ACT No. XXI of 2017 AN ACT to make provision for the establishment of the Malta Development Bank and the determination of its functions and powers and to provide for matters ancillary or incidental thereto.

I assent.

M ARIE- L OUISE

(L.S.)

C OLEIRO P RECA

President

5th May, 2017

ACT No. XXI of 2017

AN ACT to make provision for the establishment of the Malta

Development Bank and the determination of its functions and powers

and to provide for matters ancillary or incidental thereto.

BE IT ENACTED by the President, by and with the advice and

consent of the House of Representatives, in this present Parliament

assembled, and by the authority of the same as follows:-

(1) The short title of this Act is the Malta Development Short title and

commencement.

Bank Act, 2017.

(2) This Act shall come into force on such date as the Minister

may, by notice in the Gazette, establish and different dates may be so

established for different provisions and different purposes of this Act.

In this Act, unless the context otherwise requires

Interpretation.

"applicant" means a person who applies to the Bank for

financing, or any other service;

"Bank" means the Malta Development Bank established under

article 3;

"Board" means the Board of Directors of the Bank established

under article 20;

"body corporate" means a body of persons having a legal

personality distinct from that of its shareholders;

"bye-laws" means the bye-laws made in terms of article

22(2)(j);

"Central Bank" means the Central Bank of Malta as defined by

the Central Bank of Malta Act;

"Chairperson" means the Chairperson of the Board appointed in

accordance with article 21(2)(a);

"company" means a company formed and registered under Part

V of the Companies Act or the Commercial Partnerships Ordinance; Cap. 386.

"Chief Executive Officer" means the administrative head of the

Bank appointed in accordance with article 21(9);

"credit institution" has the same meaning assigned to it in point

(1) of Article 4(1) of Regulation (EU) No. 575/2013 of the European

Parliament and of the Council of 26 June 2013 on prudential

requirements for credit institutions and investment firms and

amending Regulation (EU) No. 648/2012, as amended from time to

time, and includes any implementing measures that have been or may

be issued thereunder (CRR);

"debt obligation" means a bond, debenture, note, investment

certificate or other evidence of indebtedness or a guarantee of a

corporation, whether secured or unsecured;

"de minimis Regulation" refers to Commission Regulation (EU)

No. 1407/2013 of 18 December 2013 on the application of articles

107 and 108 of the Treaty on the Functioning of the European Union

to de minimis aid;

"Depositor Compensation Scheme" means the scheme

established by regulation 4 of the Depositor Compensation Scheme

Regulations;

"Director" means a member of the Board appointed in

accordance with article 21;

"emergency" means a force majeure circumstance or a situation

where, as a result of a serious shortfall in income and/or liquidity

suffered by the Bank or of severe disruption in the financial markets,

there is a material adverse effect on the safety and soundness of the

Bank;

"enterprise" means an organised economic activity carried on by

one or more persons;

"equity" means ordinary, common or preference shares,

warrants, options or debt which, with the passage of time or, as a

result of financial or other conditions, may be converted into equity at

either the issuer or holder’s option;

"European Commission" means the European Commission

established by article 13 of the Treaty;

"European Economic Area" means the area defined by Article 1

of the Agreement on the European Economic Area;

"European Investment Bank" means the bank established by

Article 308 of the Treaty on the Functioning of the European Union;

the "European Union" means the European Union as referred to

in the Treaty;

"financial institution" has the same meaning assigned to it by

article 2 of the Financial Institutions Act, and includes any branch in

Malta of an institution not incorporated in Malta;

"General Block Exemption Regulation" refers to Commission

Regulation (EC) No. 651/2014 of 17 June 2014 declaring certain

categories of aid compatible with the internal market in application of

articles 107 and 108 of the Treaty;

"Government" means the Government of the Republic of Malta;

"interested person" means

(a)

the spouse, common-law partner, child, brother,

sister or parent of a Director,

(b) the spouse or the common-law partner of a child,

brother, sister or parent of a Director, or

(c)

the parent, sister or brother of the spouse, or of the

common-law partner, of a Director;

"Malta Council for Economic and Social Development" means

the advisory body established by article 3 of the Malta Council for Cap. 431.

Economic and Social Development Act;

"Minister" means the Minister responsible for the Bank;

"National Audit Office" means the National Audit Office set up

by article 108 of the Constitution of Malta and enacted by the Auditor Cap. 396.

General and National Audit Office Act;

"person" includes a trust, a partnership, an association of natural

persons, corporations, public organisations and public entities;

"politically exposed person" shall have the same meaning

assigned to it by regulation 2 of the Prevention of Money Laundering S.L. 373.01.

and Funding of Terrorism Regulations;

"project" means an investment in an economic activity

undertaken by one or more persons or undertakings;

"resolution" means a resolution of the Board made in terms of

article 22(2)(j);

"securities" means the shares of any class or series of shares,

warrants, options or the debt obligations of a corporation and includes

certificates evidencing those shares or debt obligations;

"shareholders" means the owners of the shares of the Bank in

terms of article 10(2);

"subsidiary" has the same meaning assigned to it by article 2 of

the Banking Act; and

"the Treaty" shall have the same meaning assigned to it by

article 2 of the European Union Act.

Part II

Establishment and Conduct of Affairs of Bank

(1) There shall be a Bank to be called the Malta

Development Bank. The Bank may use the designation "MDB" in

commercial and legal contracts.

(2) The head office of the Bank shall be in Malta.

(3) The Bank shall be a body corporate having a distinct legal

personality and be capable, subject to the provisions of this Act, of

entering into contracts, of acquiring, holding and disposing of any

property for the purpose of its functions, of suing and of being sued,

and of doing all such things and entering into all such transactions as

are incidental or conducive to the exercise or performance of its

functions under this Act.

(1) The purpose of the Bank is to support

entrepreneurship and socio-economic development in Malta by

providing promotional investment and financing, financial and

advisory services, and by issuing securities or otherwise raising funds

or capital in support of those services.

(2) In carrying out its activities, the Bank shall give particular

consideration to

(a)

the needs of small and medium-sized enterprises,

through State Aid measures that are compatible under the

General Block Exemption Regulation (GBER) or through

finance measures in line with the de minimis Regulation; and

(b) large infrastructural projects that contribute to

important regional or national development.

(3) The Bank shall, in general, act as a wholesale intermediary

in coordination with and via commercial banks, private investors and

other private financial intermediaries, be they aided or non-aided

within a pre-defined remit based on ex-ante defined market failures in

accordance with article 6(7).

(4) The Bank may undertake direct lending provided it does

not crowd out viable financing from commercial banks, private

investors and other private financial intermediaries.

(5) The Bank may also provide financing on market terms and

achieve returns equivalent to those reached on the market by

comparable benchmarks, provided that in conducting such non-aided

activity, the Bank will not compete with commercial providers but

will address gaps or failures in the financial infrastructure.

(1) The Government shall, subject to the provisions of Guarantee of the

Government.

sub-article (2), guarantee

(a) up to one hundred (100) per centum of all

obligations of the Bank in respect of the aggregate of loans

extended to, and debt securities issued by, the Bank, forward

transactions or options entered into by the Bank, and other

credits extended to the Bank as well as credits extended by

licensed credit and financial institutions or other publicly owned

entities to third parties to the extent that the said transactions,

options or credits are expressly guaranteed by the Bank; and

(b) up to one hundred (100) per centum of loans,

facilities or guarantees issued by the Bank in the ordinary

course of business as further specified under the Memorandum

of Understanding referred to in sub-article (2).

