The ECB and Maltese banks
The ECB last Thursday reduced its base rate to its lowest ever - at 1.25 per cent - since the euro was created. Please take note Malta banks, the ECB has again reduced its base rate! Allow me to ask the Malta banks whether they know why the ECB reduced...
The ECB last Thursday reduced its base rate to its lowest ever - at 1.25 per cent - since the euro was created. Please take note Malta banks, the ECB has again reduced its base rate! Allow me to ask the Malta banks whether they know why the ECB reduced the base rate.
I am being rather sarcastic for a specific reason. This is part of the monetary policy of the European Central Bank, of which Malta has formed part since we joined the eurozone in January 2008, and of which currency zone the Malta banks also form part.
The world is going through an unparalleled economic and financial crisis. Unemployment has soared in every country to very serious levels and governments around the globe are all working together to create a stimulus to bring the world economy back into growth mode.
Many governments have pumped billions of dollars/euros into their respective economies to save giant banks, companies and financial institutions from total collapse and thus also help to avoid further unemployment and the stability of the financial system.
Therefore these governments, together with their central banks, have adopted loose fiscal and expansionary monetary policy measures to stimulate demand. Some governments, desperate to stimulate this growth, even resorted to the printing of money, which is an incredible measure that would definitely result in inflation in future. That was the price they were prepared to pay to stop this massive unemployment.
Back to the ECB, when inflation looms in the air, meaning crudely "too much money running after too few goods", central banks adopt a tight monetary policy and raise the base rate, so they hit both sides of the commercial banks' balance sheet.
On one side, this measure allows the banks to increases the rate at which companies would have to borrow funds from them, thus making it expensive and curtailing the investment programmes and expansion of companies. On the other side of their balance sheet, they make the deposit rate for savers more attractive so that depositors would have an incentive to leave their funds in the bank rather than spend them, therefore curtailing demand.
The opposite is true for an expansionary monetary policy, which we are living at present. Therefore, and here Malta banks please note, the expansionary policy that the ECB is adopting is to make it cheaper for customers of commercial banks to borrow not only as regards new borrowings, but also on their existing borrowings, thus creating a financial cost saving to these companies. So these customers, in turn, can invest in order to create employment, or have savings so that they will not need to dismiss people.
Therefore, allow me to ask the Malta banks: have they indeed reduced their respective base rates in the same proportion as the ECB? One or two banks might have reduced the rates slightly or nominally. Here I must say that any Maltese company borrowing from a foreign bank in Malta has indeed had a major saving in his cost of borrowings as most foreign banks located in Malta lend on a Eurobor basis.
In fact, companies I know of have halved their interest expense since November 2008 while having the same amount of debt. However, I believe that the indigenous banks have unfortunately not passed on this entire cost saving to their borrowing clients!
The argument these banks have used is that they did not reduce the base rate since they have kept deposit rates higher than in other countries to favour Maltese depositors. This argument was also used by some senior public officials in public debates.
This, to me, is a fallacy. In any way, who asked the banks to unilaterally favour the depositors, when the ECB is sending an unequivocal signal to all and sundry (except, it seems, to the Maltese banks) that the ECB wants to create demand by reducing rates to all, borrowers and depositors, because its prime objective is to stimulate growth and fight unemployment, and Malta is not excluded in this.
As we saw late last week, unemployment grew by 12 per cent in February (The Times, April 3) and it is about time that local banks play their part to help all parties in this national and international financial crisis by also reducing their respective base rate in the same percentage and manner by which the ECB has done and not by strengthening their balance sheets.
They have already a very strong balance sheet as the Maltese banking system has been classified as the 10th strongest in the world. The Maltese Governor of the Central should use moral persuasion to bring this about.
Mr Vassallo is a former Governor of the Central Bank of Malta.
I am being rather sarcastic for a specific reason. This is part of the monetary policy of the European Central Bank, of which Malta has formed part since we joined the eurozone in January 2008, and of which currency zone the Malta banks also form part.
The world is going through an unparalleled economic and financial crisis. Unemployment has soared in every country to very serious levels and governments around the globe are all working together to create a stimulus to bring the world economy back into growth mode.
Many governments have pumped billions of dollars/euros into their respective economies to save giant banks, companies and financial institutions from total collapse and thus also help to avoid further unemployment and the stability of the financial system.
Therefore these governments, together with their central banks, have adopted loose fiscal and expansionary monetary policy measures to stimulate demand. Some governments, desperate to stimulate this growth, even resorted to the printing of money, which is an incredible measure that would definitely result in inflation in future. That was the price they were prepared to pay to stop this massive unemployment.
Back to the ECB, when inflation looms in the air, meaning crudely "too much money running after too few goods", central banks adopt a tight monetary policy and raise the base rate, so they hit both sides of the commercial banks' balance sheet.
On one side, this measure allows the banks to increases the rate at which companies would have to borrow funds from them, thus making it expensive and curtailing the investment programmes and expansion of companies. On the other side of their balance sheet, they make the deposit rate for savers more attractive so that depositors would have an incentive to leave their funds in the bank rather than spend them, therefore curtailing demand.
The opposite is true for an expansionary monetary policy, which we are living at present. Therefore, and here Malta banks please note, the expansionary policy that the ECB is adopting is to make it cheaper for customers of commercial banks to borrow not only as regards new borrowings, but also on their existing borrowings, thus creating a financial cost saving to these companies. So these customers, in turn, can invest in order to create employment, or have savings so that they will not need to dismiss people.
Therefore, allow me to ask the Malta banks: have they indeed reduced their respective base rates in the same proportion as the ECB? One or two banks might have reduced the rates slightly or nominally. Here I must say that any Maltese company borrowing from a foreign bank in Malta has indeed had a major saving in his cost of borrowings as most foreign banks located in Malta lend on a Eurobor basis.
In fact, companies I know of have halved their interest expense since November 2008 while having the same amount of debt. However, I believe that the indigenous banks have unfortunately not passed on this entire cost saving to their borrowing clients!
The argument these banks have used is that they did not reduce the base rate since they have kept deposit rates higher than in other countries to favour Maltese depositors. This argument was also used by some senior public officials in public debates.
This, to me, is a fallacy. In any way, who asked the banks to unilaterally favour the depositors, when the ECB is sending an unequivocal signal to all and sundry (except, it seems, to the Maltese banks) that the ECB wants to create demand by reducing rates to all, borrowers and depositors, because its prime objective is to stimulate growth and fight unemployment, and Malta is not excluded in this.
As we saw late last week, unemployment grew by 12 per cent in February (The Times, April 3) and it is about time that local banks play their part to help all parties in this national and international financial crisis by also reducing their respective base rate in the same percentage and manner by which the ECB has done and not by strengthening their balance sheets.
They have already a very strong balance sheet as the Maltese banking system has been classified as the 10th strongest in the world. The Maltese Governor of the Central should use moral persuasion to bring this about.
Mr Vassallo is a former Governor of the Central Bank of Malta.