Deutsche Bank: Luxemburg en Malta kunnen leren van crises Cyprus (en)

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

The Luxembourg government said in a communiqué 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."

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 Maltese 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 begun saying its banking sector should be scaled down to prevent a Cyprus-type scenario.

When Cypriot banks got into trouble, its government could not help 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, while Luxembourg-based banks are worth 22 times as much.

For his part, Thomas Meyer, the chief economist at the Frankfurt-based Deutsche Bank, told EUobserver that 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 bank sector, the state will go bankrupt," he said.

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

"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 step in to save subsidiaries if things go wrong.

He noted that in 2009 the European Bank for Reconstruction and Development had to create the "Vienna Initiative" to stop Western banks from cutting off 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 big bailout loan.

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