(2) The Government and the Bank shall enter into a

Memorandum of Understanding setting out the amount in euro and/or

the percentage mentioned in sub-article (1), of the guarantee to be

provided to the Bank. The Government’s guarantee shall be

unconditional, irrevocable and at first demand. The amount referred

to in this sub-article shall be communicated to the Bank on the first

working day of each first, sixth and subsequent years at five-year

intervals, but shall always be such that amounts guaranteed in

previous periods and in respect of which the Bank has outstanding

obligations be covered.

(1)

The Bank may

Specific powers

of the Bank.

(a) make loans to;

(b) invest in; and/or

(c) give guarantees,

in relation to any person, except a politically exposed person.

(2) The loans, investments and guarantees may be made or

given only where, in the opinion of the Board or any committee listed

in article 22(2)(d) or officer of the Bank designated by the Board

(a)

the person is engaged, or is about to engage, in an

enterprise or project in or for the benefit of Malta;

(b) the amount invested, or to be invested, in the

enterprise or project by persons other than the Bank and the

character of the enterprise or project are such that the Bank may

reasonably expect that those persons will have a continuing

commitment to the enterprise or project causing it to willingly

meet its obligations in a timely manner; and

(c)

the enterprise or project may reasonably be expected

to succeed in providing goods and services in a sound and

viable manner as well as generating sufficient cash flow to make

timely payment of its obligations to its creditors and other

stakeholders.

(3) In any circumstances in which the Bank may make a loan

or investment to a person, or give a guarantee in relation to a person,

under this article, the Bank may

(a) purchase or otherwise acquire real or personal

property or immovable or movables including accounts

receivable; and

(b) subject to any right of redemption that may exist,

hold, lease to the person or subsequently sell, dispose of or

otherwise deal in the said property.

(4) The Bank may

(a) acquire and hold senior or subordinated security or a

security interest or a right in a security, of any kind and in any

form for the due discharge of obligations under a loan,

investment, guarantee or agreement that it makes or gives;

(b) surrender a security, security interest or right in a

security and acquire and hold, in exchange, security or a

security interest or a right in a security, of any kind and in any

form;

(c)

realise a security, security interest or right in a

security made, acquired or held by it on the loan, investment,

guarantee or agreement; and

(d) exchange, lease, sell, assign, convey or otherwise

dispose of a loan, investment, guarantee, agreement, security,

security interest or right in a security.

(5) The Bank may acquire and deal with as its own any loan,

investment or guarantee made or given by another person if

(a) the loan, investment or guarantee would meet the

Bank’s eligibility criteria in sub-article (2); or

(b) it is part of a block of loans, investments or

guarantees the majority of which meet those criteria.

(6) In applying sub-article (1), the Bank may

(a)

finance enterprises, businesses and projects of all

sorts, but particularly those that contribute to a high quality,

dynamic, productive and innovative economy;

(b) provide suitable access capital to small and medium-

sized enterprises, the professions, and business start-ups;

(c)

finance projects by cooperatives, social enterprises

and housing projects, particularly where they involve urban

renewal;

(d) fund important regional or national infrastructural

projects,

particularly

those

that

enhance

Malta’s

competitiveness;

(e)

grant loans and other forms of financing for the

purpose of project or projects to authorities, agencies,

corporations, special purpose vehicles, and other entities

established under public law;

(f)

grant other financings in the interest of the Maltese

and European economy, such as projects in the interest of the

European Union that are co-financed by the European

Investment Bank or similar multilateral financing institutions;

(g)

provide financial and project advisory services;

(h) carry out other operations to the extent that there is a

direct relationship between such operations and the performance

of its functions described hereinabove; and

(i)

guarantee, whether as primary or secondary obligor,

in whole or in part, loans for economic development

participated in by the Bank.

(7) In applying sub-articles (1) and (6), the Bank shall limit its

activities to the provision of

(a)

aided financing authorised under –

(i)

the General Block Exemption Regulation;

(ii) approved aid schemes;

(iii) approved aid under specific guidelines issued

by the European Commission; and

(iv) EU financial instruments funded from EU

funds, where the Bank will act as a vehicle to channel

and manage EU funds, or as co-investor;

(b) aid that fulfils the conditions of the de minimis

Regulation at the level of the final beneficiaries;

(c)

financing on market terms to eligible final

beneficiaries covered by the General Block Exemption

Regulation, where all the conditions of the relevant articles of the

General Block Exemption Regulation are complied with, except

the requirements relating to aid intensities or maximum aid

amounts, subject that, in the cases of infrastructure projects,

participation by private investors shall be at least fifty (50) per

centum pari passu with the Government;

(d) financing of participation in EU financial instruments

on market terms;

(e)

provide such other financing subject to prior approval

by the European Commission.

(8)

The Bank may raise both short-term and long-term

funding by borrowing on a bilateral basis, and issue

(a)

certificates of deposit;

(b)

fixed or floating rate certificates; and

(c)

other securities,

in Malta and elsewhere.

The Bank is not permitted to take retail deposits from the

public. The Bank will not offer deposits covered by the Depositor

Compensation Scheme.

(1) The Bank may offer financing under article 6(1)

directly on its own or in syndication with other financial institutions

where it is determined that -

(a)

the financial market is failing to provide adequate

financing to certain lines of business, categories of clients, or

types of enterprises that meet the Bank’s social and economic

mission, or

(b) such financing, though provided by the market, is

not appropriate to reach its purpose further to article 4

Provided that, in general, the Bank’s direct financing

on its own shall -

(i)

not exceed 25 per centum of its overall lending,

and

(ii) be provided under schemes tailored for the lines

of business, categories of business, or types of

enterprises concerned.

(2) The Bank’s loans will generally be directly or indirectly

secured by customary banking security or other security acceptable to

the Bank. In taking collateral, the Bank is relying on such assets as a

second form of repayment in the event the project’s primary cash flow

is weakened.

The Bank, its Chairperson, directors, officers and staff Independence

shall exercise their mandate under this Act independently and in an and

of the Bank.

autonomous manner, and shall not seek nor receive instructions from

any authority, public or otherwise, or from any other institution.

(1) The initial authorised share capital of the Bank shall Authorised

be two hundred million euro (€200,000,000), divided into two million share capital.

(2,000,000) shares having a par value of one hundred euro (€100)

each.

(2) The Government shall subscribe to one hundred (100) per

centum of the authorised and issued share capital. The Government

may subscribe up to thirty (30) per centum of the authorised and paid-

up capital in the form of moveable and, or immoveable property that

is free and clear of all encumbrances, hypothecs or other attachments.

The Bank shall receive from the Government a general warranty of

title against claims from all persons, as well as covenants of a right to

sell and of peaceful possession. The value of any immoveable

property transferred to the Bank shall be audited by the National

Audit Office.

(3) (a)

The authorised and issued capital shall be

determined by the shareholders from time to time. The initial

subscription to the authorised share capital shall be done in

accordance with the First Schedule to this Act;

(b) The paid-up capital of the Bank shall be determined

by the Board from time to time and shall be paid in by the

shareholders in installments as determined by the Board with

two months’ notice.

(4) The capital paid in by the Government as of the coming

into force of this Act and subsequently as provided in this Act is

vested in the Bank as its paid-in capital and is converted into common

shares of the Bank.

