessary in order that such transfer be effected."

According to witnesses in the ongoing court case, the Prime Minister also threatened that if they refused, he would remove the shareholders' limited liability, extending it beyond the bank's share capital to their personal assets.

One of the directors, Attard Montalto, would later quote Mintoff as saying: "Tell all the shareholders that whoever doesn't sign will be held personally responsible. Tonight I will go to parliament the minute I leave here and I will pass one of two laws: either a law to appoint a Council of Administration to take care of the banking group's assets and liabilities, or else I will pass a law to remove the limited liability of all the shareholders."

When Attard Montalto retorted that this was unconstitutional, Mintoff famously replied (according to the same testimony): "I know this is against the Constitution, I don't give a damn

about the Constitution. Wasn't I the one who wrote it? I don't give a damn about the judges or anybody."