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Monaco’s Banking Sector: A Picture of Robust Capitalization and Sound Asset Quality

Despite the global financial turmoil, Monaco’s banking sector continues to demonstrate robust capitalization and sound asset quality, according to a recent report.

Market Overview

The system generates a substantial amount of liquidity that is transferred to parent institutions or lent through the money market. The report highlights that two-thirds of banks’ customers are non-resident, indicating a strong international presence. Additionally, it notes that the off-balance-sheet component of banks’ assets, comprising assets held in financial institutions on client accounts, plays a significant role in the sector’s overall liquidity.

Concentration Index

The Herfindahl-Hirschman Index (HHI) was calculated for 14 credit institutions and found to be above the threshold of 1,800, indicating high concentration in the market. This suggests that the sector is dominated by a few large players.

Capitalization

Monaco’s banks are known for their strong capitalization, with regulatory capital as a percentage of risk-weighted assets remaining well above requirements. Although leverage has increased, the capital buffer remains robust.

Return on Equity

The report also notes that return on equity has been relatively low, which may be attributed to high costs associated with private banking business and conservative investment activity by Monegasque banks.

Potential Risks

However, financial market turmoil may pose challenges for the sector, as many banks have specialized in asset management for their clients. A significant slowdown in capital markets could negatively impact recurring earnings power.

Non-Banking Financial Sector

In the non-banking financial sector, the industry of collective investment schemes (CISs) has grown marginally in recent years, with total assets amounting to €6.1 billion by the end of 2007. On the other hand, the activity of non-bank portfolio management companies has increased substantially, more than doubling its total assets from €4.0 billion to €10.5 billion over the 2003-07 period.

Conclusion

Overall, while there are potential risks and challenges facing Monaco’s banking sector, market participants remain confident that the impact of current market turbulence will be contained.

Key Statistics

Regulatory capital as a percentage of risk-weighted assets: 15.3% (2002) to 16.3% (2006)
Capital adequacy ratio: 13.8% (2002) to 12.2% (2006)
Non-performing loans as a percentage of gross loans: 1.3% (2002) to 0.5% (2006)

Sources

Bank data
Industry reports
Central bank statistics

“Monaco’s Banking Sector: A Review of the Recent Performance”
“The Impact of Global Financial Turmoil on Monaco’s Banking Sector”