For the purposes of this Act, the term "ordinary capital

resources" of the Bank shall include funds raised by the following

(a)

issued and paid-up capital of the Bank subscribed

pursuant to article 10;

(b)

debt securities issued by the Bank;

(c)

borrowings of the Bank by virtue of powers

conferred by article 18;

(d) repayment of loans or guarantees made or returned

to the Bank; and

(e)

income from any other funds received by the Bank.

The resources and facilities of the Bank shall be used

exclusively to implement the purpose and functions set forth in this

Act.

(1) The total amount outstanding of loans, equity

investments and guarantees made by the Bank in its ordinary

operations in favour of a single individual or a group of connected

clients shall not at any time exceed twenty-five (25) per centum of the

total amount of its unimpaired subscribed capital, reserves and

surplus included in its ordinary capital resources, exclusive of other

reserves not available for ordinary operations.

(2) In the case of funds invested in equity capital out of the

ordinary capital resources of the Bank, the total amount invested shall

not exceed ten (10) per centum of the aggregate amount of the

unimpaired paid-in capital stock of the Bank together with the

reserves and surplus included in its ordinary capital resources,

exclusive of the reserves not available for ordinary operations.

(3) The amount of any equity investment shall not exceed such

percentage of the equity capital of the enterprise or company

concerned as the Board shall in each specific case determine to be

appropriate. The Bank shall not seek to obtain by such an investment

a controlling interest in the enterprise or company concerned, except

where necessary to safeguard the investment of the Bank.

(4) Any equity financing shall be made only after the Board,

by a vote of a majority of the total number of Directors, shall have

determined that the Bank is in a position to participate. The Board

shall approve such equity investment on a case-by-case basis.

The operations of the Bank shall be conducted in Operating

accordance with good commercial and economic practice and the principles.

following principles shall, inter alia, be followed

(a)

before a financing is granted, the applicant shall

have submitted an adequate loan proposal and the Chief

Executive Officer shall have presented to the Board a written

report regarding the proposal, together with his

recommendations, on the basis of a staff study;

(b) in considering an application for a loan or guarantee,

the Bank shall pay due regard to the ability of the borrower to

obtain financing or facilities elsewhere on terms and conditions

that the Bank considers reasonable for the recipient, taking into

account all pertinent factors;

(c)

in making or guaranteeing a loan, the Bank shall pay

due regard to the prospects that the borrower and its guarantor,

if any, will be in a position to meet their obligations willingly

under the loan contract;

(d) in making or guaranteeing a loan, the rate of interest,

other charges and the schedule for repayment of principal shall

be such as are, in the opinion of the Bank, appropriate for the

loan concerned;

(e)

in guaranteeing a loan made by other investors, or in

underwriting the sale of securities, the Bank shall receive

suitable compensation for its risk;

(f)

in the case of a direct loan made by the Bank, the

borrower shall be permitted by the Bank to draw its funds only

to meet expenditures in connection with the project as they are

actually incurred;

(g) the Bank shall take the necessary measures to ensure

that the proceeds of any loan made, guaranteed or participated

in by the Bank are used only for the purposes for which the loan

was granted and with due attention to considerations of

economy and efficiency;

(h) the Bank shall seek to maintain reasonable

diversification in its investments in equity capital; it shall not

assume responsibility for managing any company or enterprise

in which it has an investment, except where necessary to

safeguard its investments; and

(i)

the Bank shall be guided by sound banking

principles in its operations.

In the case of direct loans made or participated in or loans

guaranteed by the Bank, the contract shall establish, in conformity

with the operating principles set forth in article 14 and subject to the

other provisions of this Act, the terms and conditions for the loan or

the guarantee concerned, including those relating to payment of

principal, interest and other charges, maturities, and dates of payment

in respect of the loan, or the fees and other charges in respect of the

guarantee, respectively. Guarantees by the Bank will be issued only

with a fixed term of maturity and shall provide that the Bank may

terminate its liability with respect to interest if, upon default by the

borrower and the borrower’s guarantor, if any, the Bank offers to

purchase, at or below par and interest accrued (or part thereof) to a

date designated in the offer, the bonds or other obligations

guaranteed.

(1) The Bank shall charge, in addition to interest, such

commissions and fees on credits, services or other facilities made

available or participated in as part of its ordinary operations.

(2) In guaranteeing a loan as part of its ordinary operations,

the Bank shall charge a guarantee fee, at a rate determined by the

Board, payable periodically on the face amount of the guarantee

outstanding.

(3) Other charges of the Bank in its ordinary operations and

any commission, fees or other charges in its special operations shall

be determined by the Board.

(1) In cases of default on loans made, participated in or

guaranteed by the Bank in its ordinary operations, the Bank shall take

such action as it deems appropriate with respect to modifying the

terms of the loan, including but not limited to the application of pre-

agreed financial penalties.

(2) Whenever necessary to meet contractual payments of

interest, other charges or amortization on borrowings of the Bank in

its ordinary operations, or to meet its liabilities with respect to similar

payments in respect of loans guaranteed by it, chargeable to its

ordinary capital resources, the Bank may call an appropriate amount

of the uncalled subscribed callable capital pursuant to article 10 and,

if the Bank deems that additional capital resources are required for its

operations beyond the subscribed and uncalled capital, it will

recommend such capital increase for the consideration of its

shareholders, provided that any increase in capital shall be subject to

prior consultation with the European Commission.

Without prejudice to the powers specified elsewhere in this General powers.

Act, the Bank shall also have the power to

(a) borrow funds in Malta or elsewhere, and in this

connection to furnish such collateral or other security for such

purpose as the Bank shall determine;

(b) buy and sell securities the Bank has issued or

guaranteed or in which it has invested;

(c)

guarantee securities in which it has invested in order

to facilitate their sale;

(d) underwrite, or participate in the underwriting of,

securities issued by any company or enterprise for purposes

consistent with the objective of the Bank and in line with the

provisions of article 6(7);

(e)

invest funds, not needed in its operations, in

marketable securities;

(f)

enter into any transaction for the purpose of

reducing risk in the financial management of the Bank,

including any financial instrument or agreement whose

objective is the management of financial risks, such as interest

rate or currency exchange agreements, options, forward futures

contracts, securitisation arrangements, and other similar

agreements;

(g) pledge or hypothecate any of its assets as security

for any debt obligations issued by the Bank or as security for the

due performance of its obligations under any agreement;

(h) provide technical advice and assistance which serve

its purpose and come within its functions, and where

expenditures incurred in furnishing such services are not

reimbursable, charge the net income of the Bank therewith; in

the first five (5) years of its operations, the Bank may use up to

two (2) per centum of its paid-in capital for furnishing such

services on a non-reimbursable basis; and

(i)

exercise such other powers and establish such rules

and regulations as may be necessary or appropriate in

furtherance of its purpose and functions, consistent with the

provisions of this Act.

The Bank may hold any of the following

(a)

gold or convertible currencies;

(b) currencies obtained by the Bank pursuant to articles

11 and 16.

The Bank shall have a Board of Directors, a Chairperson, a

Chief Executive Officer and such other officers and staff as may be

considered necessary.

(1)

The Bank shall have a Board of Directors of seven

members.

(2) The Board of Directors shall be appointed as follows

(a) a Chairperson, who shall be a person of high

competence in the economic or financial sector, appointed by

the Minister after consultation with the Opposition;

(b) four Directors, who shall be persons of high

competence in the economic or financial sectors, appointed by

the Minister; and

(c)

two independent Directors from the non-government

sector, who shall be appointed by the Minister on the

recommendation of the Malta Council for Economic and Social

Development, but not being members of that Council.

