Central Bank launches Forum for Financial Stability

The Central Bank of Malta has launched the Forum for Financial Stability “in furtherance of its statutory responsibility to ensure financial stability”. The Forum, which will be composed of representatives of the relevant authorities and of the major stakeholders in the financial services industry, is designed to foster a structured dialogue on issues of common interest, with a particular emphasis on the identification and management of risks that could have a negative impact on the financial system.

The Forum was announced at a seminar opened by the Governor of the Central Bank of Malta, Michael Bonello. The chairman of the Malta Financial Services Authority, Joseph Bannister, the secretary general of the Malta Bankers Association, James Bonello, and John Fell, deputy director general, of the European Central Bank’s Financial Stability Division, were guest speakers.

Mr Bonello explained why central banks have an intrinsic interest in financial stability, particularly in the light of the recent experience of financial market turbulence and economic recession. He noted that the importance of monitoring systemic risk and putting in place an effective response mechanism has indeed been one of the major lessons of the crisis. He warned that the fact that Malta’s financial system was not directly affected should not give rise to complacency.

In this context the Governor observed that both the Central Bank of Malta and the Malta Financial Services Authority were acutely aware of the need to preserve confidence in Malta’s financial system, not least because Malta today has a reputation to defend as a successful financial centre.

He referred to the positive record of close cooperation between the Bank and the MFSA and suggested that this needed to be further strengthened particularly in the light of the considerable changes that have taken place recently in the domestic financial system and in the external environment with which it increasingly interacts.

Against this background, the Governor expressed the hope that the Forum would prove to be of mutual benefit to the authorities and the stakeholders, becoming a source of up-to-date market intelligence and promoting an increased awareness about the importance of continued efforts to mitigate risks and to strengthen the resilience of Malta’s financial system.

Mr Bonello observed that there is a relatively high concentration of risk on both sides of bank balance sheets, in particular a significant exposure to the real estate sector, both in the form of loans and collateral held against them. At a time when corporate non-performing loans have been increasing, he reiterated his call for the banks to increase their provisions commensurately with this heightened credit risk.

At the same time, the Governor pointed out, dividend policies must be mindful of the need for higher levels of retained earnings in order to further strengthen capital buffers, also in view of the more onerous requirements of the Basle III regulatory regime, which will be largely transposed into the Capital Requirements Directive (IV).