(3) No individual is eligible to be appointed or to continue as a

Director or Chairperson if the individual is

(a)

a Member of the House of Representatives; or

(b)

employed in the public service; or

(c)

is a director or officer of another credit institution;

or

(d)

has been adjudged bankrupt under the law of any

country.

(4) The Directors, except for the Chairperson and the

independent Directors appointed in accordance with sub-article (2)(c),

shall hold office for a term of five (5) years and may be re-appointed

for a period of three (3) years, but may be removed for cause pursuant

to sub-article (7).

(5) The Chairperson shall hold office for a period of six (6)

years and may be re-appointed, but shall not serve for more than ten

(10) years and may be removed for cause pursuant to sub-article (7).

(6) The independent Directors shall hold office for a period of

six (6) years and may be re-appointed for three (3) years, but may be

removed for cause pursuant to sub-article (7).

(7) Conduct worthy of removal may include but is not limited

to the person concerned becoming of unsound mind, being convicted

of any crime punishable by imprisonment, or being declared bankrupt

during his term of office, breach of confidence, breach of fiduciary

duties, undisclosed conflicts of interest, serious breaches of the

Bank’s Code of Ethics, or in the case of a Director appointed pursuant

to sub-article (2)(c) if the Minister, on the advice of the Supervisory

Board, as defined in article 37, is of the opinion that he no longer

qualifies as an independent Director.

(8) The Chairperson and the Directors are entitled to be paid

by the Bank the remuneration fixed by the Minister for their time to

attend meetings of the Board and to perform their duties under this

Act.

(9) The Directors shall appoint a Chief Executive Officer for

such period and on such terms and conditions as they deem fit, and

subject to any agreement entered into in any particular case, may

revoke such appointment. The Chief Executive Officer shall attend

meetings of the Board if asked by the Chairperson, except when the

Board discusses his conditions of service, his performance, the

revocation of his appointment or any disciplinary procedures

affecting him, and shall not have a vote.

(1)

All the powers of the Bank shall be vested in the Powers of

Board of

Board.

Directors.

(2) The Board shall be responsible for the direction of the

general operations as well as the administration of the affairs and the

business of the Bank and, for this purpose, shall, in addition to the

powers assigned to it expressly by this Act

(a) take decisions concerning loans, guarantees,

investments in equity capital, borrowing by the Bank,

furnishing of technical assistance and other operations of the

Bank;

(b) authorise the conclusion of agreements for co-

operation with international organisations;

(c)

determine the salary and other terms of the contract

of service of the Chief Executive Officer;

(d) establish a Risk Committee, an Audit Committee, an

Ethics and Governance Committee, and a Remuneration

Committee and such other committees as the Board considers

advisable, and determine their composition, authority, duties

and the tenure of their members. These Committees, which may

be presided by one or more Directors as the Board shall decide,

shall give non-binding opinions to the Board so as to facilitate

the decision-making procedure. The Committees may be presided

by one or more Directors as the Board shall decide, provided that

in the event that any of the Committees is presided by one

Director, that Director shall be an independent Director;

(e)

delegate power to act in all matters that are not by

this Act or any bye-law or resolution specifically reserved to be

done by the Board

(i)

to such person or committee;

(ii) by such means (including by power of

attorney);

(iii) to such an extent;

(iv) in relation to such matters or territories; and

(v) on such terms and conditions;

(f)

authorize further delegation of the directors’ powers

by any person to whom they are delegated, and may revoke any

delegation in whole or part, or alter its terms and conditions;

(g)

approve the budget of the Bank;

(h) approve, after reviewing the auditor’s report, the

general balance sheet and the statement of profit and loss of the

Bank;

(i)

determine the reserves and the distribution of the net

profits of the Bank;

(j)

make, by resolution, bye-laws to regulate the

business and affairs of the Bank;

(k) accept deposits as security for the due performance

of any arrangement or agreement with the Bank;

(l)

determine and charge interest and any other form of

compensation for services provided by the Bank in the exercise

of its powers under this Act;

(m) procure

the

incorporation,

dissolution

or

amalgamation of subsidiaries and acquire or dispose of any

shares in them;

(n) acquire and dispose of any interest or right in an

entity by any means;

(o) acquire, hold, exchange, lease, sell or otherwise

dispose of any interest or right in real or personal property or

immoveables or moveables and retain and use the proceeds of

disposition; and

(p) exercise such other powers as are necessary for the

proper performance of the Bank’s business under this Act.

(1) The Board shall meet when convened by the Procedure of

Chairperson on his own initiative or at the request of one of its Board

Directors.

members, provided that it shall meet not less than six times per year

and shall decide, on each occasion, the date of its next meeting.

(2) Any member of the Committees referred to in article

22(2)(d) may be invited to attend the meetings of the Board.

(3) Notice of meetings of the Board must be issued not less

than seven (7) working days before the date set for each meeting.

(4) To the extent possible, the members of the Board must be

in possession of the agenda and related documents not less than five

(5) working days before the meeting. The Bank may employ

electronic means to transmit the documentation.

(5) Each Director may require the inclusion of items on the

agenda for a meeting of the Board, provided that he conveys his

requirement in writing to the Chairperson not less than three (3)

working days before the meeting.

(6) The time limits laid down in sub-articles (3) to (5), both

inclusive, may be waived, if all the Directors consent or,

exceptionally in the event of an emergency, by the Chairperson.

(7) The quorum at any meeting of the Board shall be four

Directors, one of whom shall be an independent Director.

(8) Save as otherwise provided elsewhere, decisions of the

Board shall be taken by a majority of the Directors.

(9) The Board may, where necessary, adopt decisions by tacit

approval, provided that this occurs at a meeting attended by at least

one of the independent Directors. A decision by tacit procedure shall

be deemed to have been adopted within two weeks from notification

thereof and shall be attached to the minutes of the Board meeting

immediately succeeding the meeting where the decision has been

taken

Provided that the decision shall not be adopted if during

the two weeks from notification thereof, four Directors have indicated

that they do not agree with that decision

Provided further that each Director may require the tacit

procedure to be interrupted.

(10) Each Director may receive written authorisation from not

more than one of his colleagues to act as his proxy at a meeting of the

Board and to vote in his stead.

(11) Minutes shall be kept of the meetings of the Board. They

shall be signed by the Chairperson of the meeting and the Chairperson

presiding over the meeting during which they are approved as well as

by the secretary of the meeting.

The appointment or replacement of the secretary and the

conditions of holding office shall be determined by the Board. The

secretary shall be responsible for

(a) preparing the agenda for, and taking minutes of,

board meetings;

(b)

ensuring that proper notice be given of all meetings;

(c)

maintaining statutory books;

(d) monitoring changes in relevant legislation and the

regulatory environment;

(e)

paying dividends and administering changes in

shares and transfers thereof; and

(f)

such other duties as he may be required to perform

by the Board.

(1) The Chairperson shall preside every meeting of the The

Board, or if there is no such chairperson, or if he shall not be present Chairperson.

within twenty (20) minutes from the time appointed for the

commencement of the meeting, or is unwilling to act, the Directors

present shall elect one of their number, to be chairperson of the

meeting.

(2) The legal and judicial representation of the Bank shall be

vested in the Chairperson or, without prejudice to the powers of the

Chairperson, in any person or persons deputed and authorised for this

purpose by the Board.

(1) The Bank shall not accept loans or assistance that Prohibition of

may in any way prejudice, limit, deflect or otherwise alter its purpose political

activity.

or functions.

(2) The Bank, its Chairperson, officers and staff shall not

participate in any political activities and shall not be influenced by

any political party in their decisions. Only economic considerations

shall be relevant to their decisions. Such considerations shall be

weighed impartially in order to achieve and carry out the purpose and

functions of the Bank.

(3) The Bank shall not make any financial contribution

directly or indirectly to any political party.

(1) The Board shall determine annually what part of the Allocation of

income of the Bank shall be allocated, after making provision for income.

reserves, to surplus and what part, if any, shall be distributed to the

shareholders.

(2) Payments shall be made in such manner as the Board shall

determine.

In an emergency, the Board may temporarily suspend Temporary

operations in respect of new loans and guarantees, pending an suspension

operations.

opportunity for further consideration and action by the Board.

(1) The shareholders may terminate the

Bank’s Termination of

operations.

operations on advice of the Board or on their own initiative.

(2) After such termination, the Bank shall forthwith cease all

activities, except those incidental to the orderly realisation,

conservation and preservation of its assets and settlement of its

obligations.

(3) The Minister, acting on the advice of the Supervisory

Board, shall appoint liquidators and give them instructions for

carrying out the liquidation.

(1) In the event of termination of the operations of the

Bank, the liability of all shareholders for uncalled subscriptions to the

share capital of the Bank shall continue until all claims of creditors,

including all contingent claims, shall have been discharged.

(2) All creditors holding direct claims shall first be paid out of

the assets of the Bank and then out of payments to the Bank or unpaid

or callable subscriptions. Before making any payments to creditors

holding direct claims, the Board shall make such arrangements as are

necessary, in its judgment, to ensure a pro rata distribution among

holders of direct and contingent claims. Holders of equivalent claims

shall, as far as possible, be paid concurrently.

No distribution of assets shall be made to the shareholders

on account of their subscriptions to the share capital of the Bank until

all liabilities to creditors have been discharged or provided for.

Moreover, such distribution must be approved by the Board by a vote

of two-thirds of the total number of Directors.

The Bank, its assets, property, income and its operations

and transactions, shall be exempt from all taxation under the Income

Tax Act and duty on documents and transfers under any law for the

time being in force.

(1) The annual financial statements, the management

report, and the consolidated financial statements must be prepared,

audited, and disclosed in accordance with any applicable regulations

referred to in article 35.

(2) Directors will approve the annual financial statements

within three months from the end of a financial year.

(3) The financial year is the calendar year.

(4) The Annual Report and Consolidated Financial Statements

shall be tabled in the House of Representatives not later than four

months after the end of the Bank’s financial year, shall be published in

the media as determined by the Board and on the Bank’s website, and

copies shall be made available by the Secretary when requested by the

public.

The Minister will ensure that the Bank complies with the Legal

supervision.

Laws of Malta, the Bank’s bye-laws, and other regulations.

(1) The Minister shall have the power to determine by Applicable

regulation that the Bank shall be required to conform mutatis mutandis regulations

directives.

with certain banking supervisory laws and regulations, in whole or in

part, in order to safeguard the conduct of proper business operations by

the Bank.

(2) Regulations under sub-article (1) may also introduce

provisions concerning disclosure, reporting and submission duties of

the Bank to the competent authorities, as well as information, inquiry

and auditing rights of the Auditor General.

(1) Directors are entitled to be paid by the Bank Miscellaneous

reasonable travel and living expenses incurred in connection with the provisions.

performance of their duties under this Act while absent from their

habitual place of residence.

(2) Officers, employees, advisors and consultants are entitled

to be paid by the Bank the remuneration, expenses and benefits that

the Bank may determine.

(3) The Bank shall not grant a loan, investment or guarantee to

a Director or officer of the Bank.

(4) (a)

An applicant for any of the Bank’s financings or

services, as defined in article 2, must disclose in writing to the Bank

whether the applicant is an interested person, as defined in article 2

or, if the applicant is a company or body corporate, whether a

shareholder, director or officer of the company or body corporate, is

an interested person or a Director or officer of the Bank.

(b) A Director must not be present at a meeting of the

Board when the Board is considering an application, or a vote

on a resolution relating to it, if the applicant is -

(i) a person related to the Director as described in

the definition "interested person", or

(ii) a company or body corporate of which the

Director, or a person referred to in sub-paragraph (i), is a

partner, shareholder, director or officer.

Part III

Supervisory Board

(1) The Minister shall appoint a Supervisory Board that

oversees the policy pursued by management and its implementation,

reviews the general state of affairs of the Bank either on request or on

its own initiative and issues directives including directives relating to

the prudential conduct, capital adequacy and risk strategy of the Bank.

(2) In performing its duties, the Supervisory Board shall act in

accordance with the interests of the Bank and those of its stakeholders

(including the Bank’s shareholders, employees, customers and

suppliers).

(3) The Supervisory Board shall draw up its own rules of

procedure, which rules shall be approved by the Minister, and shall

also have the power to regulate its meetings.

(1) The Supervisory Board shall have no executive

powers whatsoever over the Bank, its officers, management and

employees.

(2) Within the framework of its monitoring, advisory, and

regulatory activities, the Supervisory Board shall have the power to

request from the Bank any information it deems necessary for

performing its tasks, and the Bank shall ensure to keep the Supervisory

Board informed on a regular basis, and in a timely and comprehensive

manner, on the course of the business, developments in individual

business segments and capital adequacy.

(3) The Supervisory Board shall have the right to

(a) request, and have access to, any documents, minutes

and, or data it requires in performing its duties;

(b) request the internal and, or external auditors to carry

out special ad hoc investigations or risk assessments; and

(c)

recommend to the shareholders the removal of

Directors.

(4) The Supervisory Board shall receive from the Board

monthly management accounts, and advance copies of the annual

financial statements and the auditor’s report. The Supervisory Board

shall receive a written and verbal presentation by the Board of

Directors on the Bank’s performance and situation, as well as any

risks and issues, twice a year.

(1) The responsibilities of the Supervisory Board shall Responsibilities

of the

include the supervision of, among others

Supervisory

Board.

(a) the development, alignment and execution of the

Bank’s business strategy;

(b)

the realisation of the Bank’s strategic and financial

targets;

(c)

the capital adequacy of the Bank;

(d) the Bank’s risk bearing capacity and risk strategy as

quantified in the Bank’s risk model as approved by the

Supervisory Board;

(e)

the structure and management of the Bank’s internal

risk management and control systems;

(f)

the Bank’s financial reporting process;

(g) corporate social responsibility aspects which are

relevant to the Bank;

(h) the management of the Bank’s relationship with its

shareholders;

(i)

the

Bank’s

compliance

with

legislation

and

regulations;

(j)

the corporate governance structure of the Bank;

(k)

the remuneration policy of the Bank; and

(l)

reported conflicts of interest or breaches of the Code

of Ethics applicable to the Board and the staff of the Bank.

(2) The Supervisory Board shall submit its analysis,

observations and recommendations to the Board and to the Minister

in writing and as often as it determines, and shall require written

submissions from the Board if and when its recommendations are not

implemented.

(3) (a)

The Supervisory Board shall give the Board general

instructions and directives in respect of prudential conduct, capital

adequacy, and risk policies of the Bank, including the risks inherent

in its business activities for the purpose of the effective prudential

supervision of the Bank in accordance with articles 35 and 41, and the

Bank’s Board shall comply with such instructions and directives.

(b)

If the Supervisory Board is not satisfied that its

instructions and directives are being complied with, it shall refer the

matter to the Minister so that the Minister may issue any regulations

that may be necessary to ensure such compliance in accordance with

article 41(1).

(4) The Supervisory Board shall prepare an annual report on

its functioning and activities and submit it to the Minister and the

Bank.

(1) The Supervisory Board shall consist of a maximum

of six (6) members, of whom one shall be an officer of the Malta

Financial Services Authority, one of the Central Bank of Malta, one

of the Ministry of Finance, one of the ministry responsible for the

Bank from time to time, and two independent professionals with

banking and, or regulatory experience. The Chairman of the

Supervisory Board shall be appointed by the Minister from amongst the

independent professionals, after consultation with the Opposition.

(2) Each member of the Supervisory Board shall be appointed

for a maximum period of five (5) years, or for a shorter period as may

be determined by the Minister and may only be removed by the

Minister. Members of the Board cannot serve on the Supervisory

Board. Ex-members of the Board cannot serve on the Supervisory

Board before three (3) years have elapsed since their last day of

service at the Board.

(3) The members of the Supervisory Board shall comply with

the Code of Conduct applicable to the Board.

(4) The remuneration of the members of the Supervisory

Board shall be fixed by the Minister and shall be paid by the Ministry.

The Bank must refund the Ministry for the supervisory costs incurred.

(5) Any costs for staff or other support services required by

the Supervisory Board shall be borne by the Bank.

(1) Without prejudice to the autonomy of the Bank, the

Minister may make regulations to enhance the prudential regulation

of the Bank.

(2) The Minister may, by regulations, amend the First, Second

and Third Schedules of the Second Schedule (Malta Development

Bank Supervisory Board Regulations).

Part IV

General

This Act may only be amended by a resolution of the Amendments.

House of Representatives.

Five years after this Act comes into force, and every five Review.

years thereafter, the Minister must undertake a review of the

provisions and operation of this Act, including the conclusions of any

State Aid reviews conducted during the period, and submit it to

Parliament within six months from the conclusion of the review.

(1) Subject to the provisions of sub-article (2), all Privileged

information obtained by the Bank in relation to its customers is information.

privileged and a Director, officer, employee or agent or mandatory of,

or advisor or consultant, to the Bank must not knowingly

communicate, disclose or make available the information, or permit it

to be communicated, disclosed or made available, except if it is

already in the public domain.

(2) Privileged information may be communicated, disclosed or

made available

(a) for the purpose of the administration and

enforcement of this Act and legal proceedings related to it;

(b) for the purpose of prosecuting an offence under this

Act or any other Act of Parliament; and

(c)

with the written consent of the person to whom the

information relates.

First Schedule

Initial Subscriptions to the Authorised Share Capital

of the Malta Development Bank

The Government of Malta shall subscribe an initial capital of sixty

million euro (€60,000,000).

Second Schedule

Malta Development Bank Supervisory Board Regulations

BY VIRTUE of the powers vested in the Minister in terms of

article 41 of the Malta Development Bank Act, the Minister

responsible for the Malta Development Bank has made the following

regulations.

1. The title of these regulations is the Malta Development

Bank Supervisory Board Regulations.

2. In these regulations, unless the context otherwise requires

"Act" means Malta Development Bank Act;

"Bank" means the Malta Development Bank established under

article 3 of the Act;

"Board" means the Supervisory Board as established by article

37 of the Act;

"Board of Directors" means the Board of Directors of the Bank

established under article 20 of the Act;

"Chairperson" means the Chairperson of the Supervisory Board

appointed in accordance with article 40(1) of the Act;

"Chief Executive Officer" means the administrative head of the

Bank appointed in accordance with article 21(9) of the Act;

"meeting" means a meeting of the Board held in accordance

with regulation 7; and

"member" means a member of the Supervisory Board appointed

in accordance with article 40 of the Act.

3. (1) The Supervisory Board is responsible for overseeing

the policy pursued by the Bank’s management, the implementation of

this policy and the general state of affairs of the Bank, and advising

the Board of Directors regarding the conduct of business, either on

request or on its own initiative.

(2) In performing its duties the Board shall act in accordance

with the interests of the Bank and the business connected with it,

taking into consideration the interests of the Bank’s stakeholders

(including the Bank’s shareholders, employees, customers and

suppliers). In addition, the Board shall take its supervision

responsibility with respect to the environmental, social and

governance aspects relevant to the Bank. The Board is responsible for

the quality of its own performance.

(3) In pursuance of its responsibilities in accordance with

article 39 of the Act, the Board shall regularly examine and submit its

recommendations to the Bank’s Board of Directors and the Minister

as it deems appropriate in respect of

(a)

the Bank’s monthly management accounts and its

rolling six-monthly projections;

(b) the appropriateness of the Bank’s growth or its

growth strategies, its management effectiveness, changes in

asset quality, levels of risk concentration, capital adequacy,

effectiveness of the Bank’s policies, procedures, and internal

controls, timelines in the identification of prospective losses and

the creation of loss provisions, charge-offs, and recognition of

securities impairment, the quality of liquidity management and

interest rate risk exposure;

(c)

the effectiveness of management systems and

processes addressing Credit Risk, Interest Rate Risk,

Operational Risk, Liquidity Risk, Price Risk, Compliance Risk,

Strategic Risk, Reputation Risk, and Political Risk as defined in

Schedule 1;

(d) the internal risk model adopted by the Bank and

approved by the Board on an annual basis;

(e)

the regular updates of Key Measures of Business

Performance as defined in Schedule 2;

(f)

the effectiveness of controls and internal audit

procedures addressing the risk inherent in major policy areas as

defined in Schedule 3.

(4) The Board shall review the Bank’s financial performance

measures in the context of similar ratios in the European banking

industry and, in particular, in similar institutions as the Bank.

(5) The Board shall specify the minimum requirements that

the Bank must meet at all times, so that the Bank may -

(a)

conduct its business in a prudent manner by having

the appropriate financial and non-financial resources,

(b) be considered fit and proper to conduct such

business, and

(c)

be effectively supervised by the Board.

For the purposes of this sub-regulation -

(i)

the requirements referred to in paragraph (a) shall

specify, amongst others, that -

1. the Bank’s assets must be appropriate given its

liabilities,

2. the liquidity of the Bank’s resources must be

appropriate given its liabilities and when they fall due or

may fall due,

3. the Bank must value its assets and liabilities

appropriately,

4. the Bank must have resources to identify,

monitor, measure and take action to remove or reduce

risks to the safety and soundness of the Bank,

5. the Bank must have resources to identify,

monitor, measure and take action to remove or reduce

risks to the accuracy of the Bank’s valuation of its assets

and liabilities,

6. the effectiveness with which the Bank’s

business is managed must meet a reasonable standard of

effectiveness, and

7. the Bank’s non-financial resources must be

sufficient to enable the Bank to comply with any

requirements imposed by the Minister in accordance

with regulations 34 and 35;

(ii) in determining whether the Bank is satisfying the

requirements in paragraph (i), the Board shall consider -

1. the nature (including the complexity) of the

activities that the Bank carries on or seeks to carry on,

2. the nature and scale of the business carried on

or to be carried on,

3. the risks to the continuity of the services

provided or to be provided by the Bank,

4. the effect that the carrying on of the business

carried on or to be carried on by the Bank might be

expected to have on the stability of the financial system

in Malta, and

5. the effect that the Bank’s failure might be

expected to have on the stability of the financial system

in Malta;

(iii) in determining whether the Bank is a fit and proper

person with respect to the prudential objective specified in

paragraph (b), the Board shall consider whether -

1. the Bank has complied with and is complying

with its obligations under articles 6, 8, and 14 of the Act

and regulation 5,

2. whether the persons who manage the Bank’s

affairs have adequate skills and experience and have

acted and may be expected to act with probity;

(iv) in determining whether the Bank can be effectively

supervised as specified in paragraph (c), the Board shall

consider -

1. the nature (including the complexity) of the

Bank’s activities,

2. the complexity of any products that the Bank

will provide,

3. the way in which its business is organised, and

4. if the Bank has close links with another person

such that the nature of such links is likely to prevent the

effective supervision of the Bank.

(6) The Board may be assisted by experts as it deems

necessary in any of the above described duties.

4. (1) The Board is entitled to obtain all information from Information

the Board of Directors, its officers and the Bank’s external advisors from

of Directors.

required to enable it to carry out its duties properly. The Bank shall

provide the necessary means for this purpose. The Board may require

that certain officers and external advisors attend its meetings. In

exercising their duties, the Board and its committees may obtain

advice and assistance from its own external advisors if deemed

necessary at the expense of the Bank.

(2) The Board is entitled to request that on a timely basis the

Bank provides it with information (if possible in writing) on all facts

and developments concerning the Bank which the Board may need in

order to function as required and to properly carry out its duties.

5. (1) The Chairperson of the Board will be appointed by

the Board from among its members during its first meeting.

(2) The Chairperson shall be responsible for the proper

functioning of the Board and its committees. He shall chair the

meetings and determine the agenda for the meetings and shall act on

behalf of the Board as the main contact for the Board of Directors on

all matters related to the responsibilities of the Board.

(3) The Chairperson’s responsibilities shall include among

others

(a)

ensuring the adequate and timely submission of

information to the members as necessary for the proper

performance of their duties;

(b) co-ordination of the Board’s decision-making

process and ensuring that there is sufficient time for

consultation, consideration and decision-making by the Board;

(c)

steering, and procuring the adequate performance

of, any of the committees of the Board;

(d) maintaining close and frequent contact with the

Board of Directors and ensuring that the results thereof are

communicated to the other members in a timely and prudent

manner; and

(e)

deciding on reported potential conflicts of interest or

breaches of the Code of Ethics as referred to in article 39(1)(l)

of the Act.

(4) If the Chairperson is prevented or is unavailable for any

meetings of the Board, the Chairperson’s tasks shall be performed and

his powers exercised by a chairperson selected by the members

present.

(5) The Board may be assisted by a Secretary, who is

appointed by the Board and may be removed by it.

(6) The responsibilities of the Secretary are to

(a)

assist the Chairperson in the logistics of the

meetings (convocation, agenda,

minutes,

information,

evaluation, meeting schedule);

(b) follow up on action items resulting from the

meetings;

(c)

support any committees and/or experts of the Board,

as required.

6. Any committees appointed by the Board shall consist, in Committees of

the majority, of members, but may include experts appointed ad hoc. the Board.

The full Board remains responsible for all decisions.

7. (1) The Board shall meet at least six times per year in Meetings of the

accordance with an annual meeting schedule or whenever the Board.

Chairperson, one or more of its members, or the Board of Directors

requests a meeting. Meetings will generally be held at the offices of

the Bank, but may also take place elsewhere or by telephone or video

conference, provided that all participants can hear each other

simultaneously.

(2) Members of the Board who are frequently absent during

meetings of the Board will be asked to explain their absence.

Frequent absences shall be reported in the Board’s report and may

eventually lead to resignation.

(3) The Board may invite the Chairperson or Chief Executive

Officer or chairpersons of any of the Committees listed in article

22(2)(d) of the Act to attend sittings of the Board to provide further

information required by it or to discuss issues relating to its duties

under article 39(1) of the Act and regulation 3.

(4) Minutes of the meeting shall be prepared by the Secretary.

They shall be adopted in the next meeting. The minutes shall be

signed by the Chairperson and the Secretary, and shall be distributed

to all Board members as soon as practically possible.

8. (1) The Board can only validly adopt resolutions in a Resolutions of

meeting at which at least the majority of its members are present, it the Board.

being understood that members who have a conflict of interest shall

not be taken into account when calculating this quorum.

(2) The Board may also adopt resolutions outside a meeting,

provided the resolution in question has been submitted to all of its

members and none of them has objected to this form of decision-

taking. In such case the Secretary will record in writing such

resolution of the Board and have this document signed by two Board

members.

(3) Resolutions of the Board can only validly be adopted in or

outside a meeting of the Board if a majority of the Board members

has voted in favour of the resolution. If all members are present,

either in person or by telephone or video conference, and agree

thereto, the Board may resolve on issues not on the agenda. In case

there is a tie vote, the Chairperson shall have a casting vote.

(4) A declaration signed by the Secretary that a resolution has

been adopted serves as evidence to third parties of that resolution.

9. (1) Members must avoid undisclosed actual or potential

conflicts of interest with the Bank. A member with an actual or

potential conflict of interest shall disclose the conflict to the Board

and not participate in the discussions and, or decision-taking process

on items concerning such a conflict of interest. Such transaction, if

approved, must be concluded on terms that are at least customary for

arm’s length transactions in the sector concerned. The Chairperson

shall see that any transactions where a conflict of interest of members

occurred be included in its Annual Report.

(2) A member of the Board shall in any event have a conflict of

interest with the Bank if

(a)

he has a personal financial interest in a bank, other

financial institution or intermediary with which the Bank has

entered or intends to offer a financing programme or scheme or

enter into a transaction;

(b) he has a material amount of securities or risk

exposure in an economic sector, companies or activities in a

related industry, or directly in enterprises or projects with which

the Bank has entered or intends to enter into a business

relationship;

(c)

he has a relationship under family law (wife/

husband, registered partner or other life companion, foster child

and relatives by blood or marriage up to the second degree) with

a member of the board of directors of a bank, enterprise or

project with which the Bank intends to enter into a material

transaction;

(d) he is a member of the board of directors of, or hold

similar office with, a bank, enterprise or project with which the

Bank intends to enter into a transaction;

(e)

the Chairperson at his sole discretion shall have

ruled such conflict of interest exists or is deemed to exist.

(3) The member concerned shall immediately report any

potential conflict of interest to the Chairperson and to the other

members. A member with whom such (potential) conflict of interest

exists must provide all information relevant to the conflict of interest,

including information relating to the persons with whom he has a

relationship under family law, to the Chairperson. In all

circumstances other than the ones listed in sub-regulation (2)(c) and

(d), the Chairperson will determine as to whether or not a reported

(potential) conflict of interest qualifies as a conflict of interest

pursuant to which sub-regulation (1) shall apply.

10. Each member shall, during his membership of the Board Confidentiality.

and afterwards, refrain from disclosing in any manner to any

individual any information of a confidential nature concerning the

Bank or subsidiaries, which has become known to the member as a

result of his position in the Board and of which he knows or should

know to be of a confidential nature, unless required by applicable law.

A member is allowed to disclose the above information to members

of the Board of Directors and Board.

11. Any amendments to these regulations and any bye-laws Amendments

drawn up by the Board shall only come into effect subject to approval and bye-laws.

by the Minister.

Schedule 1

Risks to Bank

Credit risk. The risk arises any time Bank funds are extended,

committed, invested, or otherwise exposed through actual or implied

contractual agreements, whether reflected on or off the balance sheet.

Interest rate risk. The risk to earnings or capital arising from

movements in interest rates.

Liquidity risk. The risk to earnings or capital arising from the

Bank’s inability to meet its obligations when they come due without

incurring unacceptable losses.

in the value of either trading portfolios or other obligations that are

entered into as part of distributing risk.

Operational risk. The risk to earnings or capital arising from

inadequate or failed internal processes or systems, the misconduct or

errors of people, and adverse external events.

Compliance risk. The risk to earnings or capital arising from

violations of, or non-conformance with, laws, rules, regulations,

prescribed practices, internal policies and procedures, or ethical

standards.

Strategic risk. The risk to earnings, capital, or enterprise value

arising from adverse business decisions, improper implementation of

decisions, or lack of responsiveness to industry changes.

Reputation risk. The risk to earnings, capital, or enterprise value

arising from negative public opinion.

Political risk. The risk to earnings or capital arising from

domestic or international political decisions, events, or conditions

will significantly undermine the profitability of a business actor or the

expected value of a given economic action.

Schedule 2

Key Measures of Business Performance

Return on average assets (ROAA). A ratio that is significantly

above banks in similar markets offering similar products can be one

indicator that the Bank is taking above average risk.

Return on equity (ROE). From the shareholder’s perspective,

the higher the ROE the better. From the Board’s perspective,

however, the Bank should not seek an attractive ROE that is based on

inadequate capital or unwarranted risk.

Net interest margin (NIM). This ratio reflects the traditional

business of banking, that is, the results of the Bank’s efforts to buy

funds and reinvest them profitably.

Net non-interest expense to average assets. This ratio indicates

the impact of all non-interest expenses (such as personnel or other

costs) on the Bank’s earnings and can provide a measure of the

Bank’s efficiency in generating earnings.

Leverage ratio. Confidence in the Bank’s condition is a critical

factor in its ability to support further business. A well-managed bank

typically operates with more capital than the minimum requirement.

The Board should be alert to any declines in the ratio, should

determine the cause and recommend necessary action to ensure that

adequate capital is maintained.

Non-performing loans to total loans. A high level of non-

performing loans may suggest poor underwriting practices or

inadequate monitoring of changes in borrowers’ financial conditions.

Net losses to average total loans. This ratio is another indicator

of asset quality. The Board should determine the cause of the

increased losses and recommend appropriate corrective actions.

Schedule 3

Major Policy Areas

LOAN PORTFOLIO MANAGEMENT

The Board of Directors should oversee loan portfolio

management to control risks and maintain profitable lending

operations.

LOAN POLICY

The Bank’s loan policy should address loan portfolio

composition and should have standards for individual credit

decisions. Risk tolerances and limits should be specified.

LOAN REVIEW PROGRAMME

In addition to the general loan policy, the Board should direct

the Board of Directors to establish an internal loan review programme

that is independent of the lending function. This programme, which is

essential to managing credit risk, should monitor asset quality,

adherence to established loan policy and credit standards, and

compliance with laws and regulations.

ALLOWANCE FOR LOAN LOSSES (ALL)

The Board must ensure that the Bank has a programme for

developing, maintaining, and documenting a comprehensive,

systematic, and consistently applied process for determining the

amounts of the ALL and the provision for loan losses.

LOAN

PORTFOLIO

MANAGEMENT

-

AREAS

OF

CONCERN

When considering the Bank’s lending activities, the Board of

Directors should scrutinize the following practices or conditions

Failure to have systems that properly monitor compliance with

legal lending limits. Violating lending limits can lead to excessive

concentrations of risk, and may present an opportunity for abuse of

the Bank’s resources.

Failure to institute adequate loan administration systems. An

inadequate system to administer its loans may lead to unnecessary

losses.

Over-reliance on collateral or character to support credit

decisions. Undue reliance on factors other than cash flow or other

repayment capacity to support credit decisions may increase its

illiquid loans and its level of credit risk and may expose the Bank to

loss.

Uncontrolled asset growth or increased market share. The Board

of Directors should be alert to any activity that could indicate that

loan officers are relaxing credit standards. Such practices may result

in increases in illiquid assets and unwarranted losses to the bank.

Generation of large volumes of loans for resale to others. If the

bank plans to generate a large volume of loans to sell to others to

increase income, the Board of Directors should ensure that the Bank’s

systems and controls are capable of handling the volume.

ASSET/LIABILITY MANAGEMENT

The asset/liability management policy provides the framework

for bank management to carry out the Board of Directors’ objectives

for the composition of on- and off-balance sheet positions.

Excessive growth objectives. A bank with excessive growth

objectives may engage in activities that unduly increase its exposure

to various risks. Excessive growth also may lead to undue leverage

and capital inadequate to support the bank’s activities.

Heavy dependence on volatile liabilities. Excessive holdings of

volatile liabilities, such as large certificates of deposit and other

interest rate sensitive and credit risk sensitive funding sources may

pose problems to the Bank.

Exposure to a significant number of products with embedded

options. Holding significant amounts of assets, liabilities, or off-

balance sheet products with embedded options can expose the Bank

to unwarranted interest rate and liquidity risks.

Gaps between asset and liability maturities or between rate-

sensitive assets and liabilities at various maturity time frames.

Excessive gaps resulting from differences in the re-pricing dates of

assets and liabilities leave the Bank vulnerable to impaired earnings

and liquidity concerns if interest rates do not move according to

projections.

Asset/liability expansion, both on- or off-balance sheet, without

an accompanying increase in capital support. Engaging in excessive

leverage activities may have a bearing on capital requirements.

Inadequate capital also may make the Bank unable to fund or absorb

potential exposures.

Failure to diversify assets or funding sources. Concentrations of

assets or funding sources can expose the Bank to risks including

credit, interest rate, liquidity, and reputation.

Inadequate controls over securitized asset programmes. If the

Bank uses securitized assets to fund banking activities, it improves

the marketability of its assets and enhances liquidity. To control risks

associated with such programmes, however, management should

monitor how sales of its high-quality assets affect the strength of the

remaining portfolio.

Lack of expertise or control over off-balance sheet derivative

activities or other complex investment or risk management

transactions. The Board of Directors should be aware of potential

risks and ensure that adequate risk monitoring and control procedures

are in place before the Bank uses the products. The Board of

Directors and management should understand the role such leverage

transactions play within the Bank’s overall business strategies.

INVESTMENT ACTIVITIES

Investments should generate quality earnings, allow a bank to

diversify its asset base, and provide liquidity. The Board of Directors

must ensure the Management’s investment activities comply with the

policy it adopts.

INVESTMENT ACTIVITIES - AREAS OF CONCERN

When considering investment activities, the Board of Directors

should scrutinize the following practices or conditions

Failure to select securities dealers carefully.

Efforts to obtain higher yields without regard for other portfolio

objectives.

Purchase of low-quality investments to obtain higher yields.

Purchase of structured securities without appropriate due

diligence.

Failure to adequately diversify investments.

Failure to consider pledging requirements in investment

decisions.

Failure to institute adequate internal controls for investment and

trading activities.

Failure to ensure the investment portfolio complies with current

accounting standards.

Passed by the House of Representatives at Sitting No. 507 of the

12th April, 2017.

A NĠLU F ARRUGIA

Speaker

R AYMOND S CICLUNA

Clerk of the House of Representatives

€3.60